Opening the Gate to Money Market Fund Reform

Peirce, Hester; Greene, Robert

doi:10.2139/ssrn.2533195

Cited by 1 publication

(2 citation statements)

References 40 publications

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“…On the other hand, critics of this proposal believe that it would not eliminate a run, as it would not mitigate the real trigger behind a run: the risk, liquidity, and solvency of the underlying asset. Shifting to a floating NAV would require funds to incur the high costs of tax, accounting, and recordkeeping, which would outweigh the benefit, even as it demotivated investors (Peirce & Greene, 2014). Moreover, Beresford (2012) argues that because the deviation between the amortized and floating NAV is minor, there is no need to switch to a floating NAV.…”

Section: Discussionmentioning

confidence: 99%

“…MMFs originally came into existence when the US Federal Reserve in 1933 set interest rate limits on bank deposit savings to regulate bank competition. They increased in popularity in the 1970s, when interest rates on bank deposits hit this limit, with investors finding them to be a safe option that offers the liquidity, stability, and competitive returns (Peirce & Greene, 2014). The safety of MMFs was due to their nature of holding shortterm, high-quality securities and providing cash on demand for investors and therefore viewed as interchangeable with bank deposits.…”

Section: Literature Reviewmentioning

confidence: 99%

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Valuation discrepancies in money market funds during market disruptions: evidence from Egypt

Kordy

Bassiouny

Tooma

2020

Investment Management and Financial Innovations

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Money market funds (MMFs) are generally considered safe investment vehicles, but the 2008 global financial crisis showed their vulnerability during market disruptions resulting in increased regulatory oversight across developed markets to protect investors. This paper examines the effect of MMF accounting regulation on investors in an emerging market context. It hypothesizes that the continued use of amortized cost methods to account for MMFs’ Net Asset Value (NAV) during market disruptions can result in unfair treatment of investors. The Egyptian money market provided a unique laboratory to test this hypothesis over a prominent economic crisis that combined high levels of interest rate volatility with a redemption-only structure for MMFs. A model that measures the discrepancies between the amortized and floating market NAVs per certificate for various money market portfolios (MMPs) simulating MMFs of different durations is tested using the Egyptian data. A sharp rise in interest rates is found to lead to significant discrepancies between the amortized NAV per certificate relative to their floating value. Serial investor redemptions of the certificates compound the discrepancies, but only certificate holders remaining in the funds bear the accumulated losses, which are augmented for portfolios with higher durations. The results suggest that emerging market regulators consider introducing the rules that switch to floating NAV calculations for MMFs during such periods to promote equality across all investors.

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Section: Discussionmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%