The New Money Market Rule, and Me

Written by John Osbon on September 21, 2016

Every investor owns money markets, but are they the right ones? They’re not all the same, and with a new SEC Rule going into effect on October 14th, choosing the wrong one could put your money at risk. What’s the rule and what does it mean for you? Be prepared, not surprised. Here’s how:

It was only 8 short years ago

Money market funds have always been thought of as a supremely safe place to park cash. And for years that was true; the interest rates were modest, but the funds never fell in value.

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Then, in the bad old days of September 2008, the $65B Reserve Fund money market fund “broke the buck.” Instead of a Net Asset Value (NAV) of $1, the Reserve Fund moved the NAV to 97 cents and halted redemptions. How’d that happen? Well, investors at the time were reaching for higher interest rates, and money market funds were grabbing market share by offering them. Unfortunately, the Reserve Fund sought to deliver higher rates by holding, among other securities, $700m of Lehman Brothers commercial paper, which became worthless on September 16th, 2008.

The US Treasury stepped in and guaranteed all money market funds at the $1 NAV. Eventually, the Reserve Fund was liquidated and paid out 99 cents per share, but the damage was done, opening the possibility that other funds could turn your one dollar deposit into 90-something cents. 

Money market reform was necessary to prevent another stampede. That’s what’s happening now.

Mistakes that don’t need to happen

The new rules are simple. Money market funds that hold only government guaranteed debt of less than 60 days, and subject themselves to stress tests, may maintain a stable $1 per share value. All others are considered “prime” money markets funds that may hold many other types of short term debt with a floating NAV.

What kind of money market fund do you own? It’s time to find out. Before October 14th call or email your investment advisor and specify that you want only $1 NAV money market funds in your accounts, and no prime funds. File this under the investment adage, “Know Your Investments”. If you intend to own cash, own cash.

We do the work for you

We have already talked with our independent custodian, Fidelity, to make sure all Osbon Capital client short term money is secured by less than 60-day government issued funds. Fidelity was way ahead of the coming transition, and so were we. You can do the same with your investment advisor, so you don’t find yourself in one of those mistakes that never need to happen moments. Don’t worry, but do act. There’s plenty of choice when you insist that your money market fund(s) meet the new standard.

John Osbon – josbon@osboncapital.com


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