Money market funds were marketed as "safe" investments at their inception in the 197⛎0s. Their pitch was, "If your investments in the stock market are keeping you from sleeping at night, it's time to learn about the safer alternativesꦅ in money market funds."

The focus on safety and solid returns was justified because money markets traditionally maintained a 澳洲幸运5官方开奖结果体彩网:net asset value (NAV) of $1 per share and paid a higher rate of interest than 澳洲幸运5官方开奖结果体彩网:checking accounts. The combination of a stable share price and a decent 澳洲幸运5官方开奖结果体彩网:interest rate made them good places to store cash.

This positioning held until September 2008 when the 澳洲幸运5官方开奖结果体彩网:Reserve Fund "broke the buck," a financial services industry phrase used to describe the scenario when a money market fund's NAVs fall below $1 per share. The Reserve Fund had been developed by Bruce Bent, a man often referred to as the "father of the money-fund industry."

The Reserve Fund Meltdown

The Reserve Fund's meltdown directly hurt a relatively small number of investors but it revealed that the safety the investors had relied on for decades was an illusion. Investors began to wonder which money market fund was safe if the Reserve Fund couldn't maintain its share price.

The failure of the Reserve Fund called into question the definition of "safe" and the validity of marketing money market funds as "澳洲幸运5官方开奖结果体彩网:cash equivalent" investments.

Rule 2a-7

The Securities and Exchange Commission (SEC) recognized the threat to the 澳洲幸运5官方开奖结果体彩网:financial system that would 🌠be caused by a systemic collapse 𒁃of money market funds. It responded with Rule 2a-7 in 2014.

This regulation requires that money market funds restrict their underlying holdings to investments that have more conservative 澳洲幸运5官方开奖结果体彩网:maturities and 澳洲幸运5官方开奖结果体彩网:credit ratings than those previously permitted to be held. Rule 2a-7 states that the average dollar-weighted 澳洲幸运5官方开奖结果体彩网:portfolio maturity of investments held in a money market fund cannot exceed 60 days. No more than 3% of assets can be invested in securities that don't fall within the first- or second-highest ranking tier.

Increased 澳洲幸运5官方开奖结果体彩网:liquidity requirements also became more stringent under Rule 2a-7. Taxable funds were required to hold at least 10% of their assets in investments that could be converted into cash within one day. At least 30% of assets had to be in investments that could be converted into cash in less than a week. These minimums were increased from 10% to 25% and from 30% to 50% in 2023.

Funds must undergo 澳洲幸运5官方开奖结果体彩网:stress tests as well to verify their ability to maintain a stable NAV under adverse conditions. They're required to track and disclose the NAV based on the 澳洲幸运5官方开奖结果体彩网:market value of underlying holdings and to release that information on a 60-day delay after the end of the reporting period.

Impact on Industry and Investors

The enactment of Rule 2a-7 had no significant impact on investors in reality. The NAV disclosure requirement has been a non-event because investors must find the historical information. 澳洲幸运5官方开奖结果体彩网:Fund companies aren't required to provide it proactively. Yields on money market funds may be lower than they would be if the funds could invest in more aggressive options but the difference is only a few 澳洲幸运5官方开奖结果体彩网:basis points.

Reforms in 2014 required that money market funds allow their NAV to "float" or fluctuate. A fund may not𝕴 have a stable NAV of $1 at any giꦚven time.

The Bottom Line

It can cause investors to lose money if a money market fund's NAV drops below the $1 share price. The 澳洲幸运5官方开奖结果体彩网:interest rate differential between a money market fund and a checking or 澳洲幸运5官方开奖结果体彩网:savings account is generally small so investors have to watch the NAV closely to mak💦e sure they're getting the full benefit of their interest rate. The loss ofꦍ NAV could eat up the gains from interest and make the passing of Rule 2a-7 just one tactic to address this risk.