Operational Implications of a Floating NAV across Money Market Fund Industry Key Stakeholders
Since their inception more than 40 years ago, money market funds (MMFs) have become a vital short-term cash management tool for public and private sector entities. Several distinctive characteristics make MMFs the favored short-term investment and finance vehicle for these organizations.
- Principal Preservation—The safety of MMFs is one of their most critical characteristics. Principal preservation is a primary objective within most institutional investment policies, and MMFs are able to meet that requirement.
- Same-Day Liquidity—The ability to redeem shares and receive cash on a same-day basis makes MMFs a practical way to fund daily cash disbursements such as payroll and supplier payments.
- Risk Diversification—Given regulations requiring diverse underlying assets within MMFs, they provide an effective and efficient way for organizations to hold a diverse portfolio of high-quality, short-term securities.
- Administration—The stable $1 net asset value (NAV) share price dramatically eases the accounting and administrative burden for investors.
In 2010, the Securities and Exchange Commission (SEC) made changes to the Investment Company Act Rule 2a-7, strengthening MMFs by reducing risks associated with liquidity, credit, and interest rates. These changes required modifications to MMF systems and processes but did not impact the systems and processes of investors.
In June 2013, the SEC proposed additional changes to Rule 2a-7, including requiring institutional prime and tax-exempt MMFs to change from a stable NAV to a floating NAV. Other types of MMFs would continue using the fixed NAV protocol. Unlike the changes of 2010, this proposed change represents a fundamental redesign of the structure and nature of MMFs that would directly impact the systems and accounting processes used by institutional investors to manage their funds.
The purpose of this paper is to explore the dramatic cost and operational impact of what might seem to be a small change in share price accounting protocol. The research in this paper examines the compliance costs across key stakeholders within the MMF industry if all MMFs changed to a floating NAV. We believe that the loss of economies of scale associated with a dual system of pricing some funds on a fixed NAV basis and others on a floating NAV basis—as the SEC has proposed—would be more