Money Market Fund

RECENT NEWS
Motley Fool  Nov 21  Comment 
An obscure rule change affecting money market funds means that companies are paying higher rates to borrow.
Mondo Visione  Nov 16  Comment 
On 14 November 2016, the presidency reached provisional agreement with representatives of the European Parliament on a draft regulation on money market funds (MMFs), aimed at making such products more robust.  The draft regulation is...
Financial Times  Nov 4  Comment 
Investors turn to money market funds as nerves fray
Clusterstock  Oct 15  Comment 
On Friday, money market funds underwent a huge shift in how they will be regulated, resulting in a sea change for the $2.65 trillion money market fund industry. Let's recap quickly. Money market funds are mutual funds that invest mostly in...
MarketWatch  Oct 14  Comment 
The Treasury Department is looking at changing its issuance of short-term bills in the wake of money market fund reform that has increased demand for government issued securities.
Mondo Visione  Oct 13  Comment 
Thomson Reuters has introduced a specialized intraday evaluated pricing service for money market instruments, providing evaluated pricing that is updated throughout the global business day for public and other non-public short-term instruments....
Financial Times  Oct 7  Comment 
New rules for money market funds take toll on commercial paper
Reuters  Oct 6  Comment 
More than half of the 23 U.S. primary dealers expect certain types of short-term borrowing costs to rise after new rules on money market funds go into effect next week, according to a Federal Reserve survey released on Thursday.
Reuters  Sep 22  Comment 
New U.S. rules intended to prevent runs on money market funds are already sending tremors through markets and sparking debates on Capitol Hill, even though they are still weeks away from coming fully online.




 
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A money market fund is a type of mutual fund that is required to invest in low-risk securities. These funds have relatively low risks compared to other mutual funds and pay dividends that generally reflect short-term interest rates.

Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, or other highly liquid and low-risk securities.

Importance to the Repo market

Money market funds play a critical role in the repo market. Repurchase agreements, or repos, are short-term agreements in which a borrower "sells" a security, but agrees to purchase it back at a specified price and date (usually the next morning), in return for a small interest payment. Securities firms such as Investment Banks and brokerages are required to have a certain amount of cash overnight - by "selling" securities to money market funds just for the night, banks can meet their liquidity obligations.

In effect, Repos are secured loans since the lender (in this case the money market fund) gets the security as collateral for the cash being lent out.

Net Asset Value and Breaking the Buck

Money market funds attempt to keep their net asset value (NAV) at a constant $1.00 per share (the price the investor paid) – only the yield (interest) goes up and down. But a money market’s per share NAV may fall below $1.00 if the investments perform poorly - a situation known as "breaking the buck". This has only occured twice - most recently, on September 16 2008, the Reserve Primary Fund "broke the buck" after writing off a large amount of Lehman Brothers (LEH) commercial paper.

Unlike a money market deposit account at a bank, money market funds have traditionally not been federally insured. On September 19, 2008, as a result of the lehman bankruptcy and the Reserve Primary Fund breaking the buck, the U.S. Treasury Department established a temporary guarantee program for the U.S. money market mutual fund industry.

Statistics

As of December 11, 2008, retail money market funds had $1.282 trillion in Assets Under Management (AUM), of which 77% was in tax-exempt funds. There is an additional $2.5 trillion in institutional money market funds, of which the overwhelming majority - 93% - is tax-exempt.[1]

References

  1. Investment Company Institute, "Money Market Mutual Funds", Dec 11th, 2008.
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