Money Market Fund

RECENT NEWS
Mondo Visione  Jun 15  Comment 
The European Commission welcomes the agreement on the reform of Money Market Funds (MMFs) that was reached today at the Permanent Representatives Committee (COREPER) of the Council. The agreement marks a further step in the completion of...
Financial Times  Jun 10  Comment 
Diplomats say measures to be confirmed by finance ministers on June 17
Clusterstock  May 19  Comment 
By Ross Kerber BOSTON (Reuters) - The difference in yield between prime and government money market funds has widened by 6 basis points since January, according to data released on Wednesday, in a trend expected to accelerate as investors prepare...
Financial Times  Apr 28  Comment 
Assets in prime euro funds rise to €77bn this year
Financial Times  Apr 28  Comment 
New rules are already impacting the $2.7tn industry
Financial Times  Feb 16  Comment 
End of Fed’s zero interest rate policy boosts returns
Mondo Visione  Feb 16  Comment 
The European Securities and Markets Authority (ESMA) has issued today a follow-up peer review into the compliance of national competent authorities (NCAs) with guidelines regarding money market funds. This report follows up an earlier peer...
Financial Times  Jan 1  Comment 
US corporate bonds suffer as money market funds pull in $17bn
Financial Times  Dec 15  Comment 
Short-term Treasury bill yields rise on hopes of end to years of ultra-low returns




 
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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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