Money Market Fund

RECENT NEWS
Financial Times  Oct 5  Comment 
Regulator intends to limit potential systemic risks from these vehicles
Clusterstock  Oct 1  Comment 
Money market funds in Europe are fighting to avoid "breaking the buck," which could trigger huge outflows from the sector. These funds typically invest in cash-equivalent assets, like high-quality  short-term corporate debt or government debt....
Financial Times  Sep 28  Comment 
Chinese money market fund pays high rates on renminbi deposits
SeekingAlpha  Sep 20  Comment 
By Joe The Investor: During the crisis of 2008, there was a selloff on some money market funds in the U.S. that caused their prices to trade below their fixed cost of $1 per unit. This phenomenon is known as “breaking the buck”. Note that in...
New York Times  Sep 17  Comment 
Money market funds played a central role in Lehman Brothers' failure and helped spread the contagion. But, Jennifer Taub, of Vermont Law School, says, the problems remain unsolved.
Financial Times  Sep 16  Comment 
Money market funds appear to be eschewing certain transactions undertaken with European banks in favour of the reverse repo programme, or RRP, tool
Reuters  Sep 12  Comment 
Global fund manager BlackRock said on Friday it had written to investors in one of its money market funds to tell them it planned to trigger a clause aimed at protecting the value of the fund's assets.
Mondo Visione  Aug 22  Comment 
The European Securities and Markets Authority (ESMA) published today its opinion on how national competent authorities should apply the modifications to the CESR guidelines on money market funds set out in the report on Mechanistic Reference to...
DailyFinance  Aug 1  Comment 
The new money market fund rules recently announced by the SEC may lead investors to change how they view a broad range of short-term instruments, including what has been thought of as their “lowest risk” investments,...




 
TOP CONTRIBUTORS

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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