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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
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
- ↑ Investment Company Institute, "Money Market Mutual Funds", Dec 11th, 2008.
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