SEC Adopts Money Market Fund Reform Rules

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
dan121
Posts: 23
Joined: Fri May 09, 2008 9:47 am

SEC Adopts Money Market Fund Reform Rules

Post by dan121 »

Full press release here: http://www.sec.gov/News/PressRelease/De ... 9ADIPldV-w

"The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs."

Thoughts?
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

Will this affect the Vanguard (or Fidelity/TIAA-CREF/etc.) money market funds?

Schwab apparently doesn't have institutional clients in their retail money market fund(s?), or so it seemed from the news coverage.

But what about Vanguard?

And at least at Schwab, for IRA's, one had the choice to use an actual bank-type account.
That choice doesn't seem to be available in any 403b account, or at least I haven't found that.

Thanks!

RM
Topic Author
dan121
Posts: 23
Joined: Fri May 09, 2008 9:47 am

Re: SEC Adopts Money Market Fund Reform Rules

Post by dan121 »

If I understand this correctly, this applies only to institutional prime money market funds, such as Vanguard Prime Money Market Fund Institutional Shares (VMRXX) ... so I'm assuming it doesn't apply to Vanguard Prime Money Market Fund (VMMXX). But clarification from an expert would be appreciated! And even if it only applies to large institutional accounts, are there any trickle down affects for the average individual investor?
MindBogler
Posts: 1446
Joined: Wed Apr 17, 2013 12:05 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by MindBogler »

So they're going to let the NAV float and providing a mechanism to trap people who are invested there. Sounds fun!
User avatar
cfs
Posts: 4154
Joined: Fri Feb 23, 2007 12:22 am
Location: ~ Mi Propio Camino ~

Re: SEC Adopts Money Market Fund Reform Rules

Post by cfs »

Vanguard News

This information is already posted in the Vanguard website. I do not post links, but you can do a search for "SEC rules preserve the integrity of money funds for individuals." It is all business as usual at Vanguard (using Vanguard's words).

Thanks for reading.
~ Member of the Active Retired Force since 2014 ~
denovo
Posts: 4808
Joined: Sun Oct 13, 2013 1:04 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by denovo »

Who has money in money markets anymore?
"Don't trust everything you read on the Internet"- Abraham Lincoln
Topic Author
dan121
Posts: 23
Joined: Fri May 09, 2008 9:47 am

Re: SEC Adopts Money Market Fund Reform Rules

Post by dan121 »

Here's the link to the Vanguard's article: https://personal.vanguard.com/us/insigh ... sec-072014

And, FWIW, I still have cash in a MM. Where's better to keep short-term cash reserves?
ftobin
Posts: 1071
Joined: Fri Mar 20, 2009 3:28 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ftobin »

Does anyone know what qualifies an institutional fund as such? I had thought it's merely a marketing term for funds which have lower fees and higher investment minimums.
Topic Author
dan121
Posts: 23
Joined: Fri May 09, 2008 9:47 am

Re: SEC Adopts Money Market Fund Reform Rules

Post by dan121 »

From Investopedia:
"A fund that targets high value investors with low management fees, but very high minimum investing requirements. Institutional funds refers to funds that aim to manage money for large institutional investors, such as pension or endowment funds. These funds will typically offer much lower MERs than retail funds, but also mandate a minimum investment much greater than most other funds, some hedge and private equity funds withstanding."

Vanguard's has a min investment of $5,000,000.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Phineas J. Whoopee »

Happy to hear it! :sharebeer

Institutions generally aren't slouches. They understand the underlying assets as well as anybody. Their primary reason for using money market funds isn't to fool themselves, but to make their balance sheets look better while still complying with GAAP and reaping the regulatory benefits.

The press release says nothing about retail funds. It doesn't rule out doing the same to them, but neither does it impose the new rules there. Individual investors frequently are fooled into thinking the NAV really always is $1.00.

Money market funds were one of the multipliers in the recent financial crisis. Many, many businesses rely on very short-term instruments for their working capital. If your factory diminishes in resale value you may have some difficulty but you're still in business. If you lose access to working capital you're out of business, and your employees are out of work, and your suppliers are out of orders, and your downstream channels are out of product.

It's an awfully high price to pay in return for the opportunity to pretend, for accounting purposes, that market values don't exist.

PJW
Mr Bear
Posts: 209
Joined: Sat Jan 10, 2009 9:18 am

OK, Just What is the SEC Trying to Do with MM Funds ...

Post by Mr Bear »

[Thread merged into here, see below. --admin LadyGeek]

... and as a plain-vanilla individual investor who switches some bread from the 500 to Prime MM every few years when circumstances seem to warrant, how concerned should I be?

What might the SEC do that would make MM a toxic zone for little fish like me who just want a nice, easy little safe haven for the next time the fraudsters blow up the world?

And are any alternatives starting to look better? Or, in this world, is "safe haven" now only a naive and charmingly antiquated concept?
User avatar
prudent
Moderator
Posts: 9085
Joined: Fri May 20, 2011 2:50 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by prudent »

My first thought was if all MM funds floated their NAV, I would never use one again because doing taxes would be miserable.
User avatar
LadyGeek
Site Admin
Posts: 95704
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: SEC Adopts Money Market Fund Reform Rules

Post by LadyGeek »

FYI - I merged Mr Bear's thread into here, which is in the Investing - Theory, News & General forum.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: OK, Just What is the SEC Trying to Do with MM Funds ...

Post by Phineas J. Whoopee »

Mr Bear wrote:...
And are any alternatives starting to look better? Or, in this world, is "safe haven" now only a naive and charmingly antiquated concept?
Yes, there are alternatives which look better and better all the time. Online savings accounts, which are FDIC insured so long as you title the accounts properly and don't overly concentrate money at any one institution, and can deposit money inside the United States if that's an issue, have been paying much more interest than money market mutual funds for years and years.

You can even establish Traditional and Roth IRAs containing them. And if you've got the time, they've got the beer CDs.

PJW
User avatar
Dale_G
Posts: 3466
Joined: Tue Feb 20, 2007 4:43 pm
Location: Central Florida - on the grown up side of 85

Re: SEC Adopts Money Market Fund Reform Rules

Post by Dale_G »

On their face, the rules look reasonable even for institutional investors. The NAV is rounded to 4 decimal places and there will simplified tax accounting. If the NAV is $.9999 and XYZ corp writes a check for $100,000 about 100010 shares will be redeemed - effectively a $10 fee.

I would have no problem if the rules applied to retail investor funds.

Dale
Volatility is my friend
ASUGrad
Posts: 259
Joined: Sun Oct 20, 2013 8:09 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ASUGrad »

Dale_G wrote:On their face, the rules look reasonable even for institutional investors. The NAV is rounded to 4 decimal places and there will simplified tax accounting. If the NAV is $.9999 and XYZ corp writes a check for $100,000 about 100010 shares will be redeemed - effectively a $10 fee.

I would have no problem if the rules applied to retail investor funds.

Dale
You don't, and I really don't either. But tell the people who think that money market mutual funds are FDIC insured(which they aren't of course) that the principle is going to start fluctuating. The SEC's goal of avoiding runs on money markets would have instantly caused a run on money markets.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

Are there ANY changes in the new SEC regs that would affect the retail investor, specifically those using money market funds within IRA/403b/etc., type accounts.

Most of what I'm reading emphasizes that they won't break the buck on those retail accounts, but the part(s) about restricting withdrawals doesn't seem quite as clear.

REASON: We use IRA and 403b MM funds as our emergency money, because we can remove it without penalty (over 59.5).

(We can't access the Employer-contributed part of the 403b, but we can, if we wish/need, transfer out the Employee-contributed part, including returns.)

I'm reluctant to remove the 403b part especially, as we can't put that "back".

But maybe we should withdraw these "cash equiv" funds, and put them in bank account or CDs now.

Thanks.

RM
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Phineas J. Whoopee »

ResearchMed wrote:Are there ANY changes in the new SEC regs that would affect the retail investor, specifically those using money market funds within IRA/403b/etc., type accounts.

Most of what I'm reading emphasizes that they won't break the buck on those retail accounts, but the part(s) about restricting withdrawals doesn't seem quite as clear.
...
Nothing that's been published suggests the new regulations will extend to retail funds. That's not quite the same as not affecting the retail investor, because so many of us own equities (broadly indexed, preferably), and there may be some effect on corporations which passes through, but it will be small.

Nothing in the new regulations will prevent retail funds from "breaking the buck." They're less likely to now than before the financial crisis because the rules on them, not the subject of the recent SEC announcement, have already been tightened, but if things get bad enough a fluctuation in reported NAV is still possible.

You, RM, weren't asking about this point in particular but I think it bears repeating anyway: nobody should mistake a money market mutual fund for an FDIC- or NCUA-insured deposit account.

PJW
Eureka
Posts: 1123
Joined: Thu Apr 05, 2007 10:24 pm
Location: Illinois

Re: SEC Adopts Money Market Fund Reform Rules

Post by Eureka »

It's unclear to me if the gates and withdrawal fees apply to non-institutional funds. None of the stories I have read makes this clear, and the SEC statement is a bit muddy, too. There may be a missing comma in one sentence that could make all the difference. Even Vanguard's statement is vague.

We'll have months and months to get acquainted with the details, but it almost seems as though institutions are being deliberately vague to prevent panic withdrawals before the rules go into effect.
sketchy9
Posts: 205
Joined: Mon Oct 25, 2010 2:10 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by sketchy9 »

dan121 wrote:Here's the link to the Vanguard's article: https://personal.vanguard.com/us/insigh ... sec-072014

And, FWIW, I still have cash in a MM. Where's better to keep short-term cash reserves?
Any online account? For instance CapitalOne360 gives you 0.75% on a checking account, up to 1% I believe depending on your balance.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

sketchy9 wrote:
dan121 wrote:Here's the link to the Vanguard's article: https://personal.vanguard.com/us/insigh ... sec-072014

And, FWIW, I still have cash in a MM. Where's better to keep short-term cash reserves?
Any online account? For instance CapitalOne360 gives you 0.75% on a checking account, up to 1% I believe depending on your balance.
Can't do anything like this, alas, within a 403b type account.

That's the problem.

Eureka above understands our concern, about the muddiness.

RM
User avatar
Taylor Larimore
Posts: 32842
Joined: Tue Feb 27, 2007 7:09 pm
Location: Miami FL

New Rules For Money Market Funds.

Post by Taylor Larimore »

[Thread merged, see below. --admin LadyGeek]

Bogleheads:

Morningstar has published the new rules for Money Market Funds:
Required Liquidity Fees
If a money-fund's holding can be easily and readily converted to true cash, the SEC designates that holding as being either a "daily liquid" or "weekly liquid" asset. Should a fund run low on these liquid securities, such that its weekly liquid assets are calculated to be less than 10% of its total assets, then under the new rules the fund must impose a liquidity fee of 1% on redemption requests.
Effectively, those redeeming will receive 99 cents on the dollar, with the remaining penny remaining in the fund as a payment to existing shareholders. A fund may escape this provision only if its board of directors, including a majority of independent directors, overrides the automatic imposition of the fee.

Optional Liquidity Fees
If a fund's weekly liquid assets are calculated to be less than 30% of its total assets, then that fund may impose an optional liquidity fee. The optional fee, for reasons that remain unclear, would be 2%--double that of the required liquidity fee when the fund breaches the 10% liquidity threshold. Once again, this fee must be supported by the fund's board of directors, including a majority of its independent directors.

Optional Redemption Gates
With funds that have less than 30% in weekly liquid assets, fund boards (including, you guessed it, the majority of independent directors) may also vote for the stronger measure of shutting down redemptions altogether. Such gates, as they are called, can be imposed for no more than 10 days within a given 90-day period. When activated, though, they have the effect of completely cutting off all transfers, so that shareholders wishing to access their money funds for any reason are shut down until the gate is lifted.
The New Rules for Money Market Funds

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
sscritic
Posts: 21853
Joined: Thu Sep 06, 2007 8:36 am

Re: New Rules For Money Market Funds.

Post by sscritic »

Previous thread with discussion, but perhaps not this exact explanation of the rules.
http://www.bogleheads.org/forum/viewtop ... 0&t=143457
User avatar
LadyGeek
Site Admin
Posts: 95704
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: SEC Adopts Money Market Fund Reform Rules

Post by LadyGeek »

FYI - I merged Taylor Larimore's thread into here. As sscritic implies, it's "close enough" to justify the merge.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Eureka
Posts: 1123
Joined: Thu Apr 05, 2007 10:24 pm
Location: Illinois

Re: SEC Adopts Money Market Fund Reform Rules

Post by Eureka »

Finally, clarity in the Morningstar story (bold mine):

"Several reports seem to suggest, as does the SEC's press release, that the rules apply only to institutional funds. Not so--the most notable modification, requiring some money funds to float their net asset values rather than fix the price at a constant $1.00, is indeed for institutional funds only. But provisions for liquidity fees and redemption gates apply to all funds, both institutional and retail."
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

Eureka wrote:Finally, clarity in the Morningstar story (bold mine):

"Several reports seem to suggest, as does the SEC's press release, that the rules apply only to institutional funds. Not so--the most notable modification, requiring some money funds to float their net asset values rather than fix the price at a constant $1.00, is indeed for institutional funds only. But provisions for liquidity fees and redemption gates apply to all funds, both institutional and retail."
Great.

At a time when many people might most need some of the cash-equiv monies, it will still be $1.00 = 100 cents, but "you can't have it"!?

And most people are totally unaware of any of this.

RM
User avatar
prudent
Moderator
Posts: 9085
Joined: Fri May 20, 2011 2:50 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by prudent »

This absolutely makes me rethink how much I want to keep in money market funds. "Liquid" has become less so.
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: SEC Adopts Money Market Fund Reform Rules

Post by Kevin M »

For those who didn't read the Vanguard article:
The Securities and Exchange Commission (SEC) recently approved rules that will allow money market funds catering to individual investors to maintain a stable $1 share price.
<snip>
The vast majority of investors in Vanguard money market funds will not be affected by the new rules. Rather, they will continue to have access to a stable, high-quality cash management tool.
And yes, there are better alternatives outside of 401k/403b plans and IRA accounts at mutual fund companies and brokerages. Much better to have an FDIC-insured account earning 0.9% than an uninsured account earning 0.01%.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

Kevin M wrote:For those who didn't read the Vanguard article:
The Securities and Exchange Commission (SEC) recently approved rules that will allow money market funds catering to individual investors to maintain a stable $1 share price.
<snip>
The vast majority of investors in Vanguard money market funds will not be affected by the new rules. Rather, they will continue to have access to a stable, high-quality cash management tool.
And yes, there are better alternatives outside of 401k/403b plans and IRA accounts at mutual fund companies and brokerages. Much better to have an FDIC-insured account earning 0.9% than an uninsured account earning 0.01%.

Kevin
Well, apparently we'll have access to a "stable, high-quality cash management tool", one that "maintains a stable $1 share price".

However, we might NOT be able to get that money in a pinch, at a time when we might most need it, due to other "disruptions" in the financial system.

Not so good at all.

And most people aren't aware of this at all.

RM
Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Johno »

sketchy9 wrote:
dan121 wrote:Here's the link to the Vanguard's article: https://personal.vanguard.com/us/insigh ... sec-072014

And, FWIW, I still have cash in a MM. Where's better to keep short-term cash reserves?
Any online account? For instance CapitalOne360 gives you 0.75% on a checking account, up to 1% I believe depending on your balance.
Yes this topic seems pretty hypothetical for individuals as long as top bank account rates are a large multiple of MM mutual fund rates, even mediocre bank rates are way higher. And even if you have such a large multiple of $250k to keep in cash that it's too much of a hassle to split it into enough accounts for each to be smaller than the FDIXClimit, a short term bond fund has fairly small duration and credit risk for again a large multiple of MM mutual fund rates. Even for muni, the MM fund return is .01%, but hooray it's not taxable! :D I have virtually nothing in money market mutual funds now.

And, were the relative rates to once again approach being competitive with banks, I'd cast a very wary eye on the new withdrawal limits in these rules for individuals. No matter what the government or industry thinks they will achieve informing the public about that, I think the likelihood is very high that in a future panic lots of people won't know about it and the fact they couldn't get their money would heighten the panic. Especially insofar as this rule is supposedly intended to allow the government to step back from guaranteeing such funds in a future crisis. Maybe the foregoing gets too close to a discussion of policy...but I personally would require a substantial yield premium to invest in something of a given credit risk where I can't get my money out right away. It seems a particularly mismatched feature for a supposed safe but low yield investment. It guess the industry 'can live with' this compromise because they too assume most individual investors won't pay any attention to the withdrawal rules as long as the share value doesn't float, and they hope the next big crisis is on somebody's else's watch.
User avatar
prudent
Moderator
Posts: 9085
Joined: Fri May 20, 2011 2:50 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by prudent »

Is the industry "living with it" or are they paying lip service to a regulation that might even work in their favor?

In the last crisis, didn't some companies pony up their own funds to avoid breaking the buck and being stigmatized by it? Now they need not worry about that, they can just close the gate and/or assess a "liquidity fee", and point to regulations.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

Just double checked with Schwab, and the IRA "cash" there is already in an FDIC-insured bank account.

Guess we'll roll over some of the Employee-contributed 403b funds to an IRA at Schwab, and keep the emergency cash there, plus some other holdings, and have mostly just the Employer-contributed money (and returns, obviously) stay in the 403b, since we can't get at those at all, not even to roll over, til real retirement.

Need to check if we need to liquidate MF's. Schwab rep thought it can't be transferred 'in kind' from a 403b.

Anyone know for sure, or is that plan-dependent?

I'll check on Monday morning.

Vanguard doesn't have a way to put tax-deferred money into an FDIC-insured bank account, correct?

RM
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: New Rules For Money Market Funds.

Post by Phineas J. Whoopee »

Thanks Taylor. The information seems more complete than that which was available earlier in the week, as the article itself references.
Taylor Larimore wrote:[Thread merged, see below. --admin LadyGeek]

Bogleheads:

Morningstar has published the new rules for Money Market Funds:
Taylor is quoting the rules that apply to all money market mutual funds, not just to institutional varieties.
Taylor Larimore wrote:
Required Liquidity Fees
If a money-fund's holding can be easily and readily converted to true cash, the SEC designates that holding as being either a "daily liquid" or "weekly liquid" asset. Should a fund run low on these liquid securities, such that its weekly liquid assets are calculated to be less than 10% of its total assets, then under the new rules the fund must impose a liquidity fee of 1% on redemption requests.
Effectively, those redeeming will receive 99 cents on the dollar, with the remaining penny remaining in the fund as a payment to existing shareholders. A fund may escape this provision only if its board of directors, including a majority of independent directors, overrides the automatic imposition of the fee.
So, first of all, by maintaining sufficient very high quality very short term assets MM funds can avoid this condition, and even if they don't their boards can waive it.
Taylor Larimore wrote:
Optional Liquidity Fees
If a fund's weekly liquid assets are calculated to be less than 30% of its total assets, then that fund may impose an optional liquidity fee. The optional fee, for reasons that remain unclear, would be 2%--double that of the required liquidity fee when the fund breaches the 10% liquidity threshold. Once again, this fee must be supported by the fund's board of directors, including a majority of its independent directors.
Funds are further encouraged by this rule to keep still more of their assets short and high quality. Once again they can avoid the the condition if they like, and their boards can decide not to impose the fee. Morningstar is being slightly disingenuous by conflating the previous "only if its board of directors, including a majority of independent directors, overrides the automatic imposition of the fee," with the present "this fee must be supported by the fund's board of directors, including a majority of its independent directors." In the first the board must vote to override the default; in the second the default is not to impose it and the board must vote otherwise. I think in the case of a tie it will make a difference.
Taylor Larimore wrote:
Optional Redemption Gates
With funds that have less than 30% in weekly liquid assets, fund boards (including, you guessed it, the majority of independent directors) may also vote for the stronger measure of shutting down redemptions altogether. Such gates, as they are called, can be imposed for no more than 10 days within a given 90-day period. When activated, though, they have the effect of completely cutting off all transfers, so that shareholders wishing to access their money funds for any reason are shut down until the gate is lifted.
Funds can avoid this condition by doing precisely the same as they would to avoid the previous one, and again, boards don't have to put it into place.

These are matters of what funds are allowed to do, not what they must do.
Taylor Larimore wrote: The New Rules for Money Market Funds
Best wishes.
Taylor
Thanks again Taylor.

You didn't choose to quote the closing paragraph from the Morningstar article:
...
In short, money funds' future looks much the same today as it did a week ago. The funds are currently unattractive to both investors and their sponsoring fund companies (which often find themselves rebating management fees to support the funds' meager yields) because short-term interest rates are low. When rates rise, and thereby boost money fund yields, the new legislation is unlikely to stand in the way of sales. Unfortunately, it also will not do more than slow future market panics.
It ain't legislation, Morningstar.

My interpretation: competition among Money Market mutual funds, retail and otherwise, will become less about yield and more about safety. For retail investors pure yield competition will increasingly be the province of insured deposit accounts. Investors with liquid assets which fit within insurance limits will be less likely to use MMFs, and perhaps more investment firms will offer same-day transfers from bank accounts.

I view that as a good thing, echoing my upthread comments about systemic risk, although I agree with Morningstar that the problem of non-bank runs is hardly solved by these provisions, in the way insurance addressed the bank run issue and moved the needle on banking system stability.

I welcome, not that anybody needs my invitation, opposing interpretations.

PJW
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: SEC Adopts Money Market Fund Reform Rules

Post by Kevin M »

Money market funds have never been guaranteed. Where a better alternative exists, one should use it.

In a 401k/403b plan, a MM fund may still be the least risky alternative. You can use a combination of bond fund and MM fund to adjust fixed-income risk and overall portfolio risk to your preference, and hopefully the bond fund won't be subject to liquidity constraints if they are imposed on the MM fund. I get the impression that most Bogleheads don't use MM funds anyway.

In an IRA at Vanguard, Fidelity, etc., one could buy short-term treasuries instead of using a MM. At Vanguard you'll need to open a brokerage account if you don't have one. I keep a bit in MM funds in Vanguard and Fidelity IRAs for liquidity, but would switch over to individual short-term treasuries if I became worried about the MM fund liquidity.

I don't see any point in using a money market fund in a taxable account currently, since there are much better alternatives.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

Kevin M wrote:Money market funds have never been guaranteed. Where a better alternative exists, one should use it.

In a 401k/403b plan, a MM fund may still be the least risky alternative. You can use a combination of bond fund and MM fund to adjust fixed-income risk and overall portfolio risk to your preference, and hopefully the bond fund won't be subject to liquidity constraints if they are imposed on the MM fund. I get the impression that most Bogleheads don't use MM funds anyway.

In an IRA at Vanguard, Fidelity, etc., one could buy short-term treasuries instead of using a MM. At Vanguard you'll need to open a brokerage account if you don't have one. I keep a bit in MM funds in Vanguard and Fidelity IRAs for liquidity, but would switch over to individual short-term treasuries if I became worried about the MM fund liquidity.

I don't see any point in using a money market fund in a taxable account currently, since there are much better alternatives.

Kevin
Yes, but...

Doesn't money from selling any fund (bond or equity) have to go into a money market fund, from which it can then be withdrawn?
Or can one have a mutual fund sold and get the proceeds directly, without first having the proceeds land in a money market fund?
(This would be in tax-deferred accounts at Vanguard, in which there isn't any FDIC-insured bank option, correct?)

RM
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Phineas J. Whoopee »

ResearchMed wrote:...
Yes, but...

Doesn't money from selling any fund (bond or equity) have to go into a money market fund, from which it can then be withdrawn?
Or can one have a mutual fund sold and get the proceeds directly, without first having the proceeds land in a money market fund?
(This would be in tax-deferred accounts at Vanguard, in which there isn't any FDIC-insured bank option, correct?)

RM
I happen to have reviewed the Vanguard automatic withdrawal application earlier this week, for my own nefarious purposes. :twisted:

One can sell from a tax-deferred Vanguard mutual fund account and have the proceeds transferred into a bank account that has both a routing and account number. There was no listed restriction on whether said bank account had to be an IRA or non-IRA type.

Not just very recently, nor ever so long ago, Vanguard implemented same-day mutual fund purchase arrangements from bank accounts, eliminating the need to hold funds in an MMF to buy right away. My experience with redemptions since then is they were credited the next business day.

PJW
User avatar
dmcmahon
Posts: 2855
Joined: Fri Mar 21, 2008 10:29 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by dmcmahon »

denovo wrote:Who has money in money markets anymore?
Alas, me. Two of my accounts can't be swept to an FDIC account for reasons I don't understand. Schwab's default sweep is to an MM accounts though I can freely move cash to/from a linked checking account. But this means I'm exposed to MM fluctuations, should they apply. Ditto a 401k at another broker where all misc cash goes to an MM over which there is no choice. You can of course quickly use the cash to buy shares or CDs, but there's still that small window of exposure.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

Phineas J. Whoopee wrote:
ResearchMed wrote:...
Yes, but...

Doesn't money from selling any fund (bond or equity) have to go into a money market fund, from which it can then be withdrawn?
Or can one have a mutual fund sold and get the proceeds directly, without first having the proceeds land in a money market fund?
(This would be in tax-deferred accounts at Vanguard, in which there isn't any FDIC-insured bank option, correct?)

RM
I happen to have reviewed the Vanguard automatic withdrawal application earlier this week, for my own nefarious purposes. :twisted:

One can sell from a tax-deferred Vanguard mutual fund account and have the proceeds transferred into a bank account that has both a routing and account number. There was no listed restriction on whether said bank account had to be an IRA or non-IRA type.

Not just very recently, nor ever so long ago, Vanguard implemented same-day mutual fund purchase arrangements from bank accounts, eliminating the need to hold funds in an MMF to buy right away. My experience with redemptions since then is they were credited the next business day.

PJW
Is this in a taxable account, or tax-deferred?

I'm guessing it's different if there are potential tax issues in the transfer to the outside bank account.
But we'll look into this on Monday.

We probably have a work-around anyway, which is to move the move-able 403b accounts to Schwab IRAs, which then have the FDIC-insured bank accounts for "cash".
This is our emergency money, so we don't want it captured anywhere, and we'd also prefer not to have it subject to the vagaries of either bond or stock funds.
It would be nice if we never need to use it, but we might be most likely to need it if/when there is some sort of financial crisis.
Better safe than sorry for our emergency money. The rest can "sit" for a while.

Thanks.

RM
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Phineas J. Whoopee »

Hi RM,

Investigating further on Monday sounds like a good plan. In the mean time, Schwab Bank's FDIC-insured savings account pays 0.12%. If you want to use such vehicles, other online banks also offer IRAs, and some pay a lot more.

PJW
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: SEC Adopts Money Market Fund Reform Rules

Post by Kevin M »

ResearchMed wrote: Doesn't money from selling any fund (bond or equity) have to go into a money market fund, from which it can then be withdrawn?
Or can one have a mutual fund sold and get the proceeds directly, without first having the proceeds land in a money market fund?
(This would be in tax-deferred accounts at Vanguard, in which there isn't any FDIC-insured bank option, correct?)
RM
I don't believe there is any FDIC-insured bank savings type option for any type of account at Vanguard (you can buy FDIC-insured CDs, but that's not what we're talking about). Taxable mutual fund accounts have already been addressed (use a linked bank account instead).

The linked bank account also works for IRA mutual fund accounts. I think I've always taken IRA distributions from a money market account in the past, for example because I tend to accumulate dividends in the MM fund. But I just now went into an inherited IRA account at Vanguard and went through the steps to sell a few shares of a bond fund and have the proceeds deposited into one of my linked bank accounts. I didn't click Submit on the final screen, but it all worked fine up until that point.

As pointed out just above, you must have a money market fund to use as the "sweep account" for your Vanguard brokerage account, but of course you don't have the maintain an ongoing balance in the MM fund.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
Constant Chaos
Posts: 175
Joined: Fri Sep 06, 2013 11:45 am

Re: SEC Adopts Money Market Fund Reform Rules

Post by Constant Chaos »

Anyone care to comment on how this would play out in a state 529 plan? I would never choose to put money in a money market fund, given any other option. But my childrens' 529 funds have no other "safe" cash choices whatsoever. No FDIC insured savings accounts or CDs. My allocation glide path has me transferring money from equity and bond funds to the money market fund as they get closer to entering college. I'm extremely alarmed that if I needed to withdraw funds concurrent with some financial crisis, the plan could prevent me from doing so, and/ or charge me exit fees?
sscritic
Posts: 21853
Joined: Thu Sep 06, 2007 8:36 am

Re: SEC Adopts Money Market Fund Reform Rules

Post by sscritic »

RM:

When you sell a Vanguard fund, you can send proceeds to your bank or to another Vanguard fund (of which a money fund is just one of many) or you can ask them to mail you a check.

I am over 59 1/2; who is Vanguard to deny me my money by not sending it to me when I sell a fund in an IRA? And even if I weren't, they don't know I am not willing to pay the taxes and penalties nor do they know whether I am going to take the money and send it to an IRA at Fidelity within 60 days. [I know there are reasons to do a trustee-to-trustee transfer, but why is it any of Vanguard's business where I send my money and where I open an IRA?]

Here. Let me try. I have an IRA at Vanguard. It has one fund in it. Let me try and sell some [don't worry, I know what cancel means].

Running commentary:
logged on
balances and holdings
click buy and sell under IRA; choose sell funds
Check box next to the one fund's name
Box for amount pops open; I put in $5000.

There is now new text on the right.
2. Where's the money going?

BANK OF DEFAULT
Drop down:
  • Exchange to another fund
    BANK OF DEFAULT
    BANK OF NOT DEFAULT
    Send me a check
Select a method (with buttons)
  • Electronic bank transfer
    Wire
With the choice as EBT, you see this:
You should receive the money in 2 business days; 3 business days if submitted after the close of regular trading on the NYSE (usually 4 p.m., Eastern time).
With the choice as Wire, you see this:
The money should be wired to your bank by the close of the next business day, or the second business day if your request is submitted after the close of regular trading on the NYSE (usually 4 p.m., Eastern time).

Note: Vanguard doesn't charge a fee for outgoing wires. However, your bank may charge a fee to receive or accept a wire.
Next step, having gotten all the information I need, cancel.

I guess I could have chosen exchange to another fund, but with all the rebalancing that I keep reading about, I am assuming you know how that works.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by ResearchMed »

Phineas J. Whoopee wrote:Hi RM,

Investigating further on Monday sounds like a good plan. In the mean time, Schwab Bank's FDIC-insured savings account pays 0.12%. If you want to use such vehicles, other online banks also offer IRAs, and some pay a lot more.

PJW
Thanks PJW.

This wasn't relevant until now, because we really preferred not to move the 403b money "out" unless we really needed to - and hopefully we wouldn't.
But now....

So yes, we should check into other FDIC-insured accounts, including other online choices.
We are now likely to keep a bit more there. Increasing this "cash" total among the various accounts was something we were already doing, in prep for DH at some point reducing his work time.
(However, it seems a bit more likely for a while that he'll keep the same workload, but just do more of it from more interesting locations. :happy Better than having him retire or go half-time and *still* do the same work, at lesser or no pay.)

First, we need to juggle the various holdings, and then move more cash to a Schwab IRA, and get it into a *bank* account there.
Then we'll look for IRA accounts with some sort of actual non-negligible interest, as best as exists these days, and keep just a bit locally "around the corner", literally.

Thanks!

RM
User avatar
Oicuryy
Posts: 1959
Joined: Thu Feb 22, 2007 9:29 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Oicuryy »

It is about time that investors who buy money market securities through mutual funds bear the risk of those securities.

Ron
Money is fungible | Abbreviations and Acronyms
User avatar
Kevin M
Posts: 15789
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: SEC Adopts Money Market Fund Reform Rules

Post by Kevin M »

Constant Chaos wrote:Anyone care to comment on how this would play out in a state 529 plan? I would never choose to put money in a money market fund, given any other option. But my childrens' 529 funds have no other "safe" cash choices whatsoever. No FDIC insured savings accounts or CDs. My allocation glide path has me transferring money from equity and bond funds to the money market fund as they get closer to entering college. I'm extremely alarmed that if I needed to withdraw funds concurrent with some financial crisis, the plan could prevent me from doing so, and/ or charge me exit fees?
I would transfer the safe portion to another 529 plan. I believe Virginia 529 offers an FDIC-insured account with a decent rate (2%?). I know for a fact that Colorado 529 offers a stable value fund currently paying 2.64% (I own it), but that may not be safe enough for you. I think some plans also offer CDs, which you mentioned.

I think you can transfer from one 529 plan to another once each year, but you can look that up.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
User avatar
dmcmahon
Posts: 2855
Joined: Fri Mar 21, 2008 10:29 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by dmcmahon »

Oicuryy wrote:It is about time that investors who buy money market securities through mutual funds bear the risk of those securities.

Ron
Sure - just let individuals and companies have accounts at the Fed to hold their cash, and I'll agree. Until then, can't agree with this thinking. You might just as easily say "it's about time a banks depositors bear the risk of the mortgages it holds". Sure. And next thing you know, it's time to "go to the mattresses!"
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Phineas J. Whoopee »

Constant Chaos wrote:Anyone care to comment on how this would play out in a state 529 plan? I would never choose to put money in a money market fund, given any other option. But my childrens' 529 funds have no other "safe" cash choices whatsoever. No FDIC insured savings accounts or CDs. My allocation glide path has me transferring money from equity and bond funds to the money market fund as they get closer to entering college. I'm extremely alarmed that if I needed to withdraw funds concurrent with some financial crisis, the plan could prevent me from doing so, and/ or charge me exit fees?
I certainly can see how the new rules would be more onerous for someone in an account type where the money is not easily moved, not without penalty anyway, and in which somebody else gets to choose the MMF in question.

What I'd say in reaction to your post is it probably depends on how soon you anticipate the need. It may seem glacial, but I suspect over time rules and options in such accounts will shift in light of the new information.

Otherwise, as long as the tax and penalty rules are on your side, maybe you should plan to pull the money several weeks or months earlier than your need to spend it. The rule says the longest suspension of withdrawals is for 10 days out of any quarter, and the very worst penalty is 2%. I'm not saying the latter would be easy to absorb, but one should be able to reduce the risk by, as they say, getting out while the getting is good.

Of course, breaking the buck is just as possible now as it was before. The difference is now there are less drastic steps that can come earlier. It isn't as if the prospect of a 1% or 2% penalty is worse than the prospect of an x% drop in NAV, in crisis conditions.

PJW
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Phineas J. Whoopee »

dmcmahon wrote:
Oicuryy wrote:It is about time that investors who buy money market securities through mutual funds bear the risk of those securities.

Ron
Sure - just let individuals and companies have accounts at the Fed to hold their cash, and I'll agree. Until then, can't agree with this thinking. You might just as easily say "it's about time a banks depositors bear the risk of the mortgages it holds". Sure. And next thing you know, it's time to "go to the mattresses!"
At Treasury Direct you can place an unlimited amount (maybe there would be something that eventually kicked in, but it isn't ridiculously tiny like the maximum $5,000,000 noncompetitive bid in an auction) into the Zero Percent Certificate of Indebtedness. You could also roll 4-week T-bills, which are auctioned every seven days. Split it up 25% into each issue, plus, they're state and local tax free.

It's linked to your checking account and transfers take one business day.

Does that mean you do agree with the thinking now? :wink:

PJW
Constant Chaos
Posts: 175
Joined: Fri Sep 06, 2013 11:45 am

Re: SEC Adopts Money Market Fund Reform Rules

Post by Constant Chaos »

Kevin M wrote: I think you can transfer from one 529 plan to another once each year, but you can look that up.

Kevin
I would rollover to another 529 plan, but we've taken the 5% state tax deduction for over a decade. And the state ( Illinois) has a clawback provision for that deduction if you rollover to another 529 plan. :(
Johno
Posts: 1883
Joined: Sat May 24, 2014 4:14 pm

Re: SEC Adopts Money Market Fund Reform Rules

Post by Johno »

prudent wrote:Is the industry "living with it" or are they paying lip service to a regulation that might even work in their favor?

In the last crisis, didn't some companies pony up their own funds to avoid breaking the buck and being stigmatized by it? Now they need not worry about that, they can just close the gate and/or assess a "liquidity fee", and point to regulations.
True, that will help them 'live with it' the first time. I just wonder the future of the product after that. But I guess the current execs figure that will be a future exec's problem.

Among the informed class of investor here, does anyone anticipate that a money market fund you aren't forced to use would be likely to have enough yield premium to justify risking a liquidity delay or haircut when you need the money most? I mean just in practical terms looking out for oneself. I highly doubt this product will ever make sense again compared to a bank account or t-bill even if interest rate conditions change, unless the government further 'reforms' things to impose limits and haircuts on withdrawals from banks or sale of t-bills during a crisis. I believe the average investor will ignore the new feature to too great degree for the pricing to work, until a mass of people actually get burned by it in a future crisis.
Post Reply