Money Market Redemption Gate

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
chinchin
Posts: 19
Joined: Tue Nov 14, 2017 8:02 pm

Money Market Redemption Gate

Post by chinchin » Wed Sep 12, 2018 3:19 am

If a 2008-level financial crisis happens again, what are the odds of a money market redemption gate being enforced? How long would it last?

AlohaJoe
Posts: 3840
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Money Market Redemption Gate

Post by AlohaJoe » Wed Sep 12, 2018 3:49 am

The odds are 1 in 26,314.

I'm curious what possible concrete actions you are taking based on those specific odds?

chinchin
Posts: 19
Joined: Tue Nov 14, 2017 8:02 pm

Re: Money Market Redemption Gate

Post by chinchin » Wed Sep 12, 2018 3:56 am

Sorry, maybe the question was posed in an unclear way.

I am not asking for a quantitative answer.

I was trying to start a conversation about the fat tail risk of getting locked out of MM funds during a crisis. Personally I have been stashing extra money in MM but am considering moving it to a CD ladder or high interest saving account. Want to get a gauge of how others see the risk.

Future sarcastic remarks will be ignored, thanks. Please do not post in this thread if you don’t have anything informative to add. Mahalo.
Last edited by chinchin on Wed Sep 12, 2018 4:37 am, edited 1 time in total.

AlohaJoe
Posts: 3840
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Money Market Redemption Gate

Post by AlohaJoe » Wed Sep 12, 2018 4:11 am

My reply wasn't sarcastic. In 2008 there was 1 money market fund out of 26,000 registered money market funds that had to freeze redemptions.

Some people had to wait over a year to get all of their money. The final distribution came five years later but that was only $60 million of the original $3.5 billion, so most people had received most of their money long before that.

I still don't really understand what this information helps you do, though.

chinchin
Posts: 19
Joined: Tue Nov 14, 2017 8:02 pm

Re: Money Market Redemption Gate

Post by chinchin » Wed Sep 12, 2018 4:39 am

Ok, thanks for the explanation.

Im just increasingly worried that MM funds are not secure due to floating NAV and redemption gate rules. Will probably move my cash to some other instrument.

Freefun
Posts: 381
Joined: Sun Jan 14, 2018 3:55 pm

Re: Money Market Redemption Gate

Post by Freefun » Wed Sep 12, 2018 5:16 am

I didn't know MM NAV can move. So my VMMXX can have a price other than $1 ??
Remember when you wanted what you currently have?

Valuethinker
Posts: 36349
Joined: Fri May 11, 2007 11:07 am

Re: Money Market Redemption Gate

Post by Valuethinker » Wed Sep 12, 2018 5:43 am

Freefun wrote:
Wed Sep 12, 2018 5:16 am
I didn't know MM NAV can move. So my VMMXX can have a price other than $1 ??
The below seems to say that retail Prime MMF cannot "break the buck" however they can impose redemption gates. Some funds are both institutional and retail (eg 401k MMFs) and they do have floating NAV.

https://www.morganstanley.com/im/public ... orm_us.pdf

https://usmoneymarketfunds.com/uploads/ ... erview.pdf

And from Investopedia (my highlights)
Retail Investors Not Completely Affected
The most significant rule change, the floating NAV, is not likely to affect investors who invest in retail money market funds. These funds may still maintain the $1 NAV. However, they may still be required to institute the redemption triggers for charging a liquidity fee or suspending redemptions. Many of the larger fund groups are taking actions to either limit the possibility of a redemption trigger or avoid it altogether by converting their funds into a government money market fund, which has no requirement.

The same cannot be said for people who invest in prime money market funds inside their 401(k) plans, because these are typically institutional funds subject to all of the new rules. Plan sponsors will have to change out their fund options, offering a government money market fund or some other alternative.



Read more: 4 Factors to Know About Money Market Reform in 2016 (FII, BAC) | Investopedia https://www.investopedia.com/articles/i ... z5Qsn014GJ
Follow us: Investopedia on Facebook
https://usmoneymarketfunds.com/uploads/ ... 0Depth.pdf

Valuethinker
Posts: 36349
Joined: Fri May 11, 2007 11:07 am

Re: Money Market Redemption Gate

Post by Valuethinker » Wed Sep 12, 2018 5:48 am

AlohaJoe wrote:
Wed Sep 12, 2018 4:11 am
My reply wasn't sarcastic. In 2008 there was 1 money market fund out of 26,000 registered money market funds that had to freeze redemptions.

Some people had to wait over a year to get all of their money. The final distribution came five years later but that was only $60 million of the original $3.5 billion, so most people had received most of their money long before that.

I still don't really understand what this information helps you do, though.
As I understand it, the US Treasury bailout of the MMFs might now no longer be legal.

It exposes a risk point in the world financial system. The so-called "Shadow Banking System" which provides liquidity (i.e. cash) to financial institutions and companies all over the world on a day to day basis.

A contact is a corporate treasurer for a $1bn+ North American company, backed by Private Equity. The experience of Q4 2008 was absolutely terrifying, as Commercial Paper would not "roll". Companies were literally running out of cash to pay suppliers & employees.

The British government delayed collecting tax from companies that was due - effectively a loan. Exposure got to something like £20 bn, which is perhaps 2% of UK GDP.

Freefun
Posts: 381
Joined: Sun Jan 14, 2018 3:55 pm

Re: Money Market Redemption Gate

Post by Freefun » Wed Sep 12, 2018 6:06 am

Ok. So if the odds are 1 in 26,314 I'm not sure I should be doing anything.

I've stashed a few years living expenses in VG MM. I don't plan on having much income (will retire) hence the need to use MM funds to live on.

Should I put some cash elsewhere, and if so any suggestions?
I have accounts at Chase so I could move some money there.

Thanks!
Remember when you wanted what you currently have?

ddurrett896
Posts: 874
Joined: Wed Nov 05, 2014 3:23 pm

Re: Money Market Redemption Gate

Post by ddurrett896 » Wed Sep 12, 2018 6:44 am

chinchin wrote:
Wed Sep 12, 2018 3:19 am
If a 2008-level financial crisis happens again, what are the odds of a money market redemption gate being enforced? How long would it last?
What makes a MM account different than a savings in terms of being able to withdraw money?

Grt2bOutdoors
Posts: 19324
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Money Market Redemption Gate

Post by Grt2bOutdoors » Wed Sep 12, 2018 6:49 am

Freefun wrote:
Wed Sep 12, 2018 6:06 am
Ok. So if the odds are 1 in 26,314 I'm not sure I should be doing anything.

I've stashed a few years living expenses in VG MM. I don't plan on having much income (will retire) hence the need to use MM funds to live on.

Should I put some cash elsewhere, and if so any suggestions?
I have accounts at Chase so I could move some money there.

Thanks!
US Treasury only money market funds are the safest, they are holding direct obligations of the US Treasury. If they fail to redeem on time, we will have much bigger problems. In 2008, those who held US Treasuries and cash were most secure. Those who held commercial paper could have experienced a much different outcome had not the Federal Reserve step in with various programs.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
Posts: 19324
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Money Market Redemption Gate

Post by Grt2bOutdoors » Wed Sep 12, 2018 6:52 am

ddurrett896 wrote:
Wed Sep 12, 2018 6:44 am
chinchin wrote:
Wed Sep 12, 2018 3:19 am
If a 2008-level financial crisis happens again, what are the odds of a money market redemption gate being enforced? How long would it last?
What makes a MM account different than a savings in terms of being able to withdraw money?
The underlying investment needs to be liquid in order for the fund to meet redemptions. Illiquid investments do you no good when someone is clamoring for instant access to funds and it does not exist. It’s like trying to collect on an IOU and saying I’ll have it for you when I can. Make you feel good?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

arf30
Posts: 282
Joined: Sat Dec 28, 2013 11:55 am

Re: Money Market Redemption Gate

Post by arf30 » Wed Sep 12, 2018 6:57 am

Federal money market funds (VMFXX, SPAXX) don't have the redemption gates and other restrictions that Prime MM funds have, you could use one of those.
The fund will not impose a fee upon the sale of your shares, nor temporarily suspend your ability to sell shares if the fund's weekly liquid assets fall below 30% of its total assets because of market conditions or other factors.
Last edited by arf30 on Wed Sep 12, 2018 7:13 am, edited 1 time in total.

Freefun
Posts: 381
Joined: Sun Jan 14, 2018 3:55 pm

Re: Money Market Redemption Gate

Post by Freefun » Wed Sep 12, 2018 6:59 am

Ok so it sounds like I need to move all my VMMXX (prime MM) to VUSXX (treasury MM). Correct?
Thanks !
Remember when you wanted what you currently have?

stan1
Posts: 6007
Joined: Mon Oct 08, 2007 4:35 pm

Re: Money Market Redemption Gate

Post by stan1 » Wed Sep 12, 2018 7:11 am

Freefun wrote:
Wed Sep 12, 2018 6:59 am
Ok so it sounds like I need to move all my VMMXX (prime MM) to VUSXX (treasury MM). Correct?
Thanks !
Federal interest is not taxable by states so that's an added benefit of treasury MMF if you pay state income taxes. If I didn't have immediate plans for the cash I'd use an FDIC/NCUA insured CD for at least part of it. For example Pen Fed has a 12 month CD at 2.45% right now. It is very easy to do ACH transfers back and forth between Vanguard and a bank/credit union. People haven't talked much about inflation in recent years but it was 2.9% for the 12 months ending in July.

Freefun
Posts: 381
Joined: Sun Jan 14, 2018 3:55 pm

Re: Money Market Redemption Gate

Post by Freefun » Wed Sep 12, 2018 7:38 am

stan1 wrote:
Wed Sep 12, 2018 7:11 am
Freefun wrote:
Wed Sep 12, 2018 6:59 am
Ok so it sounds like I need to move all my VMMXX (prime MM) to VUSXX (treasury MM). Correct?
Thanks !
Federal interest is not taxable by states so that's an added benefit of treasury MMF if you pay state income taxes. If I didn't have immediate plans for the cash I'd use an FDIC/NCUA insured CD for at least part of it. For example Pen Fed has a 12 month CD at 2.45% right now. It is very easy to do ACH transfers back and forth between Vanguard and a bank/credit union. People haven't talked much about inflation in recent years but it was 2.9% for the 12 months ending in July.
No state income tax.
Not sure I can bother with CDs. I'm striving for simplicity especially since finding this great forum.

So I'll move to.VUSXX.

Thanks everyone - always great help here.
Remember when you wanted what you currently have?

User avatar
dm200
Posts: 18765
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Money Market Redemption Gate

Post by dm200 » Wed Sep 12, 2018 11:47 am

Put some in the Federal MM - which follows more stringent rules and a lower risk.

chinchin
Posts: 19
Joined: Tue Nov 14, 2017 8:02 pm

Re: Money Market Redemption Gate

Post by chinchin » Wed Sep 12, 2018 1:15 pm

dm200 wrote:
Wed Sep 12, 2018 11:47 am
Put some in the Federal MM - which follows more stringent rules and a lower risk.
I’m looking at ultra short term bond ETF. That way I wont be gated or fee’d in a crisis. Dont want any MM in the underlying assets though.

User avatar
Phineas J. Whoopee
Posts: 7581
Joined: Sun Dec 18, 2011 6:18 pm

Re: Money Market Redemption Gate

Post by Phineas J. Whoopee » Wed Sep 12, 2018 3:35 pm

Money market fund regulations changed not quite two years ago, and include gates and fees, and floating net asset values, and different arrangements based on whether the fund is institutional-only or meant for retail investors.

The gates and fees do not apply to Treasury and Federal money market funds. That's what drove Vanguard to change its brokerage settlement funds from Prime to Federal.

Indeed all of this is meant to stop some of the things that went wrong during last decade's financial crisis. It wasn't only breaking the buck, which only one fund did, but the drying up of liquidity normally invested in commercial paper, which companies use to fund their short-term operations.

Without a profit you can keep trying to turn it around for a long while. Without cash you're out of business this week.

That's also why the Fed, not the Treasury, didn't bail out any money market funds. They, on a strictly temporary basis, guaranteed the assets in such funds already. It didn't apply to new purchases. The idea was to free up short-term cash for enterprises. The Fed paid nothing to any of the funds, and its only exposure was the small difference between the Net Asset Value and $1 that might have resulted.

PJW

Post Reply