Money Market Fund Temporary Guarantee by the U.S. Treasury

New regulations by the U.S Treasury are providing a temporary guarantee of money market fund asset values.  Do to the instability in 2008 of short term money market instruments and the concern for significant and swift redemptions of money market mutual fund shares, the U.S. Treasury announced a temporary program to guarantee certain assets in money market funds.  When liquidity in credit markets reached a peak in 2008, some of the short term money market holdings of money market funds became much less liquid, causing some concern that significant withdrawals from the money market funds could lead some funds to not be able to maintain their $1.00 per share net asset value.  The loss in these funds brought on by the credit freeze and subsequent illiquid markets caused alarm that further erosion in money market and capital market pricing may escalate.

The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.  For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund, both retail and institutional, that pays a fee to participate in the program.

President George W. Bush approved the use of existing authorities by Treasury Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below.

Money market funds play an important role as a savings and investment vehicle for many Americans; they are also a fundamental source of financing for our capital markets and financial institutions.  Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system.

Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets.  In turn, these pressures have caused a spike in some short term interest and funding rates, and significantly heightened volatility in exchange markets.  Absent the provision of such financing, there is a substantial risk of further heightened global instability.  Maintenance of the standard $1 net asset value for money market mutual funds is important to investors.  If the net asset value for a fund falls below $1, this undermines investor confidence.  The program provides support to investors in funds that participate in the program and those funds will not “break the buck”.

This action should enhance market confidence and alleviate investors’ concerns about the ability for money market mutual funds to absorb a loss.  Investors in money market mutual funds with a net asset value that falls below $1 would be notified that their fund triggered the insurance program.

The program is intended to forestall the concern of a run on the money market mutual funds that has caused problems at some money market funds, in particular those used by corporations and other large institutions as cash-management accounts.  It provides coverage to shareholders for amounts that they held in participating taxable and tax-exempt money market mutual funds as of the close of business on September 19, 2008.  Coverage runs for three months. 

For any fund participating in the program, the coverage will be triggered if a fund comes under duress as a result of a credit problem or the inability to meet shareholder redemptions. Specifically, for the coverage to kick in, a participating fund’s net asset value must fall below $0.995, forcing it to liquidate, which means selling all of its assets and redeeming all investors’ shares.

The temporary program provides coverage to shareholders for amounts that they held in participating money market mutual funds as of the close of business on September 19. In addition, if an investor redeems shares of a participating fund after September 19, the coverage extends only to the balance in the fund on the date it “breaks the buck.”  The investor is covered for the lesser of two amounts: the balance in the fund account as of September 19 or the balance in the fund on the day the fund failed to maintain its stable $1 per share price.

It is also important to point out that subsequent share purchases of participating funds are not covered, nor are purchases into a fund made by new investors.  Consequently, coverage is grandfathered for balances in money market funds as of September 19 but does not cover any new money invested in a fund.

Because the key issue in the money markets today is investor confidence not a problem with the structu

This entry was posted on Tuesday, January 6th, 2009 at 3:42 pm and is filed under Mutual Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.