In October a change goes into effect concerning money market mutual funds. From an earlier blog (9/9/16), you may remember mutual funds are counted as runnable debt, accounts not insured by the FDIC but are part of a bank’s debt obligations. To shore up a bank’s ability to withstand a bank run, regulators are imposing new rules that will boost the funds’ safety but may make it harder to withdraw funds. (“How To Navigate a Safe-is Harbor,” by John Waggoner, Money, Sept. 2016, pg. 45.) These new regulations will apply to larger investors of money market funds, like pensions and endowments, but retail investors should be aware of the change.
In the past, if a customer put a dollar into one of the three major fund types – government money funds, (Click) prime funds (Click) and commercial paper (Click) – he or she expected to withdraw that same dollar out. Under the new rules, these money market mutual funds will float like any other mutual fund. The intent is to “ensure banks have enough cash on hand to handle large redemptions.” (Ibid pg. 45) The dollar an investor puts in may not be a dollar when withdrawn but seventy-five cents. What’s more, under the new regulations, prime funds and commercial paper funds can charge up to 2% as a redemption fee. Also, there may be a wait of up to 10 days for the withdrawal to go into effect.
Government money-market funds pay the least but are the most secure and there are no withdrawal fees. The remaining two fund types can charge a fee and are the least secure. (Ibid Pg. 45.)
As I said in the beginning, the changes in October apply to funds used by the wealthy or large institutions. Retail customers of CD’s and the like will still put a dollar in and get a dollar out. Nonetheless, regulators are honing in on the liability of the remaining runnable money. At some point, they may decide to look at the collective assets of small investors. In the future, holding on to your money will require you to be nimble.