Current Thinking

Managing Money Market Reform

A blog by Frederic Slade, CFA, Assistant Vice President and Senior Director, Investments and Michael Randazzo, Vice President, Investments and Senior Investment Strategies, CFA, Pentegra Retirement Services – August 30,2016

In July 2014, the Securities and Exchange Commission (SEC) issued new rules for the further regulation of money market mutual funds. The rules are scheduled to be implemented by October 14, 2016. The impetus for the new rules is to prevent money market funds from going below a stable $1.00 NAV (i.e.“breaking the buck” as the Reserve Primary Fund did in 2008) as well as to prevent large scale redemptions due to market stress or for any other reason.

The new rules distinguish between government and mixed or non-government retail and institutional money market funds. Government funds exclusively hold government guaranteed or sponsored securities. Mixed and non-governmental funds may hold securities issued by the government as well as corporate and other obligations. Retail funds will be able to transact at a stable $1.00 NAV, and these funds will be available to 401(k) investors and other retirement plan accounts for which each account in the fund has a person’s name attached to it. However, institutional money market funds, those designated for defined benefit and similar plans, must transact at a floating NAV, meaning the funds’ net asset value can be above or below $1.00. Both retail and institutional money market fund boards will be permitted to impose redemption fees or temporarily halt withdrawals if fund liquidity falls below certain regulatory limits. Government money market funds will continue to transact at a stable $1.00 NAV for all investors.

Pentegra has determined that offering only government money market funds as a short term investment option is in the best interest of its 401(k) plan sponsors and participants. Plan sponsors and participants expect money market fund investments to be simple to understand and protected from surprises such as markdowns in the fund NAV and gates on fund withdrawals. In fact, there has been pressure on non-government money market funds as investors have been moving out of these funds into government money market funds as the October 14th date approaches. In our view, rules that explicitly allow funds flexibility in gatekeeping or NAV markdowns make their eventual use more likely, introducing an unacceptable risk to our fiduciary clients.

In summary, we believe that offering government money market funds represents the most prudent response to money market reform, and we will continue to assess its impact from a legal and investment standpoint.

NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.


About the Author

Frederic Slade

Frederic Slade is Assistant Vice President and Senior Director, Investments at Pentegra Retirement Services. He joined Pentegra in May 2007 as a Senior Analyst in the Investment Department and became Director-Investments in January 2013. He is responsible for managing over $1 billion in internal bond portfolios and providing asset/liability studies, analytics and product strategy for Pentegra’s Defined Benefit and Defined Contribution Plans. Mr. Slade is also a frequent contributor of economic and financial market blogs to Pentegra’s Talk to a Specialist website and the financial media. Prior to joining Pentegra, Mr. Slade was a Senior Quantitative Analyst at Citigroup Asset Management, providing asset allocation and quantitative stock screening for mutual fund products. Prior to Mr. Slade’s tenure at Citigroup, he was an Investment Manager at NYNEX Asset Management (now Verizon). At Verizon, Mr. Slade was responsible for asset allocation and planning for its $15 billion Defined Benefit pension fund. Mr. Slade holds a Ph.D. in Economics from the University of Pennsylvania and a CFA, and is a frequent presenter at industry seminars and conferences.




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