Markets & Economy
What's the latest on money market regulations?
July 07, 2014
Crystal Hardie: Jackie poses a question about the possible upcoming regulation that might require money market funds to have a floating net asset value, rather than the usual stable-dollar-per-share value.
David Glocke: Sure. So ever since the financial crisis and the reserve event, the SEC has been active in trying to find ways to enhance the money market product to make it more attractive to investors and to provide the confidence to them that the money market is an appropriate investment option.
So in 2010, they came out with the first set of new rules for money market funds that we became compliant with, enhancements to liquidity. So money market funds were required to have at least 10% daily liquidity and 30% weekly liquidity. There were no liquidity requirements previously in money market funds.
There were the "know your client" rules that were instituted so that we have a better understanding of the type of investors that are in the fund and their particular needs, so we can make sure that we come up with a strategy to make sure that we have cash available if we know there are large investments that are going to be leaving the portfolio.
The SEC also shortened the average maturity of the fund, took it from 90 days down to 60. Reducing it by a third causes the portfolio to have faster turnover in the fund also, and so it reduces risk to the investor base. They also put limits on some of the lower-quality debt that was allowed to be in money market funds. And while Vanguard has never bought any of that debt in our money market funds, it did reduce the amount that other advisors can go ahead and put into the fund.
So they added a lot of rules to go ahead and, again, increase the stability of the portfolio by reducing its weighted average maturity and adding other features designed to go ahead and keep us, as managers, focused on the clients that we have in the portfolio.
Since that time, we knew that the SEC still had intentions to do more, and a year ago they issued a 698-page report, including a smorgasbord of different ideas that had been presented to the SEC and things they wanted us to go ahead and take into consideration and respond to, which we did.
And since that time, we've patiently been waiting for the SEC to conclude their study of that information and release the new set of rules, but we haven't heard anything yet. And, in fact, The Wall Street Journal just recently reported that there's still some dissention amongst the SEC commissioners about which way they want to go with this, and they speculated that it might not be until maybe the end of the summer that the new rule may or may not come out.
And so, because of that, I really don't think it's probably best if we turn around and try to speculate what may or may not happen over the course of the next few months. We're patiently going to wait and see where the commissioners decide they want to go ahead and push the product. But there's $2.5 trillion worth of assets, all patiently waiting to find out. And as soon as we do hear something, I would encourage everybody to go to vanguard.com because there we'll have an opportunity to respond to what the SEC comes out with.
Sarah Hammer: I fully agree with what David said, and we deal with these types of questions a lot with our clients. And we like to encourage them to really, as tough as it is, try to tune out the noise from Washington and stay focused, maintain discipline and a long-term perspective, and, again, control the one variable that you can, which is cost.
I just want to go back really quickly to what David said about liquidity in the portfolio. He was talking about the provisions that are in place for portfolio management of money market funds. So when we talk about daily liquidity or weekly liquidity in the money market funds, for example, the rule that's in place that says you have to have a certain amount of daily liquidity in your portfolio simply means that the portfolio manager wants to be able to convert the instruments to cash within that period of time. So, again, liquidity is all about accessibility without incurring significant cost.
And the other thing that David mentioned was knowing your customer, and that's a key component that's really highlighted in our commentary, The Buck Stops Here, as well, which helps to prevent those disruptive redemptions, which can be costly to the remaining investors in a money market fund.
All investing is subject to risk, including the possible loss of the money you invest.
For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.
© 2014 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.
Vanguard experts discuss the regulatory environment
The SEC has mandated many changes to the money market industry in recent years but there are still others being considered. Vanguard fixed income and investment experts David Glocke and Sarah Hammer review the regulations already in place but caution against speculating about what may happen in the future.
Other highlights from this webcast:
- Why there's a place for a money market fund in your portfolio
- How to choose a money market fund that's right for you
- All investing is subject to risk, including the possible loss of the money you invest.
- For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
- An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
- This webcast is for educational purposes only. We recommend that you consult a financial or tax advisor about your individual situation.