Rule changes enhance money fund safety
Chief Investment Officer Debbie Cunningham offers her thoughts on recent money market regulatory changes.
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Money Market Outlook: Rule Changes Enhance Safety
The SEC amended Rule 2a-7 in 2010 to increase fund liquidity, credit quality and diversification. What’s been the effect of the SEC’s 2010 Rule 2A-7 enhancements? Chief Investment Officer Debbie Cunningham, who oversees Federated’s taxable money markets, provides her insights.
How well have recent regulatory changes worked?
In just a few words, the effect has been enhanced fund safety. Changes to diversification, liquidity and credit quality requirements were positives in 2010 when they were invoked. But certainly, the market put the rules to test in July and August 2011, when concerns about the European debt situation affected prime and municipal money market funds. At the same time, in late July and early August, U.S. debt negotiations and concerns about a potential U.S. default ultimately resulted in the Standard and Poor’s downgrade of the U.S. government long-term debt rating. With both of those issues weighing on the market, there was volatility — from the shareholder and client perspectives — similar to what we saw in the fall of 2008.
The difference was that, from a liquidity perspective, the market impact was much less severe and muted because of 2A-7 enhancements. Certainly, the market didn’t plan this test, but it was one that was well-received from a money fund standpoint — and certainly from a shareholder standpoint.
Another aspect of the rule changes that was significant during 2011 focused on disclosure: specifically better, more timely disclosure. More uniform disclosure of portfolio holdings and characteristics to shareholders, as well as to regulators, provided quality information at a time when information was necessary. That allowed money market funds to function very well during a time of shareholder and client volatility.