Municipal money market funds are hemorrhaging cash in advance of rules aimed at reducing the risk of runs on the pools.
Assets have plunged $64 billion since the beginning of the year to the lowest levels since 1999 as investors pulled money from tax-exempt funds in 25 of the last 30 weeks and shifted into ones that buy only government debt. These government-only funds are exempt from Securities and Exchange Commission rules effective in October that require floating net-asset values and impose liquidity fees and redemption suspensions under certain conditions.
The new regulations are adding more pain to funds that have been plagued by seven years of the Federal Reserve’s zero interest-rate policy.
“They’re in danger of going extinct, especially if you don’t get a rate hike anytime in the next couple of years,” said Peter Crane, president of Westborough, Massachusetts-based Crane Data LLC. “Municipal money market funds lobbied hard to get an exemption from the SEC’s rules, but the SEC threw them under the bus."
Ryan White, a spokesman for the SEC, declined to comment.
In 2014, the SEC adopted new money-market rules after a four-year debate between the fund industry and regulators. The rules were aimed at preventing a repeat of the run on one money fund during the 2008 credit crisis. The $62.5 billion taxable Reserve Primary fund "broke the buck" because of losses on Lehman Brothers Holdings Inc. debt it held. The fund’s move to reprice shares below $1 sowed panic among investors, who pulled $310 billion from money funds in a single week, helping freeze credit markets.
Under SEC rules taking effect Oct. 14, municipal-money funds whose investors are institutions, including municipalities such as Los Angeles, must abandon their $1 per-share value and allow their prices to float. Retail tax-exempt funds can keep a stable $1 per-share fixed price.
In addition, both institutional and retail funds may impose liquidity fees and suspend redemptions if weekly liquid assets fall below 30 percent of total assets. If weekly liquidity falls below 10 percent, money market funds must impose a 1 percent liquidity fee, unless the board decides it’s not in the fund’s best interest.
The changes don’t apply to Treasury and government-only funds.
Liquidity Situation