What changed: The average maturity of securities of an MMF investment must be 60 days or less, down from 90 days before the new rules were implemented. The maximum maturity limit for MMF-owned securities is unchanged at 397 days.
What it means: Funds will be better able to return investors' money in a pinch. But future yields may suffer, Era says. As with most debt instruments, longer maturities mean higher returns.
If money market funds have to stick with shorter maturities, they'll be missing out on potentially higher yields. This would especially be true in future falling-rate environments where managers are trying to hang on to high yields as long as possible, he says.
What changed: MMF managers can now suspend redemptions if their fund is in danger of breaking the buck to allow for an orderly distribution of the fund's assets to all shareholders, big and small. Such a halt will mean an end to the fund. "Once you halt redemptions, basically, you're done," Collins says.
What it means: The changes will allow a more orderly winding down of failing funds, ensuring small investors don't get shortchanged because faster "hot money investors" drain the funds, Collins says.
Low yieldsThree months in, most investors probably haven't noticed anything different, because the biggest drivers of money market fund yields -- the federal funds rate and conditions in the broader economy -- are still keeping yields extremely low, Collins says.
But over time, when you add all these rules together, there will be a measurable cost in yield for the increased safety provided by the new rules, says Peter Crane, president of Crane Data in Westborough, Mass.
"Estimates range from 3 (basis points) to 20 basis points," Crane says.
However, Crane agrees that most investors probably won't notice because, "even in a spread-out environment, the cost in yield would be dwarfed by a single move by the Fed," he says.
In the end, these rules are fairly incremental and will likely be just one step in a continuing process to make money market funds more stable in a financial crisis.
"Would (these changes) have stopped a spontaneous run? Maybe," Crane says. But regulators are still discussing stronger steps such as an emergency liquidity bank or some formalization of the type of government backing for MMFs that came into play in 2008, he says.
"Investors are a little bit safer, but (regulators) are still trying to walk the fine line between promising that the government will support the financial and banking systems, while not trying to increase moral hazard," Crane says.
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