Money Market Reform in 100 Seconds

October 30, 2016

Written by Matt White, CFA®, Investment Analyst

On October 14th, the most significant provisions of the 2014 amendment to the SEC’s rules governing money market accounts (MMAs) will take effect.  The changes are in response to the credit and liquidity shortfalls that short-term debt investments experienced during the financial crisis.  The new provisions are intended to protect investors and better address the risks embedded in MMAs, making them safer, more liquid, and more transparent.

The most noteworthy change is a new class distinction between retail and institutional MMAs, along with restrictions on who can invest in each class.  Retail MMAs will only be available to accounts owned by a “natural person” and will continue to trade at a constant net asset value (NAV).  Institutional investors such as corporations, partnerships, limited liability companies, sole proprietorships, charity accounts, and certain trust accounts may invest in institutional MMAs.  Institutional MMAs will trade at a floating NAV with no guarantee of principal.  Both retail and institutional investors may also hold assets in government MMAs, which invest substantially all of its assets in short-term government securities.

All non-government MMAs, both retail and institutional classes, will be subject to potential redemption limitations during extreme market stress.  This is to prevent a “run” of redemptions from harming remaining investors.  The restrictions can include up to a 2% redemption fee and/or the suspension of redemptions for up to ten business days in a 90-day period.

No action is currently needed for MRA Associates clients since all necessary changes in their accounts were implemented in June and July.  Cash balances of individual clients with Schwab accounts transitioned to the bank sweep feature.  The bank sweep feature is FDIC insured up to $250,000 and provides interest rates similar to the money market sweep feature in which these accounts were previously invested.  These holdings will not be subject to market risk and will earn a stated rate of return.

The cash balances of MRA Associates clients with institutional Schwab accounts transitioned into the Schwab Government Money Fund.  While this fund does not guarantee preservation of principal, it is invested almost entirely in government and agency securities, making it one of the safest options for cash investments.

If you have further questions or would like to discuss these changes in more detail, please contact a member of your MRA Associates engagement team.