ICI Answers Questions on Money Market Funds

ICI explains that a money market fund “breaks a buck” when it does not maintain a $1.00 net asset value (NAV). It notes that to date, money market fund shareholders have lost only a few pennies on the dollar from money market funds that have “broke(n) the buck.” When a fund does this, shares are redeemed and investors are repaid at the fund’s NAV, calculated on the day they place their redemption order.

In some cases, ICI says, a fund will close to new investors and distribute its assets to investors in accordance with the distribution terms in its prospectus. A fund might do this to provide equitable treatment to all investors in the face of significant redemption pressure that might lead to a forced sale of the fund’s assets.

In its discussion, ICI notes that Rule 2a-7 under the Investment Company Act of 1940 includes several conditions intended to stabilize a fund’s share price at $1.00:

• Credit Quality: Money market funds are required to hold high-quality securities. For taxable money market funds, at least 95% of a money market fund’s assets must be invested in securities that received the highest short-term rating from two NRSROs (unless only one NRSRO rates the security or issuer of debt); or securities of comparable quality. Not more than 5% of a money market fund’s investments may be in securities that received the second-highest short-term rating categories.
• Diversification: Money market funds must maintain a diversified portfolio. This requirement limits a fund’s economic exposure to any single issuer. For instance, in general, money market funds may not invest more than 5% of assets in the securities of any single issuer (1%, if the issuer has received ratings in only the second highest short-term rating category), with the exception of securities issued by the federal government or its agencies.
• Maturity: Money market funds must invest in securities that are considered “short-term.” In general, money market funds cannot acquire a portfolio security with a remaining maturity of greater than 397 days. In addition, a money market fund’s weighted average maturity (WAM)-an average of the maturities of all securities held in the portfolio, weighted by each security’s percentage of net assets-must not exceed 90 days.

ICI’s discussion, including links to other information about money market funds and information on the government’s temporary guaranty program, can be found here .