US Securities and Exchange Commission economists have found that reforms adopted in 2010 have bolstered the $2.6 trillion money fund industry but would not have prevented the Reserve Primary Fund from "breaking the buck" during the financial crisis.
The SEC's findings were laid out in a new study released late on Wednesday that examines the 2008 financial crisis and the impact of reforms implemented as a response to those events. During the crisis, heavy exposure to collapsed investment bank Lehman Brothers caused the net asset value (NAV) of the Reserve Primary Fund, a large money market fund, to fall below $1 per share, or "break the buck" in industry parlance.
"The findings indicate that funds are more resilient now to both portfolio losses and investor redemptions than they were in 2008," the report says.
"That being said, no fund would have been able to withstand the losses that The Reserve Primary Fund incurred in 2008 without breaking the buck, and nothing in the 2010 reforms would have prevented The Reserve Primary Fund's holding of Lehman Brothers debt."
The study was requested by SEC Democratic Commissioner Luis Aguilar and Republicans Troy Paredes and Dan Gallagher, all three of whom were reluctant to support any new reforms championed by SEC Chairman Mary Schapiro without additional economic analysis.
The study does not make any policy recommendations. However, it does explore various explanations for redemption activity by investors during the financial crisis, and how any potential structural changes to money funds could affect investor behavior.
Since last year, Schapiro has been calling for a new round of reforms to the money market fund industry.
Although the SEC implemented numerous reforms in 2010 she has said those did not go far enough to prevent runs that could cause money market funds, ordinarily presumed to be risk-free investments, to drop below an industry target of $1 per share and thus lose money.
Those reforms at the time bolstered fund transparency, tightened credit quality standards, shortened the maturities of fund investments and imposed a new liquidity requirement.
Earlier this year, Schapiro circulated a draft proposal to SEC commissioners that contained several options for new measures. The leading option called for capital buffers coupled
with redemption limits during periods of stress. Another approach called for moving from a stable $1 per
share net asset value to a floating NAV, so that investors would not get spooked by the prospect of funds breaking the buck. But Schapiro