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Money Market Fund Reform and Short-Duration Bond ETFs


The Securities and Exchange Commission is “actively” working on balanced reforms to address risks in the $2.6 trillion money market fund industry, which could push investors to ultra-short-duration bond ETFs as a viable alternative.

“The staff and Commissioners are actively engaged in discussions designed to yield an appropriate and balanced proposal in the near future,” SEC Chairman Mary Jo White said Friday.

However, White stopped short of fully detailing proposals on the table.

The regulatory body is considering a scaled-back approach after then-SEC Chairman Mary Schapiro’s failed attempts to enact reforms last year, reports Andrew Ackerman for the Wall Street Journal.

Some are throwing around the idea of only requiring the riskiest funds to abandon their fixed $1 per share price and let values float like other mutual fund offerings.

The SEC staff argues that this would let investors know that money funds can fluctuate in value before everyone makes a run on the funds in times of severe stress. Specifically, the SEC could focus on “prime” money funds that invest in short-term corporate debt – the funds make up 54% of the industry and are most vulnerable as they were the source of investor runs during the 2008 crisis. [Money Market Reform Could Drive Hundreds of Billions to Short-Duration Bond ETFs]

“The data show that the only funds that experienced large sudden redemptions were institutional prime funds, and therefore regulators need to narrowly tailor any additional reform to those funds,” Nancy Prior, Fidelity’s president of money markets, said in the WSJ article.

In 2012, the SEC was considering more stringent requirements, such as forcing all funds to float their share price or require funds to hold bank-like capital reserves. Earlier this year, the 12 regional Federal Reserve presidents also endorsed the idea of a floating share price, arguing that it reduces the advantage of investors who cut and run right before funds dip below $1.

Nevertheless, White maintains that the SEC will develop meaningful money market fund reforms.

“Our goal is to preserve the economic benefits of the product while addressing potential redemption pressures and the susceptibility of these funds to runs – runs in which retail investors are especially likely to suffer losses,” White added.

If regulators push for a floating price, investors could also turn cheap to short-term bond exchange traded funds as a viable alternative, including:

  • PIMCO Enhanced Short Maturity Strategy (MINT) : effective duration 0.97 years; 0.58% 30-day SEC yield
  • SPDR Barclays 1-3 Month T-Bill (BIL) : modified adjusted duration 0.16 years; -0.08% 30-day SEC yield
  • iShares Barclays Short Treasury Bond (SHV) : effective duration 0.42 years; 0.00% 30-day SEC yield
  • Guggenheim Enhanced Short Duration Bond (GSY) : average duration 0.37 years; 1.04% 30-day SEC yield

For more information on the money markets, visit our money markets category.

Max Chen contributed to this article.