Getting From A To B
November 08, 2011
But systemic risk contagion could arise from the asset management sector, too. Take the US$2.6 trillion US money market fund (MMF) business, where the promise of a minimum US$1 per share redemption value, enshrined by convention and hinted at in marketing literature, is in fact not a guarantee at all. Meanwhile, maintaining a stable NAV under conditions of near-zero interest rates is becoming tougher and tougher.
As Robert Dubois has ably described on IndexUniverse.eu, there’s still limited transparency into how exactly these funds operate. While the US government stepped in and guaranteed money market fund NAVs at US$1 in 2008, there’s presumably less likelihood that it would be able to do so in our current, straitened times. But even though it seems like an obvious solution just to tell investors that they may not receive a minimum US$1 per share back for their MMF holdings, the US SEC is still reluctant to accept the need for a fully floating (i.e. market-driven) NAV for these funds. Why? The regulators are panicked at the prospect of a run on MMFs.
How all these competing forces can be reconciled and whether regulators can ever arrive at a level playing field is debatable. On Friday in Brussels, the talk was of undertaking a broader review of the UCITS rules and a deeper examination of shadow banking—repo market, money market funds, securities lending and all. All this smacks of a discussion that could extend several years into the future. That’s good news for regulators, lawyers and journalists like me, who will get to report on it. But not, I suspect, for consumers of financial products, nor for the world economy.
Whether markets will wait that long (and not force government and bank defaults long before) is a very good question.
Meanwhile, as if they didn’t have other things to worry about, investors now need to keep an ear open for complex regulatory discussions when selecting a financial product and product provider. Getting from A to B sounds simple, but travellers may face unexpected risks, unmapped detours and a sudden imposition of tolls along the road.