Money-market funds (MMFs) have had no shortage of attention since 2008, when the Reserve Primary fund broke the buck in the wake of Lehman’s collapse, leading to a run on money funds in the United States. That led to a steady flow of regulatory initiatives around the globe that affected money-market funds: Amendments to Rule 2a-7 reduced maturity limits and increased the liquidity of U.S. money funds, while the London-based industry association, the Institutional Money Market Funds Association (IMMFA), updated its own Code of Practice along similar lines. Meanwhile ratings agency Moody’s Investors Service updated its rating methodologies for money funds.
While many in the industry feel these changes have bolstered the resilience of money-market funds and addressed the issues highlighted by the financial crisis, there is much more to come. The full impact of Basel III, which requires banks to issue longer-term paper, has yet to play out for the money fund industry. Solvency II, the revised capital adequacy regime for insurers in Europe, and the International Accounting Standards Board’s financial statement presentation project could both have adverse implications for money funds. Meanwhile the U.S. President’s Working Group on Financial Markets and the U.K.’s Financial Stability Board have initiatives in motion that could have significant consequences for funds.
In light of these comments and the various regulatory proposals, it is easy to see why there is concern in the industry about the future of the CNAV fund. But while regulators see VNAV funds as a solution to some of the product’s perceived shortcomings, not everyone agrees that investors do not comprehend how CNAV funds work.
“What we understand is that investors want to be able to continue to invest in CNAV funds,” says Jonathan Curry, a director at IMMFA and chair of its technical committee. “They understand the product. They understand the risks that are clearly described to them. And I think the evidence of the volume of assets in this type of fund means they are valuable to the end investor.”