When a dollar is 99 cents

27 January 2010 By Rolfe Winkler

Proposed new U.S. regulations will boost liquidity, improve credit quality and shorten the maturities in money market funds. That’s good. But the industry successfully beat back an effort to demystify the $1 NAV illusion. Without that, there’s still risk in the system.

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The SEC adopted new rules to strengthen money market mutual funds by improving liquidity, increasing credit quality and shortening maturity limits for fund holdings. It will also require funds to publicly disclose their net asset value on a 60day lag basis. The industry has lobbied fiercely against a floating NAV.

Liquidity rules would require 10 percent of assets in cash or securities convertible to cash in one day, while cutting in half to 5 percent funds' illiquid holdings defined as any security that can't be sold at carrying value within 7 days.

Credit quality rules would further restrict holdings of "second tier" securities.

Maturity limits would be shortened to 60 days from 90 for maximum weighted average maturity.

Other regulations include requiring funds to perform an independent credit analysis of every security purchased.

SEC statement.

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