Money markets put forth proposals on to have their own emergency funds

A proposal has been made by the money fund industry to keep some money from the money market mutual funds in a private fund in order to meet some emergency situations such as large redemptions.  This proposal has come from the ICI or the Investment Company Institute which is the funds’ trade group.  Here the aim is to have a private liquidity fund which could come into force if the money funds are faced with huge redemptions where they would be forced to pay up around $1 per share.  This fund would have collateral loans which could be given to the funds which require extra liquidity to meet bigger redemptions.

The share price of money funds are being kept at a constant of $1 per share and interest is being paid in fractional shares.  This share price is more like a bank account for consumers although the money funds are not federally insured.

In September 2008, the share price of the Reserve Primary Fund fell lower than $1 when there were huge redemptions due to the Lehman Bros bankruptcy.  There was shock waves sent across the financial community which paralyzed the entire money market and mostly the commercial paper that are short-term corporate IOU’s.

So basically the money funds would be using the private liquidity fund that has been proposed by the ICI.  According to the proposal, the prime funds or the ones that invest in high-quality but short-term money market funds like commercial paper would also be legally bound to take part in the liquidity fund.

However, the liquidity fund will not pay up if there were bad investments made by the money fund states John Hollyer, The Vanguard Group.  Only high-quality assets could be bought he stated.

The proposal to have a liquidity fund is to partly ensure that investors are reassured and also to propose that the funds have a floating price instead of the constant $1 share price more like the bonds and stocks.  The idea of floating share prices on money funds was proposed in October much to the horror of the entire financial community.

This move would potentially kill the product as no one would see the reason to own it, states Brian Kalish, Association for Financial Professionals.  Most companies would discontinue the use of money funds in their portfolios if they switched to a floating share price as not a single company was in favor of this.