Regulators are considering a proposal to require money market funds move from a stable $1.00 price per share to a floating net asset value (NAV). The theory is that a floating NAV would provide greater transparency into the underlying market value of the fund and therefore prevent runs if there was fear of the fund “breaking-the-buck.” However, there is no empirical evidence showing that floating the NAV would serve its intended purpose. Hard evidence does show that funds with floating NAVs are not immune to redemption pressure. For example, the French equivalent of floating-value money market funds lost about 40% of their assets in just a three-month time span from July 2007 to September 2007.
Instead of eliminating panicky redemptions, floating the NAV would deter investors and shrink the money fund industry. First, the cost and complexity of accounting for money market fund investments with a floating net asset value will be too great, leading corporate treasurers, state treasurers, and institutional investors to find another investment vehicle to place excess cash. Businesses do not have their financial systems set up to account for a floating NAV and would have to invest significant resources into modifying these systems. Second, many businesses, state governments and institutional investors have investment policies that preclude them from investing cash in anything other than stable value investment. Moreover, certain investors must adhere to laws that prohibit investments in anything with a floating net asset value.
The flight from money market funds would have significant negative consequences—shrinking the capital pool and making financing less available (and less affordable) for businesses that issue commercial paper. Businesses will be forced to find alternative, more costly and less flexible financing sources using valuable money that could be put towards job creating activities such as expansion and research and development.