Redemption Restrictions

An other option for regulators is to subject money market funds to redemption restrictions.  Shareholders would be denied the ability to redeem the full amount of their investment. Although regulators have not specified how these restrictions would be calculated or applied, reports indicate regulators may propose freezing 3 percent of an account’s assets for 30 days following each redemption.  The money held back from an investor’s account would be used to absorb losses if a fund can’t maintain its $1.00 value during this time period and reduce the incentive to “run” in adverse market conditions.

For corporate treasurers whose primary cash management goal is liquidity, redemption restrictions would severely impact their ability to manage their cash effectively. Placing restrictions on fund redemptions would hinder liquidity and deny businesses full use of their most critical short-term operating funds.  Additionally, if businesses aren’t able to access all of their funds, they may be forced to issue greater amounts of commercial paper or other debt and incur additional borrowing costs in order to meet daily cash requirements.  Moreover, businesses will often make a number of investments and redemptions over the course of a month, but under this proposal, there would be an ever increasing amount of cash “locked-up” for every redemption that they make to meet short-term cash requirements.  For many businesses, these challenges will encourage them to find alternative investment options.