The Securities and Exchange Commission released a 700+ page explanation of its proposed money market reforms over the summer, but even after hearing from all major players it seems that some key questions have yet to be resolved.

Money Market Fund

“The fact that the type of money funds that will face a floating NAV and the details of moneyfund redemption restrictions are still unresolved came as a surprise to us – and we suspect to others,” wrote RBC Capital Markets analyst Eric N. Berg.

Money market fund shares at the end of 2011

Going back to last year, money funds were terrified that the SEC would force them to use a floating NAV (net asset value) on all of their funds, killing a lot of the appeal of the funds in the first place. Federated CEO J. Christopher Donahue wrote an op-ed in Forbes explaining that “those who use money market funds know they are not risk-free and that they come with no federal guarantees. They also know that instituting a floating NAV will irreparably harm the utility and benefit of the funds. This is well illustrated by the nearly $2.7 trillion in money market fund shares at the end of 2011 compared to just $280 billion in short-term bond funds with a floating NAV, despite the latter’s higher yields.”

When the proposed SEC rules came out in July, it seemed that only prime funds would use a floating NAV while government money funds and municipal money funds would be unaffected, but apparently this issue is still up in the air.

Redemption restrictions, which would allow money markets to limit people’s access to their money in times of distress, probably wouldn’t do as much damage to money markets as a financing tool, but it would narrow the scope of institutions and companies that are interested in using them.

The goal of both regulations

The goal of both regulations is to increase stability and transparency, but if companies simply stop using money markets and start using private dark pools instead, the SEC can’t say that it has succeeded. In the meantime, anyone thinking about investing in Federated or one of its competitors should probably hold off.

“We would look elsewhere for opportunities in the asset-management sector while this No. 1 issue [new regulations] gets clarified,” writes Berg.