The SEC is requiring money funds to unveil a net asset value that reflects small previously undisclosed realized and unrealized losses or gins a figure known as the "shadow NAV". Many money funds take loses and gains on individual securities through their trading. Some securities will actually blow-up. All of these price adjustments may have small changes in the price of the money fund. The simplest case is when a securities is sold before maturity at a slight loss. If the loss is not offset by similar gains, there will be a discrepancy with the $1 NAV. Nevertheless, these loses or discrepancies in price may lead to a break in the buck out to some decimal place that will have limited impact. However, there is still a difference in price away from $1.
The SEC's New Money Market Reforms explains the current regime, "In addition, the rule includes certain procedural requirements overseen by the fund's board of directors. One of the most important is the requirement that the fund periodically 'shadow price' the amortized cost net asset value of the fund's portfolio against the mark-to-market net asset value of the portfolio. If there is a difference of more than one-half of one percent (or $0.005 per share), the fund's board of directors must consider promptly what action, if any, should be taken, including whether the fund should discontinue the use of the amortized cost method of valuation and re-price the securities of the fund below (or above) $1.00 per share, an event colloquially known as 'breaking the buck.'"
This is not a new regulation. Shadow NAV's has been used in twice a year reports to the SEC. The new rules will take effect 60 days after the end of November, with reports starting in February 2011. However, this will make running money funds more difficult and risky. Some funds are getting out of this business and others will have to put up cash to that the shadow NAV does not fluctuate. The impact is that fund companies will have to pay-up for loses.
The bottom line is that a money fund will have to increase its credit quality because it does not want to take the risk of having the shadow NAV fall below zero. Less lending will occur through non-ban sources. The credit channel will be negatively effected and this will affect economic growth.
The SEC's New Money Market Reforms explains the current regime, "In addition, the rule includes certain procedural requirements overseen by the fund's board of directors. One of the most important is the requirement that the fund periodically 'shadow price' the amortized cost net asset value of the fund's portfolio against the mark-to-market net asset value of the portfolio. If there is a difference of more than one-half of one percent (or $0.005 per share), the fund's board of directors must consider promptly what action, if any, should be taken, including whether the fund should discontinue the use of the amortized cost method of valuation and re-price the securities of the fund below (or above) $1.00 per share, an event colloquially known as 'breaking the buck.'"
This is not a new regulation. Shadow NAV's has been used in twice a year reports to the SEC. The new rules will take effect 60 days after the end of November, with reports starting in February 2011. However, this will make running money funds more difficult and risky. Some funds are getting out of this business and others will have to put up cash to that the shadow NAV does not fluctuate. The impact is that fund companies will have to pay-up for loses.
The bottom line is that a money fund will have to increase its credit quality because it does not want to take the risk of having the shadow NAV fall below zero. Less lending will occur through non-ban sources. The credit channel will be negatively effected and this will affect economic growth.
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