Abstract
Money market funds (MMFs) are generally considered safe investment vehicles, but the 2008 global financial crisis showed their vulnerability during market disruptions resulting in increased regulatory oversight across developed markets to protect investors. This paper examines the effect of MMF accounting regulation on investors in an emerging market context. It hypothesizes that the continued use of amortized cost methods to account for MMFs’ Net Asset Value (NAV) during market disruptions can result in unfair treatment of investors. The Egyptian money market provided a unique laboratory to test this hypothesis over a prominent economic crisis that combined high levels of interest rate volatility with a redemption-only structure for MMFs. A model that measures the discrepancies between the amortized and floating market NAVs per certificate for various money market portfolios (MMPs) simulating MMFs of different durations is tested using the Egyptian data. A sharp rise in interest rates is found to lead to significant discrepancies between the amortized NAV per certificate relative to their floating value. Serial investor redemptions of the certificates compound the discrepancies, but only certificate holders remaining in the funds bear the accumulated losses, which are augmented for portfolios with higher durations. The results suggest that emerging market regulators consider introducing the rules that switch to floating NAV calculations for MMFs during such periods to promote equality across all investors.
Highlights
Money market funds (MMFs) are considered one of the most accessible savings mechanisms for retail investors (Rosen & Katz, 1983), globally reaching approximately USD 6 trillion in assets under management by the first quarter of 2018 (Investment Company Fact Book, 2018)
It hypothesizes that the continued use of amortized cost methods to account for MMFs’ Net Asset Value (NAV) during market disruptions can result in unfair treatment of investors
One main reason for the growth stems from the ability of MMFs to preserve their Net Asset Value (NAV) per certificate, which is possible because MMFs invest in high quality, liquid, and short-term fixed-income securities, allowing fund managers to calculate each fund’s NAV per certificate at the amortized value rather than at the floating value of the underlying investments[1]
Summary
Money market funds (MMFs) are considered one of the most accessible savings mechanisms for retail investors (Rosen & Katz, 1983), globally reaching approximately USD 6 trillion in assets under management by the first quarter of 2018 (Investment Company Fact Book, 2018). This valuation issue, which is the investments in Lehman Brothers were not unsubject of this present research, only attracted usually high – only 1% – the bank’s bankruptcy the attention from researchers and policymakers, led to a huge run on MMFs by risk-fleeing inveswhether in the US or other global markets, when tors This ‘first mover advantage’ resulted in the this safety was threatened during the 2008 global draining of the fund’s liquidity of its high-quality. Witmer (2019) provides empirical evidence fund (Brunnermeier, 2009), essentially causing that liquidity management in MMFs is crucial early redeemers to pass on the losses to the re- to protect funds against investor runs, especially maining investors in the fund (McCabe, 2010) and given their use of fixed valuation methods Such revealing the susceptibility of MMFs to manag- issues are important to explore in emerging marers’ risk-taking incentives
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