• Moody’s Investors Service Delivers Report Highlighting Sponsor Support of Money Market Funds
  • August 23, 2010
  • Law Firm: Alston Bird LLP - Atlanta Office
  • Yesterday, Moody’s Investors Service released a report discussing both the historical and possible future support of money market mutual funds by such funds’ sponsors.  The Report noted that historically, many money market funds have required support from their sponsors to avoid “breaking the buck,” a phenomenon that occurs when the net asset value of a money market fund falls below $1.00 per share.  For the period beginning with the introduction of money funds in the United States in 1972 through mid-2007, “Moody’s identified no fewer than 146 funds that would have ‘broken the buck’ but for the intervention of their fund sponsor/investment management firm.”

    The financial crisis brought a sharp spike in the number of money market funds requiring sponsor assistance.  According to Moody’s research, “62 funds, including at least 36 funds in the US and an estimated 26 funds in Europe, received financial and balance sheet support from their sponsor or parent company during the financial crisis between August 2007 and December 31, 2009.”  In all but two cases, sponsor support was sufficient to prevent shareholder losses in the funds.  Most notably, the Reserve Fund’s Primary Fund, one of the oldest money market funds in the US, broke the buck in September 2008.

    Despite historical sponsor support of money market funds, the Moody’s Report predicted that “the continuing ability of fund sponsors to financially support their money market funds might be challenged in the intermediate to long-term.”  The Report cited a number of factors that might contribute to reduced sponsor support, including lower management fees and profit margins for sponsors due to low interest rates.

    In January, the SEC approved new rules and amended some of the existing rules that govern money market funds.