The Effect of NAV Flotation on the Management of Prime Money Fund Portfolios

DERA Working Paper, 2018

45 Pages Posted: 3 Jan 2019

See all articles by Su Li

Su Li

U.S. Securities and Exchange Commission

Wei Liu

U.S. Securities and Exchange Commission

David K. Musto

University of Pennsylvania - Finance Department

Date Written: December 12, 2018

Abstract

The October, 2016 money-fund reform obliged institutional prime funds to start floating their Net Asset Values (NAVs), whereas retail prime funds could continue with stable NAVs. We use this contrast to assess the effect of NAV flotation on fund management. We find that institutional funds reduced their interest-rate, liquidity and credit risk around the reform, contributing to lower yields and NAVs, and less volatile NAVs, but by all measures, their relative risk taking was approximately back to where it was well before the reform by the end of 2017. Prime funds adjusted to their shrinkage largely through transaction sizes, but also somewhat through the number of securities per issuer they invested in, and to a small extent through the number of issuers they invested in. Transaction-size shrinkage harms transaction quality, though the quality of a fund’s transactions relates more strongly to the size of its fund complex than to the size of the transactions themselves.

Keywords: Money Market Funds, Money Market Regulation, Financial Stability, Floating Net Asset Value

JEL Classification: G10, G18, G23, G28

Suggested Citation

Li, Su and Liu, Wei and Musto, David K., The Effect of NAV Flotation on the Management of Prime Money Fund Portfolios (December 12, 2018). DERA Working Paper, 2018. Available at SSRN: https://ssrn.com/abstract=3303388 or http://dx.doi.org/10.2139/ssrn.3303388

Su Li

U.S. Securities and Exchange Commission ( email )

100 F Street NE
Washington, DC 20549
United States

Wei Liu

U.S. Securities and Exchange Commission ( email )

David K. Musto (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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