A money-market fund (MMF) is an AAA-rated, constant NAV (net asset value) pooled investment that is made up of short-term fixed income instruments that provide same-day access to liquidity for investors. In 2008 the Reserve Primary Fund, the oldest money-market fund, in the US became insolvent (broke the buck) and so new regulations and standards have been developed including the SEC's new 2a-7 rule which governs money-market funds in the US. The new regulations state that funds need to be more liquid and hold higher-quality assets, be weighted to a 60 day mean maturity (down from 90 days), and have a weighted mean life of 120 days or less. Funds will also have to disclose the value of their assets per share on a monthly basis.
The money market funds that are managed under the terms of the IMMFA (Institutional Money Market Fund Association) Code of Conduct which state that members must achieve the following:
- maintain a AAA rating
- maintain a weighted average maturity of 60 days or less
- focus on 1) security, 2) liquidity and 3) yield in order of importance
- maintain a stable NAV
- invest in securities with a residual maturity of less than 397 days
- purchase at least 95% of assets that have the highest rated short-term ratings as designated by at least one of the key credit agencies, with the remaining 5% no lower than the second highest rating
- achieve diversification by limiting exposure to a single issuer or asset.
The money market funds have consolidated and are growing in popularity again. In July 2014, the SEC adopted some amendments to the MMF rules, including the requirement for a floating NAV for institutional prime money market funds, as well as the introduction of liquidity fees and redemption gates, so that money market fund boards have the ability to impose fees and gates during periods of stress.
Key differentiators between the money market funds include:
- the underlying security of the instruments that make up the fund
- the credit and investment policies and procedures
- how the fund risk is measured, monitored and managed
- the basis of the asset valuations
- the weighted credit maturity of the fund
- the co-investors in the fund.