New Rules Transform $2.7 Trillion of Money Funds: QuickTake Q&A

Without much fanfare, there’s been a trillion-dollar upheaval in a favored corner of America’s financial system: the money-market funds where institutional and retail investors park cash to earn returns better than bank deposits offer. The turmoil has been driven by new rules that went into effect on Oct. 14. They’re meant to prevent a repeat of the crisis in September 2008, when investors found that funds they thought were as safe as banks were anything but.

One of the most cherished practices -- or myths -- of the $2.7 trillion money-market fund industry, that a dollar invested with it is always worth a dollar. That so-called constant net asset value, or NAV, makes money-market funds seem more like bank accounts. But money-market funds aren’t banks -- they’re mutual funds, and as with any mutual fund, a dollar invested buys a share of a pool of assets whose value can fluctuate. The U.S. Securities and Exchange Commission has now gotten rid of fixed $1-a-share values for a wide swath of money-market funds. Additionally, overseers of some funds now have the ability to make it harder for clients to pull their cash in a crisis, by imposing redemption gates and liquidity fees.