Money-Market Funds

Money-market mutual funds have long been one of the world's most popular investment products, and why not? For 40 years, they offered better returns than bank deposits, were just as accessible and seemed just as safe. That is, until September 2008 when Reserve Primary Fund, the oldest U.S. money market fund, collapsed, spurring a run on other funds. In the wake of that panic, the U.S. Securities and Exchange Commission in 2014 passed rules aimed at protecting investors in a crisis and making the financial system more resilient. Even before the rules take effect, they have already reshaped the money market industry — in ways some think will increase risks instead of tamping them down.

The rules take effect Oct. 14, but since they were announced, the number of U.S. money market funds has shrunk to 369 from 560 and a number of the biggest ones have stopped investing in anything other than government or government-backed securities. Only that category of funds will be allowed to continue the industry's cherished practice of pegging the price of fund shares at $1. What are known as prime funds,, which cater to institutional investors and buy short-term debt issued by banks, companies and municipalities, will have to let their share price float to reflect fluctuations in the value of those loans. Ahead of the change, investors have been shifting tens of billions of dollars out of such funds, which have been hoarding cash to prepare for further withdrawals. All this has been squeezing credit and raising worries about more market turmoil as the changeover day approaches. In Europe, where funds have always split between those with constant share prices and those whose prices floated, regulators are completing rules that would tighten up risk management and require funds to invest in more liquid assets.