The Association for Financial Professions has co-signed a letter to U.S. Treasury Secretary Timothy Geithner and SEC Chairman Mary Schapiro restating its continued opposition to the concept of moving Money Market Funds (MMFs) from a stable net-asset-value (NAV) to a variable NAV.
While no formal proposal has been introduced, it is AFP's understanding that both President Obama's Working Group on Financial Markets and the SEC are considering the idea as they continue to review ways to improve America's financial markets.
AFP believes it would be a mistake to move to a variable NAV. Such a move would provide little benefit to investors while potentially posing great harm to U.S. businesses that utilize the short-term money markets as a safe and prudent funding tool.
The case for a stable NAV
Many investors utilize MMFs because of the stable NAV. A variable, or floating, NAV by definition would render MMFs less attractive, causing many investors to abandon them as an investment option. Lower investor demand for MMFs would lower the demand for commercial paper (CP) issued by American businesses, more than 40 percent of which are purchased by MMFs.
There is no short-term, cost-efficient substitute for CP issuers. Businesses would need to borrow more from their banks, look for new investors for their debt, or change the characteristics of the debt that they issue, which may not make the most economic sense from an asset-liability perspective. Any of these options would likely incur higher cost for businesses.
In other words, a variable NAV would make it more difficult for American businesses to expand at a time when they need every tool in their arsenal just to maintain the status quo.
The AFP supports enhancements that improve the safety and soundness of MMFs, but AFP members believe that moving to a variable NAV would do neither and, in fact, would actually cause significant harm.
The letter to Secretary Geithner and Chairman Schapiro is here.