February 14, 2017 / 8:13 PM / in 5 months

Money market funds calm since rule on floating values began -govt

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WASHINGTON, Feb 14 (Reuters) - Money market funds have kept an even keel since a new U.S. rule on their net asset values went into effect last October, according to federal research released on Tuesday, indicating that it may help create stability in a market that experienced large runs in the 2007-09 financial crisis.

Last Oct. 14, institutional prime funds, which mostly invest in corporate debt, had to be in full compliance with the rule requiring them to float their net asset values, or NAVs. Leading up to the deadline, money raced out of prime funds into ones invested in government securities, and policymakers and some buyers grew anxious about long-term rockiness.

"Since NAVs began floating, money markets have been calm," wrote the Office of Financial Research, which is charged with monitoring for system-wide risks. "The extent to which floating NAVs might vary during market cycles will not be known until money market funds again come under stress.

The rule was created to prevent runs on the funds seen during the crisis when the NAV of a large money market fund fell below $1 per share and spooked large investors into rapidly pulling money from the funds.

So far, floating NAVs, which are market-based, have not varied much from an even $1, said the research office.

"Some industry observers worry that variation in floating NAVs might raise investors' concerns and still create runs," it wrote.

But it added that the market has not been under stress or experienced outside shocks since the rule came on-line.

The largest variation in values it found was in the week ending Dec. 16, when the Federal Reserve raised its target federal funds rate.

The drop in NAVs by one or two basis by nearly half the share classes the OFR tracked, though, was due to the typical price decrease in fixed-income assets when interest rates rise, according to the office. A rapid increase in interest rates could create greater instability in floating NAVs, it said.

"The size of NAV movements also depends on a fund's risk profile. Usually, prices of riskier securities - lower quality and longer maturity - vary more," the office found, adding the rule limits the amount of risk the funds can take. (Reporting by Lisa Lambert; Editing by Bernard Orr)

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