October 17, 2016 / 5:41 PM / a year ago

FACTBOX-U.S. prime money fund assets plunge due to reform

Oct 17 (Reuters) - The U.S. money market fund industry has
undergone a shake-up in the past 12 months as fund companies
convert some of their prime funds, which invest mainly in
corporate debt, into ones that own only government debt to avoid
rules that went into effect on Oct. 14.
    These rules from the Securities and Exchange Commission
(SEC) are aimed at safeguarding the sector, currently worth $2.7
trillion, from the sort of panicked withdrawals that followed
the collapse of Lehman Brothers and contributed to the credit
crunch that ensued during the financial crisis of 2008-09.
    Under the SEC rules, institutional prime funds and some
tax-free funds must allow their share price to "float" from $1
and/or impose fees and limit redemptions during times of
financial turmoil.
    Since last August, prime fund assets have fallen about $1
trillion and tax-free fund assets have declined by some $100
billion, according to data firm iMoneynet.
    Corporate treasurers who have traditionally used money
market funds as an alternative to cash deposit accounts dislike
a floating share price because it requires them to track
numerous tiny gains and losses.
    In September 2008, the share value of the Reserve Primary
Fund, a money market mutual fund, fell below $1 or "broke the
buck" shortly after the collapse of Lehman Brothers. The fund
had held a heavy amount of Lehman debt whose values plummeted.
    The demise of the Reserve Primary Fund resulted in a near
paralysis of money markets, a key source of bank funding, and
raised fears of a global market meltdown. This led to
intervention from the Federal Reserve and other major central
banks to inject massive sums of cash into the financial system. 
    The table below shows the shift in assets and number of
funds in categories tracked by iMoneynet:

             Assets      Number of   Assets      Number of
             ($bln)      funds       ($bln)9/30  funds
             8/31/2015   8/31/2015   /2016       9/30/2016
 Govt            183.85         155      499.63        216
 Prime           466.97         236      260.29        130
 Govt            792.52         321     1,476.4        355
 Prime           995.88         256      260.03        172
 Tax-free        111.50          81       60.61         61
 Tax-free         63.15         116       25.15         70
 State            61.50         101       41.30         87
 State             8.07          86        1.43         26
 Total         2,683.43       1,352    2,624.86      1,117
 All Govt        976.37                1,976.03           
 All Prime     1,462.85                  520.33           

 (Reporting by Richard Leong. Editing by Carmel Crimmins and
Andrew Hay)

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