We had grumbled last week that the Treasury had left its money market guarnatee program in the never-never land of “we’ll get back to you with details. The program is now in effect on a short-term basis. One hang up with any program of this sort is that the powers that be do not want the money market backstop to be superior to that on insured deposits; that risks a run on banks.
It also isn’t clear what the level of uptake by money market funds will be, since the program charges a premium to participating fund and the money market fund business is notoriously low margin. If funds feel they have to participate, the casualty is likely to be fund yields. However, on the surface, the charge of one basis point per share for ninety days of coverage does not appear onerous.
The U.S. Treasury Department said on Monday its temporary guarantee program for money market mutual funds for assets held as of Sept. 19 was now in effect for at least three months.
The Treasury said each fund regulated by the Securities and Exchange Commission under rule 2a-7 that maintains a stable share price of $1 can now decide whether to participate in the program.
Money market mutual fund shares acquired after Sept. 19, when the Treasury announced the plan, will not be guaranteed under the program.
To receive the government guarantee, participating money market mutual funds that had a net asset value of at least $0.9975 per share on Sept. 19 must pay a fee of 1 basis point per share to the Treasury.
Those with a net asset value below $0.995 on Sept. 19 are not eligible for the program, and those between $0.995 and $0.9975 on that date must pay a 1.5 basis-point fee.
The Treasury created the program to try to stem a massive run on some $3.4 trillion in money market mutual fund assets after one major fund fell below $1 per share — a phenomenon known as “breaking the buck”.
The Treasury program guarantees a participating fund that funds held on Sept. 19 will remain valued at $1 per share if they break the buck. The program will use about $50 billion from the Exchange Stabilization Fund, which was created during the Great Depression to help stabilize the dollar.
U.S. Treasury Secretary Henry Paulson will review the program after a three-month term to determine whether to extend it. Funds will have to pay an additional fee to renew their participation if the program is extended.