A Floating Net Asset Value Substitute

Executive Summary

We believe that mandatory disclosure of daily market value NAVs will be a significant step toward better risk transparency in money market funds. It is functionally equivalent to the FSOC/SEC’s floating NAV proposal without the unnecessary operational, accounting and tax complexities. When applied along with objective liquidity gates and/or reasonable NAV buffers, the approach should sufficiently reduce systemic concerns with money market funds and address major issues from key constituents.
We are opposed to resetting the unit NAVs to $100.00; however, we believe more work is needed for market value NAVs to be truly useful. We think shareholders could further benefit from analytical research that incorporates market value NAVs, but, at the same time, we urge regulators to address shareholder risk by enforcing more look-through shareholder concentration and asset flow disclosure.

Introduction

Back in April 2012, we proposed to the Securities and Exchange Commission (SEC) a floating Net Asset Value (NAV) recommendation that requires money market mutual funds to report daily market value-based NAVs up to the 4th decimal place, but allows shares to be traded at NAVs rounded to the 2nd decimal place. The premise is to preserve the transactional utility of the $1.00 NAV while making share value volatility fully transparent. In essence, we believe in NAV stability through market disciplines and sound risk management rather than through amortized cost accounting or sponsor capital support. Forcing NAVs to change every day not only is cumbersome, but also ineffective, in our opinion.
Recognizing floating NAVs as one of the alternatives proposed by the Financial Stability Oversight Council (FSOC), we encourage the council to reconsider our dual-NAV approach in bridging the gap between systemic concerns and transactional utility. We are encouraged by several fund sponsors’ initiatives in publishing daily market value NAVs , more commonly known as shadow NAVs. We think these announcements signify a major step toward a workable resolution similar to the one we proposed.
In the rest of the commentary, we discuss the incorporation of shadow NAVs in our dual-NAV proposal, present our argument that floating NAVs should not preclude NAV stability, and, finally, we conclude with our ongoing advocacy for enhanced shareholder transparency that, we believe, should go hand-in-hand with our modified NAV proposal.
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