Harnessing Whales: The Role Of Shadow Price Disclosure In Money Market Mutual Fund Reform

The money market mutual fund industry is experiencing a sea change. Thanks, in large part, to their role in the 2008 market break, U.S. securities regulators have targeted money market funds for a structural overhaul. Runs on money market funds by institutional investors in the wake of the Lehman Brothers bankruptcy weakened the short-term credit market to the point of collapse. The resulting intervention of the Federal Reserve and the Treasury may have saved the economy from further damage but came at such a perceived cost that legislation now forbids it. Both the Securities and Exchange Commission (SEC) and the Financial Stability Oversight Council (FSOC) believe restructuring is necessary. Their only question appears to be exactly what form the product will take. One of the elements being considered in the reform effort will be increased disclosure of money market fund shadow prices. The regulators have posited that more frequent and more available disclosure of fund shadow prices will lead to more discipline being exerted on the fund industry, especially by the institutional market. A revamped disclosure regime, however, has been in effect since monthly shadow price disclosures were imposed by the SEC in December 2010. This study looks at the impact of those 2010 disclosure regulations on different sectors of the market. It seeks to identify a correlation between shadow prices and changes in assets for both retail and institutional funds. The authors assess the findings of the study and discuss the implications of those findings for the impending regulatory restructuring