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U.S. Treasury Opens Money Market Guarantee Program
October 1, 2008
On September 29, 2008 the U.S. Treasury Department opened its temporary emergency program to insure investor losses of amounts held in participating publicly eligible money market mutual funds as of the close of business on September 19, 2008. The guarantee program is intended to sustain investor confidence in the market and designed to address temporary dislocations in credit markets. In connection with initiation of the program, the U.S. Treasury Department released answers to frequently asked questions regarding the program.
The U.S. Treasury Department initially announced the program on September 19, 2008 amidst concerns about the net asset value of money market funds "breaking the buck" and the turmoil gripping capital and credit markets. The program only covers the shares of money market funds held of record by investors on September 19, 2008, and the specifics of the program are expected to allay concerns of depository institutions that insuring money market mutual funds would provide a significant advantage to the funds in the competition for low-risk savings instruments.
Limited Term of Guarantee Program: The guarantee program will exist for an initial three (3) month term and the Secretary of the Treasury will have the option to renew the program up to the close of business on September 18, 2009. After the initial term, the Secretary of the Treasury will review the need for extending the program and the terms related to any extension. If the Secretary determines not to renew the guarantee program after the initial three (3) month term, the program will terminate.
Money market funds must meet certain eligibility requirements and must make the decision to sign up for the guarantee program. Investors cannot sign up for the guarantee program individually and will need to contact their money market fund directly to determine if it is participating in the guarantee program. If the Secretary determines to extend the guarantee program following the expiration of the initial three (3) month term, then money market funds will be required to renew their participation at that time if they elect to continue in the program.
Eligibility Requirements: Eligible money market funds include both taxable and tax exempt money market funds. To participate in the program, a money market fund must:
- be regulated under Rule 2a-7 of the Investment Company Act of 1940, as amended;
- have a policy of maintaining a stable per share price of $1;
- be publicly offered and registered with the Securities and Exchange Commission; and
- apply for participation in the program, including entering into a Guarantee Agreement with the U.S. Treasury Department and paying a fee to participate in the guarantee program.
Fee Structure: To participate in the guarantee program, eligible money market funds must pay the following non-refundable fees covering only the fees for the first three (3) months of the program:
- funds with a net asset value per share ("NAV") greater than or equal to $0.9975 as of the close of business on September 19, 2008 must pay an up front fee of $1.00 multiplied by 0.00010 (1 basis point) multiplied by the number of covered shares outstanding on September 19, 2008; or
- funds with NAV greater than or equal to $0.995 and below $0.9975 as of the close of business on September 19, 2008 must pay an up front fee of $1.00 multiplied by 0.00015 (1.5 basis points) multiplied by the number of covered shares outstanding on September 19, 2008.
Funds with NAV less than $0.995 as of the close of business on September 19, 2008 may not participate in the program.
Guarantee: The guarantee is provided by the U.S. Treasury Department, through the Exchange Stabilization Fund, which has approximately $50 billion in assets. The guarantee will be triggered if a participating money market fund's NAV falls below $0.995 and requires that the fund be liquidated within thirty (30) days of such event unless the time period is extended by the U.S. Treasury Department. The amount of the guarantee payment is dependent of the availability of funds in the Exchange Stabilization Fund.
The temporary guarantee program provides a guarantee based only on the number of shares held by a shareholder as of the close of business on September 19, 2008. Any increase in the number of shares held by a shareholder in an account after the close of business on that date will not be covered. If the number of shares held by a shareholder decreases from the number of shares held on September 19, 2008, the guarantee program will only cover the lesser number of shares.
Program Application and Guarantee Agreement: In order to participate in the guarantee program, money market funds must enter into a Guarantee Agreement with the U.S. Treasury Department setting forth the specific terms of the guarantee provided and complete certain attachments including an acknowledgement and undertaking agreement setting forth certain indemnification obligations of the fund. The money market fund must also pay the requisite fee at the time of submission of the application via Fedwire using instructions set forth in Exhibit B to the Guarantee Agreement. The submission must be made by email to the following address: email@example.com. Documents sent by mail, facsimile or other means will not be accepted by the U.S. Treasury Department. Eligible funds should apply by October 8, 2008 in order to participate in the program.