Third, MMFs’ transition from stable to floating NAVs might itself be systemically risky. For example, if shareholders perceive a risk that a fund that is maintaining a $1 NAV under current rules has a market-based shadow NAV of less than $1, these investors may redeem shares preemptively to avoid potential losses when MMFs switch to floating NAVs. Shareholders who cannot tolerate floating NAVs probably also would redeem in advance. If large enough, redemptions could force some funds to sell assets and make concerns about losses self-fulfilling. Hence, successful implementation of a switch to floating NAVs would depend on careful design of the conversion process to guard against destabilizing transition dynamics. Fourth, risk management practices in a floating NAV MMF industry might deteriorate without the discipline required to maintain a $1 share price. MMFs comply with rule 2a-7 because doing so gives them the ability to use amortized-cost accounting to maintain a stable NAV. Without this reward, the incentive to follow 2a-7 restrictions is less clear. Moreover, the stable, rounded NAV creates a bright line for fund advisers: Losses in excess of ½ of 1 percent would be catastrophic because they would cause a fund to break the buck. With a floating NAV, funds would not have as clear a tipping point, so fund advisers might face reduced incentives for prudent risk management. The fifth and final concern is that a floating NAV that accomplishes its proponents’ objectives of reducing systemic risks may be difficult to implement. Under normal market conditions, even a floating NAV would likely move very little because of the nature of MMF assets. For example, although a requirement that MMFs move to a $10 NAV and round to the nearest cent would force funds to reprice shares for as little as a 5 basis point change in portfolio value, NAV fluctuations might still remain relatively rare. Enhanced precision for NAVs (for example, NAVs with five significant figures) could bring more regular, incremental fluctuations, but precise pricing of many money market securities is challenging given the absence of active secondary markets. In addition, if fund sponsors decided to provide support to offset any small deviations from the usual NAV, deviations from that NAV might remain rare. Thus, a floatingNAV may not substantially improve investors’ understanding of the riskiness of MMFs or reduce the stigma and systemic risks associated with breaking the buck. Investors’ perceptions that MMFs are virtually riskless may change slowlyand unpredictably if NAV fluctuations remain small and rare. MMFs with floating NAVs, at least temporarily, might even be more prone to runs if investors who continue to see shares as essentially risk-free react to small or temporary changes in the value of their shares.
23 To summarize, requiring the entire MMF industry to move to a floating NAV would have some potential benefits, but those benefits would have to be weighed carefully against the risks that such a change would entail.