FYI: Federal laws and regulations that are enacted can last decades, but they tend to change after a major financial crisis. After the sub-prime mortgage meltdown in 2008, a slew of new regulations were pressed into law. The most far-reaching new regulation was the Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed in 2010,
Regards,
Ted
http://mutualfunds.com/education/what-deregulation-q-means-for-your-portfolio/
Comments
As it notes, aside from continuing to prohibit demand deposit (traditional checking) accounts to offer interest, Regulation Q had been phased out years before Dodd Frank. Even regarding checking accounts, except for commercial accounts interest bearing checking accounts had been around for decades (think "NOW").
It doesn't explain why, if Reg Q started in 1933, it took until 1972 for the first MMF (the Reserve Fund) to be created. (The answer appears to be that Reg Q was changed in 1966; until then banks offered above market rates.)
For a more extensive and clearer history of Reg Q (through 1986, when it had all but gone the way of the dodo), see the 1986 Fed paper:
Requiem for Regulation Q: What It Did and Why It Passed Away
The Figures resemble standard supply/demand lines out of Samuelson, so I pretty much skipped those. And I focused on the sections that described what changed when.
The ICI also has a two pager: Money Market Funds in 2012, History of Money Market Funds
It says:
- Money market funds were created in the early 1970s ...
- In 1994, the Denver-based Community Banker’s U.S. Government Money Market Fund reported a NAV below $1.00 and ultimately investors recovered approximately 96 cents on the dollar.
The reason why I quoted the second item is that the first MMF to fail was an institutional MMF, not a retail one. That shows that in this paper, the ICI is talking about institutional as well as retail funds when it writes that MMFs were created in the early '70s.
FWIW (can't verify, I don't know anything about the firm other than it makes the same claim on its own webpages):
"Drinker Biddle & Reath's lawyers are nationally recognized as pioneers in the bank-related mutual funds market dating back to the mid-70s. The firm developed the country's first institutional taxable and tax-exempt money market funds"
http://www.thefreelibrary.com/Drinker+Biddle+&+Reath+ranked+No.+1+mutual+fund+counsel+in+the...-a016805468
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From the 2009 Report of the Money Market Working Group:
(Section 3.1) "Money market funds were developed in the early 1970s as a way to allow retail and other investors with modest amounts of assets to participate in the money market. ... Previously, market rates of return had been available only to wealthy individuals and large institutions with sizeable amounts to invest.
[Note "market rates of return", not "money market funds"]
It goes on to describe STIFs in Section 5.1.2:
"Bank trust departments offered a short-term investment product (STIF) several years before the first money market fund appeared. These cash pools amortized cost to meet client and fiduciary demands for low-risk investments that function much like money market funds."
The only mention of an investment vehicle available to wealthy individuals in the paper is the enhanced cash fund (Section 3.1):
"These funds seek to provide a slightly higher yield than money market funds by investing in a wider array of securities that tend to have longer maturities and lower credit quality. ... Enhanced cash funds target a $1.00 NAV, but have much greater exposure to fluctuations in their portfolio valuations. Enhanced cash funds are privately offered to institutions, wealthy clients, and certain types of trusts."