February 14, 1997
TO: BOARD OF GOVERNORS No. 7-97
PRIMARY CONTACTS - MONEY MARKET FUNDS (MONEY MKT MEMBERS-ONE
PER COMPLEX) No. 1-97
PRIMARY CONTACTS - MEMBER COMPLEX (MEMBERS - ONE PER COMPLEX)
No. 7-97
RE: MONEY MARKET FUND PORTFOLIO INSURANCE
______________________________________________________________________________
As many of you know, ICI Mutual Insurance Company, the mutual fund industrys
captive insurance company, has been engaged in studies to determine whether to create a
facility to offer money market fund portfolio insurance ("MMFI"). The insurance model
under study involves defaults of payments of interest or principal on portfolio holdings of
money market funds which comply with Rule 2a-7. This memorandum is to report on
progress to date and to ask for your assistance in arriving at conclusions with respect to
certain issues. ICI Mutual estimates that it can have an insurance facility in operation by
June 1 if discussions with reinsurers are successful and there is sufficient member interest.
Specific issues under study are: (1) whether money market fund portfolio insurance
is economically feasible from an actuarial standpoint, (2) whether such insurance can be
reasonably priced from the fund investors standpoint, (3) whether reinsurance support is
available at acceptable prices, (4) the development of policy provisions which provide
protection against losses but do not reward unsound portfolio practices, and (5) the degree
of member interest in this project.
The actuarial studies vital to the first two issues above have been completed and
indicate that MMFI is a viable insurance product and can be provided at premiums which
would not significantly impair yield.
Specifically, subject to further study, premiums would probably be one basis point or
less. Insurance limits have been tentatively set at $150 million. Not yet decided is whether
coverage should be limited to a default which results in a decline in net asset value per share
to 99 cents, and whether the insurance payment would be limited to the amount necessary to
restore $1.00 net asset value per share or for the entire decline in value of the security
immediately prior to the default. Also to be decided is the amount of required deductibles,
if any.
In view of the positive results of studies to date, it appears to be timely to inquire of
members whether they would be interested in MMFI within the general parameters
described above. Moreover, your input is desired on the questions discussed above and any
other matter you deem of interest. The enclosed questionnaire is provided for your
convenience.
It would be helpful if you would complete and return the questionnaire as quickly as
possible but no later than February 28. If there is a significant degree of interest among
members, a meeting of interested members will be scheduled to discuss this matter.
Matthew P. Fink, President
Investment Company Institute
David Silver, President
ICI Mutual Insurance Company
Enclosure