New money market rules take effect as institutional money floods out of prime funds

New money market regulations went into effect Friday after a year that saw institutional investors pull hundreds of billions of dollars from prime U.S. money market funds.

Despite the outflows, money managers in the $2.5 trillion money market industry aren't being severely hurt so far. In fact, they are accelerating the trend out of the prime funds by converting the assets in prime funds to government money market funds, which aren't subject to the new Securities and Exchange Commission rules.

Year-to-date through Oct. 12, institutional assets in prime money market funds decreased 82.6% to $151.73 billion from $873.98 billion, according to data from the Investment Company Institute. Government money market funds, on the other hand, have seen institutional assets increase 77.4% to $1.552 trillion from $874.91 billion during the same period.

The new rules require prime funds to abandon their stable $1-a-share value, allowing the share value to float.

The new rules were prompted by the financial crisis, when runs on money market funds caused the federal government to step in to guarantee asset value.

Under the new rules, not only can the share price of money market funds fall to below $1, fund sponsors will have the ability to suspend redemptions or impose liquidity withdrawal fees on investors who redeem their assets during volatile market periods.