Is my money market fund safe?

With the market in turmoil, some people are worried that their money market fund maybe in danger. In order to know if the money market fund is really safe, we first need to understand what money market fund is. I find this explanation from Wikipedia:

Money market funds, also known as principal stability funds, seek to limit exposure to losses due to credit, market, and liquidity risks. Money market funds in the United States are regulated by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act restricts investments in money market funds by quality, maturity and diversity. Under this act, a money fund mainly buys the highest rated debt which matures in under 13 months. The portfolio must maintain a Weighted Average Maturity (WAM) of 90 days or less and not invest more than 5% in any one issuer, except for government and repurchase agreement securities.

Money market funds seek a stable $1.00 net asset value (NAV). The Community Bankers US Government Fund "broke the buck" in 1994, paying investors $0.96 per share. That fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. Reserve Primary Fund "broke the buck" on September 16, 2008, when its share fell to 97 cents after writing off debt issued by bankrupt Lehman Brothers Holdings Inc.[1]

Eligible money market securities include commercial paper, repurchase agreements, short-term bonds or other money funds. Money market securities must be highly liquid, and have a stable value.

The “broke the buck” situation is rare for the following reasons. First money market fund buy highest quality short term debts required by law. Second, those debts are usually over collateralized. Third, those collateral assets are usually held in custody at a third-party custodian bank. The following is a Q&A regarding Fidelity's taxable money market fund holdings provided by Fidelity.

Q. Are any of your money market funds at risk of breaking the buck?

A. We can state unequivocally that Fidelity's money market funds and accounts continue to provide security and safety for our customers' cash investments. Our funds continue to invest in money market securities of high quality, and our customers continue to have full access to their investments any time they wish. Most importantly, we have been proactive in keeping our money market funds safe and in protecting the $1.00 net asset value (NAV), which has always been our #1 objective in managing these funds.

Q. What exposure do Fidelity's taxable money market funds have to the debt of Lehman Brothers?

A. Our money market funds have no exposure to any Lehman Brothers entity.

Q. Do Fidelity's taxable money market funds have exposure to AIG?

A. Yes, the taxable money market funds have modest exposure to two issuers that are subsidiaries of AIG: ASIF Global Funding and International Lease Finance Corp.

Q. Given the market volatility surrounding AIG, is Fidelity comfortable with these holdings?

A. Yes, Fidelity is confident that these holdings will pay full principal at maturity. ASIF Global Funding is a regulated funding insurance subsidiary supporting SunAmerica and benefits from franchise strength and diversified earnings. International Lease Finance Corp. is a profitable global aircraft finance subsidiary that has enjoyed strong financial

Read the full Q&A from Fidelity