Recent revisions to the rules governing money market funds are designed to address their susceptibility to heavy redemptions, to seek to improve their ability to manage any potential contagion resulting from redemptions, and to increase fund transparency.

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Since 2008, money market funds have received much attention from regulators
relating to concerns about their stability and transparency. In this piece, we take
a look at recent money market reforms and highlight some of the Securities and
Exchange Commission (SEC) proposals on the horizon today. Then, we delve into
the opportunities we see opening up for investors. As money market funds are
further redefined by regulation, we believe there are more investment opportunities
emerging for funds sitting just outside the SEC Rule 2a-7 money market boundaries.
Money market reforms of 2010
In 2010, approximately two years after the oldest money market fund in the United
States “broke the buck,” the SEC altered the regulatory regime governing money
market funds by rolling out a series of changes to Rule 2a-7 under the Investment
Company Act of 1940. The amendments to Rule 2a-7 enacted in 2010 (the 2010
amendments) included changes to the quality, liquidity, and reporting requirements,
as well as changes to the allowable weighted average life of the portfolio holdings of
money market funds. However, we believe the restrictions with the greatest impact
on the marketplace were the new requirements governing liquidity and further
restrictions on the length of the weighted average maturity (WAM) of money market
funds.
Improved liquidity
The 2010 amendments included a series of liquidity rules, including a requirement
that money market funds maintain minimum percentages of their assets in highly
liquid securities so that those assets could be readily converted to cash in order to pay
redeeming shareholders. Previously, there were no minimum daily or weekly liquidity
requirements. The 2010 amendments included two key daily liquidity requirements:
First, money market funds were required to maintain at least 10% of fund assets in
securities that may be converted to cash in one day (overnight liquidity); second,
they were required to maintain at least 30% of fund assets in securities that may be
converted to cash in seven days (weekly liquidity).
Shorter maturities
The 2010 amendments also shortened the WAM limits for money market funds.
This facet of the rules was intended to help limit the exposure of funds to certain
risks such as sudden movements in short-term interest rates. Specifically, the rules
restricted the maximum WAM of a money market fund to 60 days — which marks a
30% shortening from the previous maximum WAM of 90 days.
• Regulators’ recent proposals to
revisetherulesgoverningmoney
market funds are designed to
address the funds’ susceptibility
to heavy redemptions, to seek
to improve their ability to
manage any potential contagion
resulting from redemptions, and
to increase fund transparency.
• New reform proposals
include moving to a floating
net asset value (NAV) for
prime/non-government —
or “institutional” — money
market funds and establishing
liquidity fees and/or temporary
redemption “gates” under
certain circumstances, or some
combination of these proposals.
• In our view, the universe
of money-market-eligible
securities continues to shrink
due to regulatory action
in recent years, but we see
attractive opportunities just
outside its borders.
Keytakeaways
FOR INVESTMENT PROFESSIONAL USE ONLY.
Not for public distribution
February 2014 » White paper
Money market (in)eligible:
An update on reform and
emerging opportunities
Joanne M. Driscoll, CFA®
Portfolio Manager
Jo Anne Ferullo, CFA®
Investment Director

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FEBRUARY 2014 | Money market (in)eligible: An update on reform and emerging opportunities
Proposals for further reform
The 2010 amendments had a significant impact on
money market funds as well as the issuers that histori-
cally have found these funds to be willing buyers of their
short-term debt. While the 2010 amendments enhanced
the transparency and conservative portfolio posture of
money market funds, we believe they also made it more
challenging for money market funds to outperform.
In an already yield-starved environment, we believe
shorter maturities and stricter liquidity requirements
have kept a tight rein on the ability of money market
funds to generate income.
However, despite the changes implemented through
the 2010 amendments, the SEC continues to articulate
what they have indicated is a fundamental concern,
which was not directly addressed by the 2010 amend-
ments: Money market funds continue to have liquidity
risk in the event of a rush to redemption but have limited
capacity to absorb potential losses. Because of this
issue, the SEC has indicated that money market funds
remain a threat to the stability of the financial system.
Consequently, throughout 2012, the SEC internally
debated possibilities for further money market reform,
which was widely reported in the media as potentially
including changing from a stable $1 net asset value
(NAV) to a floating NAV, requiring funds to be injected
with capital or to create a “capital cushion” from earn-
ings, and/or holding back some percentage of any
redemption for a specified time frame. These ideas,
which proved to be controversial, were tabled in August
2012 as then SEC Chairman Mary Shapiro indicated
that a majority of the SEC’s Commissioners would not
support the SEC staff’s then-current proposal to reform
money market funds.
Subsequently, the Financial Stability Oversight
Council (FSOC), which was established under the Trea-
sury as a result of the Dodd-Frank financial reform act,
recommended three alternatives for further money
market reform by the SEC in November 2012. The
alternatives were variations of the SEC-debated ideas,
including converting to a floating NAV.
The latest proposals
With the 2013 appointment of a new SEC Chairman,
Mary Jo White, the SEC has again picked up the torch of
money market reform. In June 2013, the SEC proposed
additional amendments to Rule 2a-7 that could result
in different requirements for institutional funds versus
retail and government money market funds. The
floating NAV, the SEC suggested, might be more appro-
priately applied to institutional money market funds,
because these vehicles are dominated by institutional
investors who, regulators worry, could stage a repeat
of the 2008 run on money market funds if asset values
suffered major deterioration.
The SEC also proposed the application of liquidity
fees, specifically to help stave off “potentially harmful
redemption behavior during times of stress,” among
other objectives.*These fees could be levied in the event
a fund’s weekly liquidity fell below 15% of its total assets,
assuming a fund’s board of directors finds that such fees
do not run counter to the best interests of the fund’s
shareholders. In addition, the fund could be “gated,”
effectively putting a temporary halt to all redemption
activity for a 30-day period unless the fund’s board
determines that taking this action would not be in the
best interest of shareholders.
While the governing objective of such regulation is
to reduce run risk and enhance the transparency and
stability of money market funds, many investors and
money managers are concerned that a floating NAV
structure, in particular, might steer more individuals
and institutions away from money market funds.
With essentially zero short-term yields in today’s low-
interest-rate environment, anything that undermines
the perceived price stability of the asset class and that
could cause a negative price return is predictably being
greeted with some skepticism in the marketplace.
1 See the “Opening Statement at the SEC Open Meeting,” June 5, 2013:
http://www.sec.gov/news/speech/2013/spch060513mjw.htm
Figure 1. Money market fund timeline
First money market
fund established
The buck breaks at
Reserve Primary Fund
in the wake of
systemic financial
market stress
FSOC recommends
alternatives for money
market reform,
including a floating
NAV and
capital buffers
SEC amends Rule 2a-7,
resulting in new
requirements for portfolio
liquidity, maturity, credit
quality, disclosure, stress
testing, and operations
Reform debate
continues, with
new proposals
issued by the
SEC in June
2013
20081971 2010 20132012

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FEBRUARY 2014 | Money market (in)eligible: An update on reform and emerging opportunities
Opportunities in a climate of
continuing reform
Quite simply, over the past two to three years it has
become a significant challenge for money market
funds to pursue and achieve their typically secondary
objective of providing income. This challenge will likely
continue for some time as interest rates remain so low at
the short end of the yield curve. More importantly, the
potential loss of transactional stability at $1 if a floating
NAV is adopted threatens to make money market funds
less attractive as the “safe haven” of choice for certain
classes of investors.
However, against the backdrop of lackluster perfor-
mance, regulatory amendments, and the prospect of
additional reforms, we see a growing opportunity in the
marketplace. Specifically, securities that today are just
outside the limited money market universe, whether
with respect to maturity or credit quality, offer more
compelling yield opportunities with the potential for
limited volatility.
Prevailing steepness in the short-term yield curve
The short end of the yield curve, generally defined as
three years or shorter, offers a key point of opportu-
nity for strategies that are willing to stand outside the
more narrowly focused money market space. As money
market funds since 2010 generally have been required
to invest in shorter-term securities, some issuers of
money market instruments have at the same time
attempted to lessen their dependence on short-term
funding. As a result, these institutions have been issuing
longer-term debt outside the reach of money market
funds with maturities longer than 13 months.
While the overall absolute level of interest rates
is low, the combination of a more restricted money
market universe and the changing supply dynamics has
produced a steep short-term credit yield curve. This
means that the overall yields for short-term instruments
move dramatically higher just outside of the money
market universe. For instance, as of September 25, 2013,
there was roughly a 52-basis-point spread between
overnight investments and one-year LIBOR. For this
reason, we believe that investing conservatively but just
outside of Rule 2a-7 can enable investors to add yield to
a portfolio — with limited downside risk.
Slightly lower credit quality
Money market funds have always concentrated in
AAA-rated and AA-rated securities, as the limitations
for any investments in lower quality are quite stringent.
Typically, A-rated and BBB-rated securities receive less
attention from money fund managers. One primary
difference in the money market universe of AAA-rated
and AA-rated securities was not created by changes
in SEC regulation. As a consequence of the credit crisis,
rating agencies tightened their methodologies for
rating domestic banking institutions, which resulted in
the downgrade of many of the large banks that formerly
were significant issuers of money-market-eligible secu-
rities. Because of the downgrades, while many remain
investment grade, these securities are no longer eligible
for purchase by money market funds.
Shining a light on
the shadow NAV
It is commonly known that money market funds
have a $1 NAV, the price at which money market
fund shares are generally transacted. But it is less
widely known that money market funds also have
a “shadow,” or mark-to-market NAV, which reflects
fluctuations in the value of a fund’s assets.
While fund managers have been disclosing their
shadow NAV to the SEC on a monthly basis since
2010 — and with a 60-day lag to the public — some
firms have recently begun to highlight this data on
a more frequent basis. Heightened transparency,
these firms may hope, will show how marginal
the difference between the stable $1 NAV and the
shadow NAV typically is — e.g., only fractions of
a penny — and thereby demonstrate the lack of a
need to adopt a “floating” NAV. The SEC’s June 2013
proposal includes enhanced disclosure, as well.
The SEC’s June 2013 proposal for a floating NAV,
also articulated by the SEC in June 2013, could
abolish the dual-NAV structure, requiring that insti-
tutional investors transact in shares whose value
would fluctuate on a daily basis. Industry critics have
expressed concerns that this requirement would
undermine investor confidence in money market
instruments and lead to higher volatility.

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FEBRUARY 2014 | Money market (in)eligible: An update on reform and emerging opportunities
These investment-grade securities rated A and BBB
represent opportunity for additional yield. The same
issuers with slightly lower ratings still represent attrac-
tive credit risk. Again, an investment strategy that
stands outside money market boundaries can access
these securities, which frequently may have up to three-
year maturities, with relative ease and at potentially
attractive terms. Furthermore, when these securities
roll closer to maturity, they may experience pronounced
spread tightening, which underscores the opportunity
in these issues.
In contrast to ultra-short bond funds
While there has traditionally been a competitive
universe category for both money market and ultra-
short bond funds, the opportunity created in today’s
market falls somewhere between the two. Though it
cannot be valued at a static $1 NAV, a portfolio invested
in this “in between” space is able to take advantage
of the steep yield curve and the slightly lower-quality
investments available just outside the Rule 2a-7 money
market universe but without taking as much risk as a
typical ultra-short bond fund.
While the ultra-short competitive space is varied, as
is common in many competitive categories, a significant
number of these funds utilize currency exposure and
invest in below-investment-grade, or high-yield, securi-
ties. Both of these strategies may add yield, but extra
yield does not come without commensurate additional
risk. Currency exposures and high-yield debt may add
greater volatility and will add greater credit risk to any
fund investing in these securities. We believe there is
room in between the very conservative money market
space and the riskier ultra-short space — in other words,
an opportunity to create vehicles with lower volatility
than exhibited by many ultra-short bond funds but that
create just a bit more yield for conservative investors.
Figure 2. Yield curve steepness of a sample issuer
1 month 3 months 6 months 1 year 2 years 3 years
0.0
0.2
0.4
0.6
0.8
1.0
(%)1.2
Anheuser-Busch
U.S. Treasury curve
Typical money market fund
Putnam Short Duration Income Fund
Sources: Putnam Investments; Bloomberg.
Past performance is not indicative of future results.

5. FEBRUARY 2014 | Money market (in)eligible: An update on reform and emerging opportunities
Putnam Retail Management | One Post Office Square | Boston, MA 02109 | putnam.com 285713 2/14
The views and opinions expressed are those of the
speaker Joanne M. Driscoll, CFA, Portfolio Manager,
Putnam Investments, and Jo Anne Ferullo, CFA,
Investment Director, Putnam Investments, as of
December 31, 2013, are subject to change with market
conditions, and are not meant as investment advice.
Consider these risks before investing: Putnam Short
Duration Income Fund is not a money market fund.
The effects of inflation may erode the value of your
investment over time. Funds that invest in government
securities are not guaranteed. Mortgage-backed
securities are subject to prepayment risk and the risk
that they may increase in value less when interest rates
decline and decline in value more when interest rates
rise. We may have to invest the proceeds from prepaid
investments in other investments with less attractive
terms and yields. Bond investments are subject to
interest-rate risk (the risk of bond prices falling if interest
rates rise) and credit risk (the risk of an issuer defaulting
on interest or principal payments). Interest-rate risk is
greater for longer-term bonds, and credit risk is greater
for below-investment-grade bonds. Risks associated
with derivatives include increased investment exposure
(which may be considered leverage) and, in the case of
over-the-counter instruments, the potential inability to
terminate or sell derivatives positions and the potential
failure of the other party to the instrument to meet its
obligations. Unlike bonds, funds that invest in bonds
have fees and expenses. Bond prices may fall or fail to
rise over time for several reasons, including general
financial market conditions and factors related to a
specific issuer or industry. You can lose money by
investing in the fund.
Request a prospectus, or a summary prospectus if
available, from your financial representative or by
calling Putnam at 1-800-225-1581. The prospectus
includes investment objectives, risks, fees, expenses,
and other information that you should read and
consider carefully before investing.