The U.S. Securities & Exchange Commission today released a document entitled, "Making Money Market Funds Less Risky" at an open meeting discussing the Commission's proposed changes to money fund regulations. Its "Fact Sheet" handout says, "The Securities and Exchange Commission today will consider proposing rule amendments designed to significantly strengthen the regulatory requirements governing money market funds. The proposal would increase the resilience of these funds to economic stresses and reduce the risks of runs on the funds."
The SEC release explains, The proposal would: Further Restrict Risks by Money Market Funds via "Improved Liquidity: The proposal would prohibit money market funds from purchasing illiquid securities. It also would require that funds have a minimum percentage of their assets in highly liquid securities so that those assets could be readily converted to cash -- For retail money market funds at least 5% of assets must be in cash, U.S. Treasury securities, or readily convertible into cash (collectively, 'liquid') within one day, and at least 15% must be liquid within one week. For institutional money market funds, which have experienced greater liquidity challenges than retail funds, at least 10% of assets must be liquid within one day, and at least 30% must be liquid within one week. Currently, rule 2a-7, the rule governing money market funds, contains no liquidity requirements. (Note: The one-day liquidity limits for retail and institutional funds would not apply to tax exempt money market funds.)
They would also restrict risks via: Shortened Maturity Limits. The SEC says, "The proposal would shorten the average maturity limits for money market funds, which would help to limit the exposure of the funds to certain risks, such as interest rate risks. It would do this by -- Restricting the maximum 'weighted average life' maturity of a fund's portfolio to 120 days (currently there is no such limit). The effect of the restriction would be to limit the ability of the fund to invest in long-term floating rate securities." Also, by "Restricting the maximum weighted average maturity of a fund's portfolio to 60 days (currently the limit is 90 days)."
The Commission proposes, "Higher Credit Quality. "The proposal would limit money market funds to investing only in the highest quality securities --that is, not 'Second Tier' securities. Currently, most funds are permitted to invest up to 5% of their assets in 'Second Tier' securities." They also propose, "Periodic Stress Tests, "The proposal would require fund managers to examine the fund's ability to maintain a stable net asset value per share in the event of shocks -- such as interest rate changes, higher redemptions, and changes in credit quality of the portfolio."
They propose, "'Know Your Investor' Procedures, "The proposal would require funds to develop procedures to identify investors whose redemption requests may pose risks for funds. Such procedures would require funds to anticipate the likelihood of large redemptions." It would also, "Enhance Disclosure of Portfolio Securities via a "Monthly Web Site Posting: The proposal would require money market funds each month to post on their Web sites their portfolio holdings" and via "Monthly Reporting: The proposal would also require money market funds each month to report to the Commission detailed portfolio schedules in a format that could be used to create an interactive database through which the Commission could better oversee the activities of money market funds."
In addition, the SEC proposals would "Improve Money Market Fund Operations with "Electronic Processing: The proposal would require that all money market funds and their administrators be able to process purchases and redemptions electronically at a price other than $1 per share. The requirement would facilitate share redemptions if a fund were to 'break the buck.'" It would also allow "Suspension of Redemptions: The proposal would permit a money market fund's board of directors to suspend redemptions if the fund were to break a buck and decide to liquidate." It would also allow, "Purchases by Affiliates: The proposal would expand the ability of affiliates of money market funds to purchase distressed assets from funds in order to protect a fund from losses."
Finally, the release says, "In addition to the proposed rules, the Commission will consider seeking public comment on such issues as: Floating Share Price - Should money market funds be required to sell and redeem shares at a floating share price rather than a stable share price (typically $1 per share)? Credit Rating Agencies - What role should credit rating agencies' ratings have in money market fund regulation?" It also seeks comment on "Asset-Backed Securities - Should the Commission amend the money market fund rule with respect to investment in asset backed securities and the attendant risks? The proposed rule amendments and requests for comment would be subject to a 60 day public comment period following publication in the Federal Register."
