Fidelity Publishes Liquidity Primer
Fidelity Investments recently published a brief entitled, "Understanding Liquidity in Money Market Mutual Funds," which tells us, "For a money market mutual fund, 'liquidity' refers to the extent to which the fund's holdings can be quickly converted to cash. Liquidity is a particularly important attribute of a money market mutual fund, as it measures the fund's ability to meet near-term shareholder redemptions. The SEC defines 'liquid assets' in Rule 2a-7. This rule defines the categories of daily liquid assets and weekly liquid assets by identifying specific types of fund holdings that can be readily converted to cash within one or five business days, respectively." They explain, "In addition to these general requirements, the SEC rules impose specific minimum requirements on the amounts of daily and weekly liquid assets a money market mutual fund must hold, as well as specific remedies for restoring liquidity in cases where these minimum levels are breached. In particular, whenever a fund's daily liquid assets account for less than 10 percent of its total assets, the fund is prohibited from acquiring any new asset other than a daily liquid asset. Similarly, if a fund's weekly liquid assets make up less than 30 percent of its total assets, the fund cannot acquire any new asset other than a weekly liquid asset. These conditional restrictions on fund management are designed to help rebuild a fund's daily and weekly liquidity levels whenever these levels become too low.... The SEC's rules permit some money market mutual funds to limit redemptions under certain conditions. Specifically, if a fund's weekly liquid assets were to fall below 30%, the board of directors of a prime (general purpose) fund or a municipal fund may either charge a liquidity fee of up to 2% on shareholder redemptions or impose a halt on all shareholder redemptions (known as a 'gate') for no longer than 10 days. Additionally, if weekly liquid assets were to fall below 10%, a prime or municipal fund must impose a liquidity fee of 1%, unless the fund's board determines that such a fee is not in the fund's best interests." (Note: Crane Data publishes the DLA and WLA numbers in our MFI Daily product.) Fidelity writes, "The SEC's intent in imposing a fee is to transfer the costs of liquidating fund securities from the shareholders who remain in the fund to those who leave the fund during periods when liquidity is scarce. In April 2016, each money market mutual fund began disclosing daily on its website the daily and weekly liquid assets as a percentage of the fund's total assets as well as net shareholder flows from the previous business day. The imposition or removal of a liquidity fee, as well as a discussion of the board's analysis in determining whether or not to impose a fee, must be disclosed promptly and publicly by a money market mutual fund.... At Fidelity, we determine the appropriate margin of safety for each money market mutual fund by conducting a quantitative analysis of such factors as historical shareholder redemption patterns, shareholder composition and concentration, and overall financial market conditions." Finally, they add, "Our experience in managing money market mutual funds has taught us that readily available liquidity is a primary goal of our shareholders. We therefore consider the management of liquidity a critical priority in our investment process, and we dedicate a significant proportion of our time and resources to ensure that we understand, monitor, and mitigate liquidity risks appropriately within our funds."
