The Investment Company Institute's ICI Operations unit published a white paper entitled, "Reverse Distribution Mechanism and Negative Yields: Considerations and Recommended Practices." It says, "The [Fed's zero yield] policy has increased the likelihood that some constant net asset value (CNAV) money market funds will post negative yields after accounting for expenses, due to the number of affected securities these funds tend to hold. In response, CNAV money market funds are exploring several actions to mitigate the pressure of negative yields. Potential mitigating actions include the following: Implementing fee waivers and/or soft closures (e.g., close funds to new investors and new money); Contributing a fund sponsor's own capital to stabilize the net asset value (NAV) and maintain a non-negative yield; Converting from a CNAV money market fund to a floating NAV....; [and] Additional alternatives involve reducing or cancelling full and fractional CNAV money market fund shares on a pro rata basis to offset the negative yield and enable the fund to maintain a constant NAV. These options include the following: Daily reverse stock split; Accrue negative yield and periodically post to shareholder accounts; [or] Reverse Distribution Mechanism (RDM)." The Foreward adds, "The Investment Company Institute (ICI) convened a working group of funds, intermediaries, and their respective service providers to discuss the operational feasibility of these share cancellation alternatives. In the end, the daily reverse stock split and negative yield accrual alternatives were deemed operationally unworkable due to a combination of current system capabilities, operational risks, and the cost and time needed to scale them for widespread use. The working group identified RDM as the most operationally feasible alternative should a CNAV money market fund have to apply negative yield quickly. This paper provides details on RDM and highlights recommended practices for successful implementation of RDM, should it become necessary." Watch for more excerpts from this paper in coming days.

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