The Securities & Exchange Commission proposed Money Market Fund Reforms Wednesday, which include higher liquidity levels, the removal of the emergency gates and fees regime, a new swing pricing mandate for Prime Inst MMFs and additional disclosure requirements. The press release, "SEC Proposes Amendments to Money Market Fund Rules," tells us, "The Securities and Exchange Commission today voted to propose amendments to certain rules that govern money market funds under the Investment Company Act of 1940. In March 2020, growing economic concerns about the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities. Prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows, which contributed to stress on short-term funding markets. The Commission's proposed amendments are designed, in part, to address concerns about prime and tax-exempt money market funds highlighted by these events." (See also their "Fact Sheet" and the full Proposal here.)
SEC Chair Gary Gensler comments, "Together, these amendments are designed to reduce the likelihood of runs on money market funds during periods of stress. They also would equip funds to better meet large redemptions, addressing concerns about redemption costs and liquidity. Given the broad reach of short-term funding markets, these proposals speak to our remit to maintain fair, orderly, and efficient markets."
The release explains, "The proposed amendments would increase liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The proposed amendments also would remove provisions in the current rule permitting or requiring a money market fund to impose liquidity fees or to suspend redemptions through a gate when a fund's liquidity drops below an identified threshold. These provisions appeared to contribute to investors' incentives to redeem in March 2020 as some funds' reported liquidity levels declined."
It tells us, "To address concerns about redemption costs and liquidity, the proposal would require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures that would require redeeming investors, under certain circumstances, to bear the liquidity costs of their redemptions. Further, the proposal would amend certain reporting requirements to improve the availability of information about money market funds and enhance the Commission's monitoring and analysis of these funds."
The release adds, "The SEC began evaluating the need for further money market fund reforms following the events in March 2020. The proposal follows a request for comment the SEC issued to gather public feedback on potential money market fund reforms, including reform options discussed in a December 2020 report of the President's Working Group on Financial Markets. The proposal will be published on SEC.gov and in the Federal Register. The comment period will remain open for 60 days after publication in the Federal Register."
A "Fact Sheet on Money Market Fund Reforms," released before the 3-2 vote which approved the proposal, states, "The Commission is considering proposing amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The proposed amendments would improve the resilience and transparency of money market funds by: Increasing minimum liquidity requirements to provide a more substantial buffer in the event of rapid redemptions; Removing the ability of money market funds to impose liquidity fees and redemption gates when they fall below certain liquidity thresholds, which would eliminate an incentive for preemptive redemptions; Requiring certain money market funds to implement swing pricing so that redeeming investors bear the liquidity costs of their redemptions; and Enhancing certain reporting requirements to improve the Commission's ability to monitor and analyze money market fund data."
It says on "Background," "Money market funds are managed with the goal of providing principal stability and access to liquidity by investing in high-quality, short-term debt securities whose value does not fluctuate significantly in normal market conditions. These characteristics have made money market funds popular cash management vehicles for both retail and institutional investors and an important source of short-term financing for businesses and governments."
The SEC continues, "In March 2020, growing economic concerns about the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities. Prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows, which contributed to stress on short-term funding markets. The outflows significantly slowed following intervention from the Federal Reserve, which established the Money Market Mutual Fund Liquidity Facility and other programs to support short-term funding markets. The Commission's proposed amendments are, in part, designed to address concerns about prime and tax-exempt money market funds highlighted by these events. In particular, these funds have shown continuing susceptibility to heavy redemptions in times of stress. They also are invested in short-term funding markets that show a lack of liquidity in times of stress."
On the "Proposed Amendments: Amendments to Portfolio Liquidity Requirements," they write, "Rule 2a-7 is the principal rule governing money market funds. Currently, the rule requires that immediately after acquisition of an asset, a money market fund must hold at least 10% of its total assets in daily liquid assets and at least 30% of its total assets in weekly liquid assets. These requirements are designed to support funds' ability to meet redemptions from cash, or securities convertible to cash, even in market conditions in which money market funds cannot rely on a secondary or dealer market to provide liquidity. The proposal would increase daily and weekly liquid asset requirements to 25% and 50%, respectively. These increased thresholds are informed by analysis of the level of liquid assets needed to meet redemptions, based on redemptions in March 2020. The increased thresholds would provide a more substantial buffer to better equip money market funds to manage significant and rapid investor redemptions."
Regarding "Removing Liquidity Fee and Redemption Gate Provisions," the Commission tells us, "Rule 2a-7 currently provides that a money market fund may impose a liquidity fee of up to 2% or temporarily suspend redemptions (i.e., impose a 'gate'), if the fund's weekly liquid assets fall below 30% of its total assets and the fund's board of directors determines that imposing a fee or gate is in the fund's best interests. The current rule also includes a default liquidity fee if a non-government fund's weekly liquid assets fall below 10%, unless the board determines that a fee would not be in the best interests of the fund. In March 2020, even though no money market fund imposed a fee or gate, the possibility of their imposition appears to have contributed to investors' incentives to redeem from prime money market funds and for money market fund managers to maintain weekly liquid asset levels above the threshold, rather than use those assets to meet redemptions. Accordingly, the proposed amendments would remove the fee and gate provisions from rule 2a-7."
On the new proposed new "Swing Pricing Requirement," they state, "Trading activity associated with meeting redemptions may impose costs, including trading costs and costs of depleting a fund's daily or weekly liquid assets. These costs currently are borne by the remaining investors in the fund, diluting these investors' interests in the fund. This can create incentives for shareholders to redeem quickly to avoid losses, particularly in times of market stress. Swing pricing is a process of adjusting a fund’s current net asset value ('NAV') such that the transaction price effectively passes on costs stemming from shareholder redemptions to redeeming shareholders. The Commission is proposing to require institutional prime and institutional tax-exempt money market funds to adopt swing pricing policies and procedures to adjust a fund's current NAV per share by a swing factor when the fund has net redemptions. The swing factor would reflect spread and certain other transaction costs of selling a vertical slice of the fund’s portfolio. The swing factor would also include an estimate of market impact costs when net redemptions exceed a specified threshold."
Finally, under "Other Proposed Amendments," the SEC adds, "The proposal also provides that stable NAV funds must convert to a floating share price if future market conditions result in negative fund yields. In addition, the proposal would amend certain reporting requirements on Forms N-MFP and N-CR to improve the availability of information about money market funds, as well as make certain conforming changes to Form N-1A to reflect the proposed changes to the regulatory framework."
