On Dec. 16, the Securities & Exchange Commission proposed its latest set of Money Market Fund Reforms, which include much higher liquidity levels, the removal of gates and fees, a controversial swing pricing feature and additional disclosures. See the Proposed Rules here, the press release here the Fact Sheet here and our Dec. 16 News, "SEC Proposes MMF Reforms: More Liquidity, No Gates/Fees, Swing Pricing. Given the close 3-2 vote and the pending 60-day comment period, there could be substantial changes in the final rule, which is expected later in 2022. Today, we quote from the SEC Commissioner's Statements Support and Dissent. (Note: Thank you for your support and readership in 2021! Merry Christmas, Happy Holidays and Happy New Year from Crane Data & Money Fund Intelligence!)
SEC Commissioner Allison Herren Lee's Statement of Support tells us, "[T]he Commission is once again proposing reforms for money market funds after once again observing vulnerability in these products during times of financial market stress -- this time during the events in March 2020 at the beginning of the pandemic. The 'dash for cash' that occurred at that time put severe stress on these funds and prompted federal intervention in the form of a backstop for the second time in just over a decade. It is clear that money market funds continue to raise both investor protection and market stability concerns. And while I support the success of these products, and I preliminarily support today's proposed reforms, I look forward to reviewing public comment on how best to address the complex challenges these products pose."
She continues, "Since their creation in the 1970s, money market funds have grown and evolved to become an integral part of wholesale funding markets.... But, of course, these funds are indeed capable of incurring losses, and they suffer from inherent structural vulnerabilities. Thus, the Commission engaged in an analysis of the money fund rules in the aftermath of the 2008 financial crisis when the Reserve Primary Fund 'broke the buck'.... The 2010 reforms were largely designed to enhance liquidity and create more transparency for the public and the Commission about a money market fund's holdings. Those reforms were tested in March 2020 when money funds were under stress again. By that time, the Commission had completed additional reforms in 2014."
Herren Lee says, "Hence today's proposal is a necessary continuation of our focus on addressing weaknesses of these funds, and providing investors and markets with key information about them. I'd like to highlight three significant areas of today's reforms: increasing liquidity thresholds, removing the fees and gates requirements, and an obligation for certain funds to use swing pricing they have net redemptions. I look forward to comment in each of these areas. Specifically, I'm interested in the foreseeable impacts of swing pricing. Will it disincentivize first movers to help stem a run as contemplated? How might it impact investor choice?"
Next, Commissioner Caroline Crenshaw states, "Today's proposed amendments thoughtfully seek to address vulnerabilities in this market. Among other changes to money market funds, the proposal would remove the liquidity fee and redemption gate provisions ... in order to reduce investors' incentive to engage in preemptive redemptions.... This change could also better enable funds to use their daily and weekly liquid assets to meet redemptions in times of stress. The proposal also would require funds to increase their minimum daily liquid assets from 10% to 25% and their minimum weekly liquid assets from 30% to 50%. These adjustments are designed to provide a more substantial buffer in the event of rapid redemptions. The proposal also would improve the availability of information about money market funds in order to put the Commission and investors in a better position to monitor funds' activities and evaluate the impact of market stress on those funds."
She comments, "The proposal also requires institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures to help ensure that redeeming investors bear the liquidity costs of their decisions to redeem. Swing pricing, like the other proposed changes, is designed to reduce investors' incentives to run during times of market stress. I am pleased that we are including swing pricing and initiating a discussion, though it is certainly an idea that deserves careful consideration.... I am particularly interested in commenter's views and analysis on how we can best operationalize swing pricing requirements from a regulatory perspective and how funds will implement their swing pricing policies and procedures. Is there a way we should be thinking about guarding against excessive levels of variability in the application of swing factors [and] how will investors respond to swing pricing generally and during market stresses?"
SEC Commissioner Hester Peirce's Statement of Dissent says, "Under greater than usual pressure, brought on by heightened public interest and aggressive deadlines, the staff has produced a thoughtful recommendation. I cannot support today's proposal, however, because it suffers from the same flaw as the existing rule: too much regulatory prescription and too little room for experimentation by funds. The proposal does include one important reform: eliminating the link between a liquidity threshold and fees and gates."
She continues, "The rest of the proposal, however, could undermine the objective of making money market funds more resilient. Not only would the proposal remove the link between the liquidity threshold and fees and gates, it would limit funds' ability to use these tools as they deem appropriate.... In addition, the proposed amendments would increase the daily and weekly liquid asset minimums to 25% and 50% respectively ... and put in place a breach reporting regime when a fund falls below half of its daily and weekly liquid asset minimums. Will the desire to remain on the right side of these high regulatory thresholds cause funds to sell illiquid securities during times of stress, as some did during March 2020?"
Peirce tells us, "The proposal also would require a complex mandatory swing pricing regime for institutional prime and institutional tax-exempt money market funds. Swing pricing is supposed to result in redeemers bearing the costs associated with their redemptions during times of market stress, but commenters question the efficacy of swing pricing.... The proposed version of swing pricing -- with its market impact factors -- may differ from what commenters envisioned, but I remain unconvinced that the addition of complexity and subjectivity to swing pricing calculations will succeed in altering investor decision making. Commenters also pointed to the real operational difficulties associated with swing pricing, something today's release also acknowledges. The proposal, if finalized in its current form, likely would continue the trend of driving more money into government funds. Doing so may serve the government's need for a buyer for its securities, but would leave investors, issuers of commercial paper, and markets worse off."
Finally, Commissioner Elad Roisman's Statement of Dissent states, "Money market funds are one of the most widely used financial products within the Commission's regulatory purview. Everyday Americans invest in them; large institutions do too, including corporate treasurers, state and municipal treasurers, as well as a multitude of pooled investment vehicles. Beyond their utility to end-users, money market funds play an important role in our fixed income markets as buyers of ultra-short and short-term debt. In such a far-reaching and interconnected ecosystem, one thing is certain: whatever changes we make to one part of the system will ripple through and affect other parts as well."
He comments, "The proposal responds to this identified market dynamic by eliminating our 2014 requirement that boards consider gates if weekly liquid assets in a portfolio fall below the required threshold. I believe this represents a positive example of retrospective review that the Commission should seek to emulate in other policy undertakings. It is less clear to me that we should prohibit the use of gates altogether, as the proposal contemplates doing, or that we should eliminate the current requirement for boards to consider charging liquidity fees to redeeming investors when the fund's liquidity drops. However, these are reasonable ideas to consider, and the release asks helpful questions on each proposed action."
Roisman tells us, "The release also does a good job of exploring several other measures that could reduce run risk for money market funds.... I have strong reservations about the proposal requiring that all institutional non-government money market funds use a uniform approach to charge fees to redeeming investors. Whether it would be the proposed swing pricing framework or one of the alternative liquidity fee frameworks, I am not persuaded that one-size-fits-all is a prudent approach.... I appreciate that the proposal asks some questions about this and would be interested in market participants' feedback -- not only which fee structures they prefer, but also whether the Commission should offer money funds some choice."
He adds, "This brings me, however, to a major shortcoming I see in today's proposal. The comment period is 60 days long, falling over the course of several holidays. It coincides with comment periods for five other proposed Commission rules. If you include the four new proposals on which we are voting today, the public is left with hundreds of questions on which we are seeking input in this short amount of time. Unfortunately, I have very little confidence that we are allowing enough time to receive feedback from the many types of market participants whom these rules will affect. So, while I thank the staff for their hard work on this proposal, I respectfully dissent."
