Barron's Writes on "SEC's New Regs"
Barron's asks, "Could the SEC's New Regs Kill Prime Money Market Funds?" The article comments, "To the untrained eye, the debate over the Securities and Exchange Commission’s proposed new money market fund regulations may seem like a fight over nothing. But it is causing a dustup between regulators and fund providers all the same. And it could have big ramifications for investors. Money market funds have undergone a tremendous transformation since the financial crisis of 2008-09, but interest rates have been so low for so many years -- you're lucky to get 0.1% -- that most investors don't give these funds much thought. One of the biggest changes was breaking them into two categories: government and prime. Government money funds have $4.1 trillion in assets; they buy Treasury bills and other short-term government securities. Prime money funds own corporate debt; today, they're primarily used by institutions and have $831 billion in assets." It explains, "Swing pricing is widely used in Europe, but not in the U.S., although it was authorized by the SEC in 2016 for regular mutual funds. Basically, it allows a fund's manager to lower its NAV when outflows of securities exceed some threshold. The reason to do this is so the first investors to exit a fund don't get better prices as managers sell off their most liquid securities, while the remaining shareholders are stuck with an illiquid portfolio that trades at fire-sale prices. Pricing and liquidity can be especially problematic with debt investments, which don't change hands constantly like stocks. 'Money markets don’t trade like other markets,' says Peter Crane, CEO of money fund tracker Crane Data. 'Almost everything in the money fund space is buy-and-hold. You don't get a whole lot of people selling a one-month T-bill because they need the money in two weeks. But when that does happen, you get these odd price distortions.' The new rule would require prime funds to adjust their net asset values by a 'swing factor' reflecting trading costs on days when funds have redemptions." Barron's adds, "Money fund managers say such calculations are too difficult. 'What swing pricing does is take the place of the [money fund redemption] fees, but does it in a way that is operationally almost impossible,' says Deborah Cunningham, Federated Hermes' chief investment officer of Global Liquidity Markets. 'It takes away the capability of funds to be able to do same-day transactions, because you can't price [a money fund's portfolio] until you know clearly, at the end of the day, what your redemptions have been.' The industry's solution to such liquidity crunches would be to keep fund exit fees, but make them more flexible. 'We actually liked the concept of liquidity fees,' says Jane Heinrichs, associate general counsel at the Investment Company Institute, a fund industry trade group that has petitioned the SEC not to require swing pricing. 'But it would be better if they were at the discretion of the board, rather than tied to a specific [liquid asset] number.'"
