With the April 12 deadline now passed for any "Comments on Money Market Fund Reform" to the SEC, we expect to see a flood of postings in the coming days. Letters submitted this week haven't been posted yet, but watch for these soon. The SEC normally takes time to upload feedback, and has been known to take submissions after the deadline. (See our March 28 News, "Northern Trust Comments on Money Market Fund Reforms; No to Prime.") In addition to the expected pending barrage of comment letters, we also expect more articles discussing the proposed regulatory changes. Already, we've seen a handful of these, and we quote from two below.
Reuters wrote late last week, "U.S. money market funds say SEC draft rule would kill some products." It explains, "U.S. asset managers are pushing back on draft rules aimed at fixing systemic risks in the $5 trillion money market funds industry, arguing that one of the proposed measures would kill off popular products, executives told Reuters. After taxpayers bailed out [sic] money market funds, a key source of short-term corporate and municipal funding, for the second time in 12 years during the pandemic-induced turmoil of 2020, the industry is facing renewed regulatory scrutiny."
The article continues, "In December, the Securities and Exchange Commission (SEC) proposed boosting money market funds' resilience by, among other measures, adjusting a funds' value in line with trading activity so that redeeming investors bear the costs of exiting a fund and don't dilute remaining investors. In theory, this "swing pricing" reduces the incentive to run to the exit first. The deadline to submit comments is Monday and the industry is pushing back hard on the swing pricing measures, arguing they would be operationally challenging, impose excessive costs on fund sponsors, and reduce daily liquidity for investors."
They quote Jane Heinrichs, associate general counsel at the Investment Company Institute, "We really do believe that it would kill the product.... Funds would determine it's not worth the changes necessary to make it work for a product that will no longer meet the needs of investors."
Reuters adds, "While swing pricing is used by some European funds, it is an unfamiliar concept to U.S. investors, said Peter Yi, a director at Northern Trust Asset Management. 'Without a doubt, swing pricing is going to be very difficult for investors to understand.'"
The publication Plan Sponsor writes that the "SEC's Proposed Money Market Funds Rules Draw Opposition." This roughly written piece tells us, "Two times burned, this time really shy. The Securities and Exchange Commission had to bolster [sic] money market mutual funds during the 2008 global financial crisis and the 2020 onset of the pandemic. Both times, investors pulled cash out of the funds. So the agency is moving to tighten the withdrawal rules."
It says, "The comment period on the SEC's proposal ends on Monday, and there's a lot of opposition. Big money market investors are threatening to yank their cash out of the funds. The funds mostly invest in commercial paper and bank certificates of deposits [sic]. And these, said SEC Chair Gary Gensler in a statement, 'tend to be illiquid in times of stress.' The problem, he stated, is that there 'isn't a lot of trading in commercial paper and CDs in good times. In stressful times, it almost entirely disappears.'"
Plan Sponsor comments, "What particularly sticks in the craw of many fund investors is 'swing pricing,' which essentially shifts the cost of redemption onto redeeming shareholders. Now, the investors who didn't redeem shoulder the cost. The other controversial feature of the SEC plan is to increase the daily and weekly liquid asset minimums to 25% and 50%, respectively, from 10% and 30%. Also, the plan would expand available information about the funds and thus the SEC's ability to monitor them."
In other news, Allspring Money Market Funds' latest "Overview, Strategy, and Outlook tells us, "In response to the FOMC move and, more importantly, to expectations of future rate increases, market yields have moved higher. Since we tend to take a conservative approach when constructing our portfolios and favor keeping excess liquidity over the stated regulatory requirements, running shorter weighted average maturities and looking to extend if the opportunity offers a favorable risk/reward proposition allowed our portfolios to capture this rate increase quickly. This conservative approach was especially beneficial this month as we were able to reflect more than a 25-bp increase in the yield month over month, and our short positions should enable us to continue to reap such benefits with further tightening. In addition to capturing higher yields, the enhanced liquidity buffer in our portfolios allows us to meet the liquidity needs of our investors and helps dampen net asset value (NAV) volatility."
They state, "While the leading story is the Fed's expressed intention to deal with its inflation problem aggressively, with the March hike of 25 bps looking like just the beginning salvo in an aggressive series of accommodation removal steps soon to follow, the front end of the government market continues to struggle with all the cash the Fed added to the banking system and the money markets over the past few years. The extra cash and its impacts can be seen in three places. First, most obviously, the Fed's reverse repurchase program (RRP), which buttresses the bottom of the Fed's interest rate target range by soaking up excess cash that can't find another home, took in an average of $1.625 trillion every day in the first quarter."
Allspring's update continues, "Second, the Fed's Secured Overnight Financing Rate (SOFR), a broad measure of overnight repurchase agreement (repo) rates, set below the RRP rate of 0.30% in the last few weeks of March. The settings at 0.27% and 0.28% in that period reflect repo investments by investors not eligible to participate in the RRP. The volume of those trades at lower rates has lately been sufficient to move the index lower, perhaps reflecting investor desire to stay as short as possible to fully capture expected Fed hikes."
Finally, they write, "Third, Treasury bills (T-bills) maturing in the next few months are trading at levels far below the RRP. For example, the last two 1-month T-bill auctions yielded 0.135%. Although this partly reflects quarter-end window-dressing demand for T-bills, it is unusual for T-bills to trade so far through the RRP level. As long as the Fed is expected to continue raising rates, this investor behavior of crowding into short maturities is likely to continue, pressuring front-end yields on repos and T-bills."
