One of the most extensive letters posted to the SEC's "Comments on Money Market Fund Reform" page comes from the ICI, the trade association for mutual funds. They write, "The Investment Company Institute (ICI) appreciates the opportunity to provide its views on the Securities and Exchange Commission's proposed amendments to certain rules that govern money market funds under the Investment Company Act of 1940. Today, over 50 million retail investors, as well as corporations, municipalities, and other institutional investors, rely on the $5.0 trillion money market fund industry as a low cost, efficient, transparent, cash management vehicle that offers market-based rates of return." (Note: Make your reservations soon for our upcoming Money Fund Symposium, which is June 20-22, 2022 in Minneapolis, Minn., and please join us for a free Money Fund Statistics Overview this Thursday, April 21 from 2-3pm Eastern.)
ICI tells us, "Given the important role of money market funds in the financial system, the SEC should evaluate reform options by comparing their impact on the ability of money market funds to fulfill this role (i.e., preservation of their key characteristics) against the likely practical impact any money market fund reforms will have on making the overall financial system more resilient. Any new reforms for money market funds should be measured and appropriately calibrated, taking into account data, the costs and benefits these funds provide to investors, the economy, and the short-term funding markets."
President & CEO Eric Pan writes, "[T]he COVID-19 crisis revealed reluctance or inability by certain banks to act as dealers in such circumstances and different expectations between investors and the role of dealers in providing liquidity in these markets. To this end, we agree with commentators that have recommended measures that would adjust bank regulations to enable banks and their dealers to expand their balance sheets to provide market liquidity during stress without materially reducing the overall resilience of those firms. It was the structure of that market during times of stress -- not the action of money market funds -- that was at the heart of the ensuing challenges of March 2020. To this end, money market fund reforms by themselves will not address these challenges."
ICI's Executive Summary states, "Our comments and recommendations, include the following: Amendments to remove liquidity fee and redemption gate provisions. We agree that the regulatory tie between liquidity thresholds and fee and gate thresholds made money market funds more susceptible to financial stress in March 2020 and could likely do so again in future periods of stress."
Discussing, "Proposed swing pricing requirement," they explain, "We strongly disagree with the proposed swing pricing requirement (and the related proposed disclosure and reporting requirements). Swing pricing fails to reflect how money market funds are managed, would not advance the SEC's goals of enhancing money market fund resiliency and by extension financial stability, would likely strip money market funds of features that are key to investors ... and would impose excessive costs to overcome unnecessary and complex structural challenges. Indeed, swing pricing will fundamentally alter the product and its appeal to investors, cause fund sponsors to stop offering the product, and is neither supported by the data nor necessary.... Nevertheless, if the SEC chooses to ignore the evidence and insists on imposing an anti-dilution mechanism (ADM) on certain money market funds, the SEC could modify and leverage the existing fee framework. Similar to retail money market funds, and as supported by data, however, nonpublic institutional prime money market funds do not need special provisions as demonstrated by their lower levels of redemptions in periods of stress."
On "Amendments to portfolio liquidity requirements," they comment, "As economic analysis shows, a modest increase in the daily and weekly liquid asset requirements -- consistent with what most public prime money market funds already maintain as a matter of conservative liquidity risk management -- and importantly in combination with the amendments to remove the current liquidity fee and redemption gate provisions -- would bolster the resiliency of money market funds sufficiently to avoid another March 2020 like event. To this end, we recommend the SEC increase daily and weekly liquid asset requirements to 20 percent and 40 percent, respectively. We also generally support a requirement that would require a fund to notify its board upon a 'liquidity threshold event,' provided the definition of such event is adjusted to require board notification when daily liquid assets and weekly liquid assets go below 10 percent and 20 percent, respectively (half of our proposed liquidity levels)."
Regarding "Amendments related to potential negative interest rates," ICI says, "We strongly oppose a requirement that government and retail money market funds must determine that each financial intermediary has the capacity to redeem and sell securities issued by a fund at a floating NAV per share or prohibit the financial intermediary from purchasing the fund's shares in nominee name. Imposing this requirement on these funds is neither necessary nor relevant to the redemption pressures experienced by other money market funds in March 2020, would be prohibitively expensive for many financial intermediaries, and may drastically reduce these important funds for the short-term funding needs of investors and the direct financing for governments, businesses, and financial institutions.... Further, the proposed provision to prohibit reverse distribution mechanisms (RDM) or reverse stock splits should not be included in the final amendments because such tools should be available to funds to use in a negative interest rate environment."
On "PWG Report Reform Options," they add, "We support the SEC's decision not to include other reform options discussed in the PWG Report, such as minimum balance at risk, capital buffers, and liquidity exchange bank membership. The likeliest impact of any of these options would be to decrease the utility and attractiveness of these products to investors and cause fund sponsors to exit the industry."
Finally, the comment letter tells us, "We also note that even if funds could accommodate the operational challenges of swing pricing, only the largest funds would likely survive because the costs would be substantial and prohibitive for smaller funds. We do not believe the SEC should want to create a regulatory environment that dampens competition and accelerates further industry consolidation."
ICI also released its latest monthly "Money Market Fund Holdings" summary, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds.
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in March, prime money market funds held 30.0 percent of their portfolios in daily liquid assets and 49.0 percent in weekly liquid assets, while government money market funds held 85.9 percent of their portfolios in daily liquid assets and 92.2 percent in weekly liquid assets." Prime DLA was up from 27.9% in February, and Prime WLA was up from 48.0%. Govt MMFs' DLA decreased from 87.3% in February and Govt WLA decreased from 93.7% the previous month.
ICI explains, "At the end of March, prime funds had a weighted average maturity (WAM) of 22 days and a weighted average life (WAL) of 56 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 30 days and a WAL of 77 days." Prime WAMs were three days shorter than February, while WALs were two days longer from the previous month. Govt WAMs were one day longer and WALs were two days longer than February, respectively.
Regarding Holdings by Region of Issuer, the release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $145.58 billion in February to $193.01 billion in March. Government money market funds' holdings attributable to the Americas declined from $3,793.98 billion in February to $3,772.27 billion in March."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $193.0 billion, or 45.6%; Asia and Pacific at $81.8 billion, or 19.3%; Europe at $144.3 billion, or 34.1%; and, Other (including Supranational) at $4.0 billion, or 1.0%. The Government Money Market Funds by Region of Issuer table shows Americas at $3.772 trillion, or 92.6%; Asia and Pacific at $108.3 billion, or 2.7%; Europe at $183.7 billion, 4.5%, and Other (Including Supranational) at $10.1 billion, or 0.2%.
