Another of the major "Comments on Money Market Fund Reform" posted to the SEC comes from J.P. Morgan. CEO John Donohue writes, "J.P. Morgan Asset Management ('JPMAM') is pleased to respond to the Securities and Exchange Commission's proposal on money market fund reforms. JPMAM is one of the largest managers of MMFs, with over $656 billion in assets under management globally. In the United States, we currently manage approximately $450 billion in MMFs, across government and treasury MMFs (~$363 billion), institutional prime MMFs (~$69 billion), retail prime MMFs (~$6 billion), and tax-exempt MMFs (~$11 billion)."
He tells the SEC, "Like many other MMFs, JPMAM's institutional prime and, to a lesser extent, tax-exempt funds saw meaningful redemptions in March 2020 as a result of the financial market's reactions to the coronavirus pandemic and government efforts to combat it. We are therefore supportive of the SEC's efforts to improve the resilience of MMFs in the US. We evaluated each of the policy options set forth in the December 2020 Report of the President's Working Group on Financial Markets, and provided views in a comment letter to the SEC in April 2021. After careful consideration of the SEC's proposed rules for MMFs and the discussion in the Proposing Release, we have modified our recommendations slightly to address the SEC's concerns."
JPMAM says, "In summary: We strongly support removing the tie between MMF's weekly liquid assets (WLA) and the obligation for a board to consider imposing a fee or gate; we believe this is the single most important reform to enable MMFs to meet elevated redemption levels. We do not oppose raising WLA and daily liquid assets (DLA) to provide a more substantial buffer; however, we believe the proposed 25 percent DLA and 50 percent WLA are too high; we recommend 20 percent DLA and 40 percent WLA. We continue to believe that swing pricing does not work for institutional MMFs, even with the SEC's proposed modifications, and that its imposition would result in a substantial reduction in both assets in and number of such funds offered. Although we do not believe additional reforms are necessary, should the SEC insist on adding an antidilution levy, we believe a tiered liquidity fee could achieve the same goals with fewer negative consequences."
On "Background," they state, "MMFs play a critical role in the functioning of US financial markets and the global economy. We believe the proposed rules, in particular swing pricing, would impair the functionality and attractiveness of institutional MMFs and, as a result, substantially reduce their assets under management (AUM), and lead to industry consolidation. As discussed in more detail below, this view is informed by discussions with clients of our institutional prime MMFs, who shared their thoughts and likely reactions to the proposed changes. In considering the costs and benefits of the proposed rules, we urge the SEC to consider the potential knock-on impacts of a substantial reduction in prime AUM across the short-term market ecosystem."
The letter also says, "As an investment option, institutional prime MMFs serve as an alternative to bank deposits for cash investors who value the same-day liquidity, diversification, and returns these funds offer. Banks frequently position MMFs with deposit customers as a means to help manage their balance sheets more effectively. Providing an alternative to deposits is more important as leverage-based requirements continue to become increasingly binding for large US banks, prompting some banks to push deposits off their balance sheets."
Discussing the "Short-Term Market Ecosystem," JPMAM explains, "[W}hile we recognize the importance of examining the resilience of MMFs following the experiences of March 2020, it is important to note that the challenges were not isolated to prime and tax-exempt MMFs. As market participants demanded cash, a number of market forces, some of them self-perpetuating, caused liquidity to tighten. As discussed in more detail in our PWG letter, modifications elsewhere in the short-term market ecosystem may also be warranted, including enhancing banks' ability to intermediate during times of crisis, reducing the procyclicality of initial margin models at central counterparties, and potentially enhancing the market infrastructure for high-quality, short-term debt. Given the interconnectedness of the short-term market, it is critical to ensure that the regulations in each area are properly calibrated on both a standalone basis and in aggregate, with the aim to strike a balance between promoting safety and soundness of the financial system while also facilitating appropriate amounts of risk-taking and intermediation."
J.P. Morgan notes, "Removing the tie between WLA and the imposition of gates could measurably reduce investor redemptions, both by alleviating investors' fear of losing access to their assets due to gates and, in doing so, reducing downward pricing pressure on longer-dated assets in MMF portfolios and further deterioration of the MMF's net asset value (NAV).... [W]e believe a MMF that imposed a gate would ultimately need to liquidate in any event; therefore, eliminating broader board discretion regarding the imposition of gates from Rule 2a-7 and relying on the existing framework in Rule 22e-3 would be sufficient.... We believe [also] that the SEC's proposal of 25 percent DLA and 50 percent WLA is too high; we propose 20 percent and 40 percent respectively."
They continue, "We continue to believe that swing pricing does not work for institutional MMFs, even with the SEC's proposed modifications. In addition to the client concerns and operational challenges it raises, swing pricing is not fit for purpose because its application is far too broad. We do not believe that any antidilution levy is necessary or beneficial in the ordinary course, or even on days with unusually high redemption volume, unless there is a coincident market disruption; any antidilution mechanism should be narrowly tailored for these rare occasions. For these reasons, we urge the SEC to revisit the redemption fee we previously recommended, with certain modifications to address the SEC's concerns. Below we discuss a) the occasions when an antidilution levy may -- or may not -- be appropriate; b) the challenges with and likely outcomes of imposing swing pricing; and c) our proposed redemption fee."
JPMAM comments, "Unlike long-term mutual funds, MMFs -- particularly institutional MMFs -- are designed to accommodate large flows. MMF investors are not concerned with 'cash drag'; they intentionally utilize such funds to maintain liquidity. MMFs are managed not to maximize returns, but to offer some returns while maintaining the ability to meet liquidity demands. They maintain substantial short-term liquidity on hand at all times and invest in highly liquid, low risk assets. Thus, in the vast majority of circumstances, MMFs do not need to transact in portfolio securities to meet subscriptions and redemptions."
They write, "Moreover, as the Proposing Release explains, institutional MMFs typically value their portfolios using the bid price of underlying securities. As a result, any spread costs associated with selling these securities are already captured in the fund's NAV. In our experience, there are no incremental costs associated with selling the securities these funds hold. Because spreads are already reflected in the NAV and there are typically no costs incurred by the fund in connection with selling securities in ordinary markets, in the ordinary course there is no meaningful dilution experienced by the fund."
JPMAM adds, "In our view, dilution is only likely to occur in a MMF when two factors coincide -- a high level of redemptions and market conditions that render it difficult to transact in portfolio securities at their recorded bid prices. Any antidilution mechanism should seek to narrowly address these circumstances. For the reasons discussed below, we believe swing pricing is not fit for purpose in MMFs; following that discussion, we propose an alternative fee structure designed to address such occurrences."
They also write, "Even if some MMF sponsors could operationalize swing pricing, we expect the costs to be substantial; only the largest funds would likely remain. Larger MMFs may also be more desirable to institutional investors, since such funds would require a higher absolute level of redemptions to trigger an AUM-based MIT. Taken together, we expect swing pricing would ultimately lead to substantial market consolidation, leaving only the largest institutional prime and municipal MMFs."
Donohue explains, "We believe that the delinking of gates from WLA is the single most impactful reform, and that additional reforms are not necessary. However, should the SEC insist on adding an antidilution levy, we believe a fee could achieve the objective of charging investors the cost of their liquidity, with fewer negative consequences. JPMAM's PWG letter proposed a modified redemption fee that was more dynamic than the one and 'up to two' percent fees in the current rule, to be more reflective of the true cost of liquidity to those demanding it. Our proposal also contemplated a pre-approved 'playbook' that provided the board with clear direction on when to impose redemption fees and how to calculate them, to reduce board discretion and facilitate rapid implementation during market stress. While we continue to support such an approach, and believe sufficient clarity could be prescribed in advance, the Proposing Release explains the SEC's concern that such an approach would not facilitate timely action by the board."
They write, "To address this concern, we now propose a prescribed approach for tiered redemption fees that does not require board approval. Under our proposed approach, an institutional prime or municipal MMF would be required to impose a fee on redeeming investors based on a combination of WLA and daily redemptions, as follows: If WLA falls below 30 percent (but above 20 percent) at the end-of-day NAV calculation, AND daily net redemptions are 10 percent of the MMF's assets or higher, a fee of 0.25 percent would be applied to all redemptions; If WLA falls below 20 percent (but above 10 percent) at the end-of-day NAV calculation, a fee of 1.00 percent would be applied to all redemptions; and, If WLA were to fall below 10 percent at the end-of-day NAV calculation, a fee of 2.00 percent would be applied to all redemptions."
Finally, JPMAM adds, "This approach addresses the SEC's concerns about timeliness and certainty, while the tiered structure serves as an approximation of the true cost of liquidity. Importantly, we believe this approach has a number of benefits relative to swing pricing. First, unlike swing pricing, it is narrowly tailored to activate only in times of stress. Second, it is far simpler to both operationalize and explain to clients than swing pricing. Third, it only impacts those who redeem, because the adjustment is external to the NAV (i.e., remaining investors will not experience additional NAV volatility as with swing pricing); and finally, the maximum value addresses investor concerns about the potential unlimited downside risk of swing pricing."
They conclude, "First, the first trigger for a fee includes not just a WLA level, which is publicly available, but net redemptions, which are not. Thus, the 'cliff edge' would not be as visible as it is under the present rules. Perhaps more importantly, as noted above, JPMAM's informal survey of clients indicated that their greatest concern was the potential risk of gates; investment risk and declining NAV were next, and fees were third. This stands to reason, as gates affect all investors in a fund, by removing access to liquidity for an indefinite period and creating uncertainty, whereas fees only affect those who redeem. Finally, the first-tier fee is substantially lower than the current fee of up to two percent that may be applied at 30 percent WLA. We believe that clients will be far less likely to engage in preemptive redemptions to avoid a 0.25 percent fee than to avoid gates or up to a 2 percent fee."
