Morgan Stanley and Dreyfus, the 7th and 8th largest managers of money market funds, also submitted "Comments on Money Market Fund Reform" to the SEC. Morgan Stanley Investment Management's letter, written by Jonas Kolk, tells us, "MSIM was an early provider of money market funds in the United States, having offered them since 1975. Today we manage government, prime and tax-exempt money market funds based in the United States -- the Morgan Stanley Institutional Liquidity Funds -- as well as internationally domiciled money market funds. Our Global Liquidity Solutions business, which includes US money market funds operating pursuant to Rule 2a-7 under the Investment Company Act, international money market funds, ultra-short bond funds, and separately managed accounts, had a total of $393 billion in assets ... as of Dec. 31, 2021. US money market funds account for the majority of the AUM of Global Liquidity Solutions ($297 billion)."
Their executive summary says, "MSIM fully supports the SEC's goals of enhancing money market fund resiliency during stressed market conditions and of improving the transparency of money market funds. We agree with the Commission that the events of March 2020 demonstrate reforms are needed to Rule 2a-7. MSIM supports eliminating incentives for preemptive redemptions from institutional prime and tax-exempt funds and allowing those funds to use liquidity buffers more effectively to satisfy heavy redemptions that occur during stressed market conditions."
It notes, "As discussed in more detail below, our letter focuses on the following key provisions of the Release: MSIM supports the SEC's proposed enhancements to certain reporting requirements for money market funds.... MSIM supports increasing daily and weekly liquid assets requirements. However, ... the SEC should adopt a minimum weekly liquid assets threshold of 45% rather than the proposed 50% threshold. MSIM believes the increased liquidity minimums, coupled with the removal of the possibility of redemption gates, may be sufficient to meet the SEC's stated goal of mitigating the effects of large redemptions, and further efforts to address shareholder dilution may not be warranted. Indeed, before imposing significant additional regulatory burdens on money market funds, such as swing pricing or another anti-dilutive measure ('ADM'), we strongly encourage the SEC to further study the effects of increased liquidity minimums on improving the resilience of money market funds."
Morgan Stanley's post continues, "Nonetheless, if the Commission believes that an ADM is necessary at this time, MSIM believes a simpler and more direct form of ADM would be far more effective than the swing pricing framework proposed in the Release. Instead of swing pricing, MSIM strongly supports an evidence-based non-discretionary liquidity fee of 2% triggered by net redemptions, the same metric the Release has proposed for swing pricing. To this end, MSIM supports the proposed removal of the redemption gate provisions from Rule 2a-7 and the delinking of liquidity fees and redemption gates from weekly liquid assets. An ADM using a liquidity fee -- divorced from weekly liquid asset levels or the possibility of redemption gates -- specifically charges first redeemers for the cost of their activity at a time of severe stress. Calibration of the trigger should be tied to levels of net redemptions that in fact indicate severe stress. MSIM's experience indicates this level should be 15% net redemptions over two consecutive trading days, which is substantially higher than the 4% proposed market impact threshold set forth in the Release. To facilitate implementation of any ADM, the SEC should require a standard T+1 settlement cycle for transactions in institutional prime and tax-exempt money market funds."
It also tells us, "MSIM strongly opposes the proposed amendments to address negative interest rates that would (i) prohibit a government or retail money market fund (a 'stable NAV money market fund') from implementing a reverse distribution mechanism ('RDM') or routine reverse stock split and (ii) expand a stable NAV money market fund's obligation to confirm in advance that its financial intermediaries can fulfill shareholder transactions if the fund converts to a floating net asset value ('NAV') per share. As evidenced by European money market funds, RDM provides a more streamlined, practical and elegant solution to address the potential for negative interest rates.... Seeking up-front assurances from intermediaries regarding their ability to handle conversions (and deconversions) between stable and floating NAVs is not necessary nor is it supported by the market and historical facts in the United States. We believe that the obligation to seek assurances from financial intermediaries would unnecessarily reduce assets in government and retail money market funds and could force investors to hold cash in demand deposit accounts, which likely would be harmful both to the investors making such deposits and to the banks receiving them."
MSIM adds, "In addition, the SEC should consider requiring financial intermediaries holding omnibus positions to provide data periodically and consistently to money market funds regarding the ten largest underlying clients (excluding identities) to assist money market funds in managing liquidity."
Dreyfus's feedback letter, written by CEO Thomas Gibbons, tells us, "BNYM Investment Adviser, through its division Dreyfus Cash Investment Strategies, manage[s] $255 billion invested in 17 domestic money market mutual funds structured within the confines of Rule 2a-7 under the Investment Company Act of 1940. Pershing LLC, provides clearing, brokerage custody and other related services. In addition, our Securities Services and Market and Wealth Services businesses provide custody, cash management, clearing, fund accounting, transfer agency, and other services for money market funds and their investors. Together, our businesses provide a well-rounded view of the Proposed Rule's impacts on money market funds."
It states, "BNY Mellon supports the following overarching goals for money market fund reform: Improve the resilience of money market funds during stressed markets, eliminating the need for government intervention; Improve the functioning of short-term funding markets; and, Reduce the likelihood that interventions would be needed to meet future money market fund runs.... BNY Mellon has assessed the changes introduced by the Proposed Rule. Due to the breadth of changes contemplated, we are focusing on three specific suggestions that would have the most impact on investors and on the money market fund industry: A. Amending portfolio liquidity requirements, including decoupling the weekly liquid asset threshold from the imposition of liquidity fees and redemption gates, B. Removing the proposed swing pricing requirement, and C. Introducing reverse distributions as an alternative option for money market funds to handle negative interest rates."
Gibbons continues, "We provide details on the ways in which we believe these rulemaking changes would better serve investors and enhance the resilience of the money market fund industry in Sections A through C below. BNY Mellon has considered the remaining reform options detailed in the Proposed Rule. We agree with the Investment Company Institute's comment letter, dated April 11, 2022, which further discusses the remaining reform options."
He writes, "We agree with the Proposed Rule that money market funds must have a strong source of available liquidity to meet daily redemption requests, particularly in times of market stress. As previously noted, the tie between the Rule 2a-7 requirement imposing a 30% weekly liquid asset minimum (the 'WLA Portfolio Minimum') and the WLA percentage threshold at which a fund's Board of Directors or Trustees may consider the potential imposition of liquidity fees and/or redemption gates could motivate investors to preemptively redeem in situations where a fund's WLA moves towards 30%. This pro-cyclical behavior hastened runs and hampered funds from accessing a fund portfolio's available liquidity to meet redemptions."
BNY Mellon comments, "We also agree with the [ICI letter] suggestion that the variability of introducing swing pricing to institutional money market funds could reduce the appeal of these funds as cash management tools. If swing pricing were introduced, the many investors using these funds for cash management purposes would migrate to private funds, ultra-short funds or separately managed accounts, and many fund managers would leave the space."
They add, "We agree that the money market fund industry must have a clear path forward on how to operate when interest rates become negative. While the pricing provisions of Rule 2a-7 explicitly state that constant NAV funds must have the ability to transition to a floating NAV in certain circumstances where the fund's Board determines that doing so is in the best interest of the fund and its shareholders, other options must be in place to support money market funds if interest rates become negative. A reverse distribution mechanism should be authorized as an additional way for a fund to operate in that environment."
Finally, they conclude, "We appreciate the goals of the Proposed Rule to help protect investors and the money market fund industry. As discussed in Sections A through C above, the three key areas in which the Commission should consider changes are: (A) amending portfolio liquidity requirements, including decoupling the weekly liquid asset threshold from the imposition of liquidity fees and redemption gates, (B) removing the proposed swing pricing requirement, and (C) introducing reverse distributions as an alternative option for money market funds to handle negative interest rates. Finally, we emphasize the need for time to make any necessary system updates to accommodate changes under any final rulemaking, which the ICI Letter outlines in further detail."
