It's been just 2 weeks since the SEC passed its latest "Money Market Fund Reforms." (See the release, "SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements for Large Liquidity Fund Advisers," and see our News coverage.) While we'd been excerpting from the rules themselves and quoting SEC Commissioners, a number of money fund managers and others have been publishing summaries and commentary. We cite a number of these below. The first, Allspring's "Amendments to Rules Governing Money Market Funds," explains, "On July 12, 2023, the Securities and Exchange Commission (SEC) approved amendments to Rule 2a-7 of the Investment Company Act of 1940, which governs money market funds (MMFs). The amendments are designed to improve the resilience and transparency of MMFs. The amended rule includes the following changes: Increased portfolio minimum liquidity requirements; Removal of temporary redemption gates and the link between portfolio liquidity and liquidity fees; New liquidity fee framework; Measures to address potential negative interest rate environment." (Note: Please join us for our July 27 at 2pm Eastern for a free "Money Fund Wisdom Demo & Training" session, where we'll review Crane Data's product suite with a focus on our MFI Daily asset series. We'll also comment on the data disclosure changes pending from the SEC's recent Money Market Fund Reforms.)
Federated Hermes writes in, "An altered landscape for money funds," "Nearly a decade after the SEC implemented a set of new regulations for money market funds, it voted for a raft of new amendments.... The final tally of the commissioners was 3-2 in favor. In Federated Hermes' opinion, the money fund industry could use the same numbers when assessing the amendments themselves: a 3-2 win/loss record."
They explain, "Federated Hermes appreciates that the SEC meaningfully took into account our and the industry's feedback on the proposals, which included referencing our comments many times in the final document. Because that tome is no less than 424 pages, we will be diligently examining it and may have further comments when a thorough review is concluded. But at first blush, we'd call the result largely good news for this broad asset class that we believe is critically important to the financial, investment and business communities."
The piece tells us, "The biggest positive was what didn't show up in the SEC staff recommendations: swing pricing. There's little question this mechanism would have had grave implications for the viability of some of the popular liquidity products. Unfortunately, the SEC enacted another method to combat what some commissioners view as a first mover problem.... We applaud the regulator for essentially retracting one of the most egregious of the 2014 reforms by removing redemption gates and the link between the weekly liquid asset threshold and potential fees."
It adds, "The new regulations require institutional prime and institutional tax-exempt money market funds 'to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund's liquidity costs are de minimis.' Just because this is less onerous than swing pricing would have been doesn't mean it might not be harmful to investors, even if made with the best intentions of protecting shareholders when large redemptions happen. This may impose large costs on the industry and simply replaces the weekly liquid assets trigger with a net redemptions trigger."
Northern Trust Asset Management distributed a "Summary of Final Rule for U.S. Money Market Funds," which states, "As a result of the volatility that occurred during the financial crisis in March of 2020 due to the COVID-19 pandemic, the Securities and Exchange Commission has been working on amendments to Rule 2a-7 for money market funds (MMFs) since December 2021. This was due to the significant stress placed in institutional prime and tax-exempt MMFs since the last round of regulatory reforms in 2016. The Commission provided a comment period from February 8 to April 11, 2022. The final rules were announced and adopted [7/12], July 12, 2023, and are intended to provide increased transparency and 'resilience' to MMFs."
They list the "New Rules/Amendments: Increase of the Minimum Daily and Weekly Liquidity Requirements (DLA/WLA): Currently, the minimum daily liquidity requirement is at least 10% and the weekly liquidity requirement is at least 30%. The new rule calls for at least 25% and 50%, respectively.... Liquidity Fee Requirement: The Commission removed the tie to WLA and liquidity fees as stated above and is now requiring mandatory liquidity fees for funds seeing more than 5% net outflows, unless a fund's transactions cost are considered to de minimus (de minimus is considered less than 1 basis point). This applies to institutional prime and tax-exempt funds. Retail and government funds are not required to implement these fees."
Northern adds, "In the event of a negative interest rate environment, retail and institutional government funds will be required to convert from a stable net asset value (NAV) to a floating NAV or reduce the number of shares outstanding in order to maintain a stable NAV; The final rule for Form N-MFP requires money market funds to report only the type of beneficial or record owner who owns 5% or more of the shares outstanding in the relevant class and not be required to supply client name, just the type of investor.... The final rule is effective 60 days after it is published in the Federal Register (which should be imminent). Once effective, the funds will be expected to comply within the following dates; Reporting Amendments: June 11, 2024; Other amendments, including DLA/WLA, Discretionary Liquidity Fees and Mandatory Liquidity Fee: 12 months."
Dreyfus also recently hosted a webinar entitled, "Enhancing Resilience: Understanding Money Market Fund Reform, which featured John Tobin, Frank Gutierrez and Christine Algozzini. Tobin says, "The first question really is when we think about reform is, 'How would we grade it?' Overall, I would say `the outcome was better than expected ... from an industry standpoint. I think the two big wins were: one, the SEC did not move forward with swing pricing.... I think the other win in this reform was RDM, the Reverse Distribution Mechanism ... an option that the industry fought hard for [that] effectively allowed stable NAVs to remain a stable NAV even in a negative rate environment.... But ... the new rules are not without significant challenges, especially for prime money market funds."
Law firm Morgan Lewis published, "SEC Adopts Further Money Market Fund Reforms." They write, "The US Securities and Exchange Commission (Commission) adopted amendments to the rule governing money market funds on July 12, 2023 in an attempt to address concerns about institutional prime and institutional tax-exempt (i.e., municipal) money market funds, which experienced large outflows during the COVID-related market turbulence in March 2020 that contributed to stress on short-term funding markets.... In a departure from the proposed amendments (Proposed Rule), [2] the Commission did not adopt a controversial provision that would have required institutional prime and institutional tax-exempt money market funds to implement swing pricing during periods of net redemptions (under swing pricing, a fund would be required to adjust its current NAV by a swing factor reflecting spread costs, transaction costs, and under certain circumstances, market impact costs).... In the Final Rule, the Commission replaced swing pricing with a mandatory liquidity fee framework that incorporates certain elements of the swing pricing proposal -- and may, much like swing pricing, raise implementation challenges for funds."
Finally, a posting entitled, "ICD Views to SEC Supported in New Money Market Fund Rules," states, "The removal of swing pricing in amendments to money market fund rules adopted by the U.S. Securities Exchange Commission (SEC) last week is a reprieve for institutional investors who use prime money market funds to earn higher returns on their cash investments, says ICD, provider of an independent technology portal for corporate treasurers investing in money market funds and other short-term instruments."
ICD CEO Tory Hazard comments, "We're relieved that the SEC voted to eliminate the burden of swing pricing on institutional investors.... Had those rules been adopted, prime funds might have ceased to exist. This not only would have taken away a higher yielding, safe and liquid cash investment option for institutional investors, but it would have diminished a source of funding for corporations as prime funds account for a significant percentage of the total commercial paper market."
Additional updates include: SSGA's "Key SEC Money Market Fund Reforms" and Western Asset's "Changes Arrive for Money Market Funds, Once Again." See also: the full SEC Money Market Fund Reforms, the SEC's MMF Reforms press release, their "Fact Sheet," and the Commissioner's Statements for more information.
