The Securities and Exchange Commission (SEC) made an announcement on July 12, 2023, regarding Money Market Fund Reforms, highlighting their continued and ongoing goals, according to Chair Gensler, to implement “rules [which] will make money market funds more resilient, liquid, and transparent, including in times of stress.”
Importantly, this round of SEC reforms targets both institutional prime and institutional muni funds and not government, treasury/repo or treasury-only funds which they have historically viewed as less susceptible to runs during times of market stress. While certain elements of these latest reforms are commendable in their goals, some elements could be deemed excessive in their execution.
The SEC emphasized the importance of strengthening MMFs through certain measures such as increasing the liquidity requirement for money market funds to 25% of a fund’s total assets in daily liquid assets and 50% in weekly liquid assets, enhancing disclosure and reporting requirements, and requiring institutional prime and institutional muni funds to implement a liquidity fee framework to “better allocate the costs of providing liquidity to redeeming investors.”
Importantly, the SEC abandoned the so-called “redemption gates” provision which allowed a money market fund to temporarily suspend redemptions. Similarly, it also abandoned its so-called “swing pricing” proposal which many industry professionals viewed as cumbersome, costly, difficult to implement, and likely to eat into the net yields earned by investors.
Questions persist as to whether the benefits of increasing daily and weekly liquidity buckets to 25% and 50% (from 10% and 30% respectively) will outweigh the costs to investors in the form of the decreased performance they may earn.
Imposing a liquidity fee framework, when a fund experiences daily net redemptions that exceed 5% of net assets, could be viewed by money fund investors as a friction point or hindrance and potentially lead investors to explore alternative investment vehicles away from money funds. This unintended consequence may undermine the attractiveness and competitiveness of MMFs, negatively impacting investor options.
While the goals of the SEC’s Money Market Fund Reforms are commendable, it is essential to strike the correct balance between regulatory safeguards and maintaining investor options. Excessive execution of certain elements could inadvertently hinder the growth and attractiveness of the MMF industry. Finding a middle ground that addresses systemic risks without overly burdening investors and fund managers is crucial to ensure a vibrant and accessible MMF market.
ABOUT THE AUTHOR
Zachary Green is an industry veteran with over 20 years of experience helming global businesses for marquee asset management firms. A tested leader with deep international experience, demonstrated strategic, analytic, human capital leadership, and motivational skills, he's restructured, expanded and launched new businesses in markets spanning North, Central and South America, Asia Pacific and Europe.