Articles Tagged with Money Market Funds

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The Securities and Exchange Commission (SEC) yesterday adopted a series of amendments to the rules that govern money market funds.  The most controversial of these amendments will require institutional prime and tax-exempt money market funds to maintain a floating net asset value (NAV) and will allow the boards of institutional and retail prime and tax-exempt money market funds to impose liquidity fees and to suspend redemptions temporarily if the funds’ weekly liquid assets fall below a certain threshold.  Funds will have two years to comply with these amendments.

Retail and government funds will be not subject to the floating NAV requirement.  A retail fund is defined as a fund that has policies and procedures reasonably designed to limit all beneficial owners to natural persons.  A government fund is defined as a fund that invests 99.5% of its assets in cash and government securities.  Floating NAVs will be rounded to the fourth decimal place.  In conjunction with the SEC amendments, the Treasury Department and the Internal Revenue Service proposed rules providing a simplified tax accounting method to track gains and losses on floating NAV money market funds and providing relief from the wash sale rules.

If a money market fund’s weekly liquid assets fall below 30% of its total assets, a fund board would be permitted to impose a liquidity fee of up to 2% on redemptions and to suspend redemptions (impose a “gate”) for up to 10 business days.  If the liquid assets fall below 10%, the fund would be required to impose a liquidity fee of 1%, unless the fund board determines that a lower or higher fee (ranging from no fee to a 2% fee) would be in the best interest of the fund.  Government funds would not be subject to these requirements, but could voluntarily opt into them if previously disclosed to investors.

Concern has been expressed that the floating NAV requirement will impose new costs on money market funds, prompt institutional investors to shift cash to government funds, bank deposits and unregulated funds, and impair the short-term funding of businesses and governments.  Concern has also been expressed that the liquidity fee and gate requirements will trigger runs.

The SEC at the same time adopted less controversial amendments to the diversification, disclosure and stress testing requirements for money market funds, as well as to the reporting requirements for money market funds and for private funds that operate like money market funds.  In addition, it reproposed amendments to remove references to credit ratings in the rules and forms relating to money market funds.

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Written by: Jay B. Gould

The SEC recently proposed rules to reform the way money market funds, which currently have over $2.9 trillion in assets, operate in order to make them less susceptible to large redemptions that could harm investors.  Specifically, the SEC proposed two alternatives that could be adopted alone or in combination.  The first alternative would require a floating net asset value for prime institutional money market funds.  The floating NAV is intended to address the heightened incentive for shareholders that have to redeem shares in times of high volatility and to improve the transparency of money market fund risks through more visible valuation and pricing methods.  The second alternative would allow the use of liquidity fees and redemption gates during times of high volatility. 

The proposed rules would also (i) require money market funds to provide additional disclosures pertaining to their levels of liquid assets, certain material events and sponsor support; (ii) eliminate the 60-day delay on public access to the information filed on Form N-MFP regarding portfolio holdings; (iii) amend Form PF to improve private liquidity fund reporting; (iv) strengthen the diversification requirements of a money market fund’s portfolio by requiring that money market funds and their affiliates aggregate their holdings for purposes of complying with the 5% concentration limit, removing the “25% basket” and requiring money market funds to aggregate all of the asset-backed securities vehicles sponsored by the same entity for purposes of the 10% guarantor diversification limit; and (v) enhance the stress testing requirements for money market funds adopted by the SEC in 2010.     

The SEC press release regarding the proposed rule can be found here and the full text of the proposed rule can be found here


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Following the September 2008 run on money market funds, which began following the failure of Lehman Brothers Holdings, Inc., the Treasury Department requested that the President’s Working Group on Financial Markets (“PWG”) prepare a report on the regulatory changes needed to address systemic risk and to reduce the susceptibility of money market funds to runs. On October 21, 2010, the PWG responded with its report entitled “Money Market Fund Reform Options.” The policy options discussed in the report include:

  • requiring money market funds to have floating net asset values;
  • creating emergency liquidity facilities funded by the money market fund industry;
  • requiring large redemptions to be paid in kind, rather than in cash; and
  • mandating participation in an insurance system.

The report emphasized that new measures intended to mitigate money market fund risks would also likely reduce the appeal of money market funds to many investors and cause investors to shift assets to unregulated funds with stable NAVs, such as offshore money market funds, enhanced cash funds, and other stable value vehicles. As such funds are subject to little or no regulatory oversight, the growth of unregulated money market funds would likely increase systemic risks. Therefore, any policies intended to reduce the risks associated with money market funds would need to limit the potential for regulatory arbitrage by imposing enhanced constraints on unregulated money market fund substitutes (for example, by providing that the exemptions from registration under the Investment Company Act of 1940 provided by Sections 3(c)(1) and 3(c)(7) thereunder are not available to investment vehicles maintaining a stable net asset value).

The Financial Stability Oversight Council will further examine the reform options discussed in the report in order to identify those most likely to reduce money market funds’ susceptibility to runs.