Today, the SEC voted unanimously for money market fund reforms. The reforms were meant to ease concerns of disruptions to money market funds and the broader money markets.

Money Market Fund

There were two proposals for money market funds that the commissioners considered and approved

1. Requiring a floating NAV for institutional prime money funds

2. “Fees and gates”, i.e. if a prime institutional money fund’s weekly liquid  assets falls below 15%, its investors would be required to pay a 2% liquidity  fee (with an exception if the fund’s board declares that such a fee would not  be in investors’ interest) and the fund has the ability to restrict redemptions  for up to 30 days.

These proposals will now enter a 90-day comment period, after which the final  rules would be formally adopted.

SEC could finally choose one proposal, both, or letting  funds have the option

The final form of the SEC regulation could require the adoption of either or both  proposals, or even allow each fund the option to choose between them. Also, the  proposal only applies to institutional prime money funds. Retail funds or those that  invest in governments only would be exempt. Many analysts expect the money funds to find  the “fees and gates” provision acceptable, since average weekly liquidity is  currently around 30%. Thus the SEC’s final vote in three months could determine  how expansively the proposals will apply.

Exemption for retail and government only money market funds

Government and retail money market funds would be allowed to continue using  the penny rounding method of pricing and maintain a stable share price. A  government money market fund would be defined as any money market fund that  holds at least 80 percent of its assets in cash, government securities, or  repurchase agreements collateralized with government securities. A retail money  market fund would be defined as a money market fund that limits each  shareholder’s redemptions to no more than $1 million per business day.

Priya Misra of BAML notes

We think the immediate market impact will be modest, with the uncertainties of  whether final adoption will involve which combination of proposals being the final  determinant. The most favorable outcome would be to allow funds the option to  choose between them. The market impact of significantly lower bill yields and  repo rates and wider credit spreads should be muted for now, but the market is  still susceptible to the impact of a stricter final rule that requires both provisions.