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.
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.