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Proposed MMF rule changes

msf
edited December 2021 in Fund Discussions
The SEC is proposing changes to MMFs. There are three key pieces (plus an enhanced reporting requirement):
  1. Increase liquidity - this could potentially decrease yields, but since yields are already at 0.01% and positive only because of subsidies, we're unlikely to see them go any lower.
  2. Remove the gating/fee requirements on fund redemptions. This is the change that appears most significant for retail investors - one will no longer have to worry about being able to get money out of prime or muni MMFs without paying a redemption fee.
  3. Implement swing pricing on institutional funds. Not going to explain this, since it affects only institutional MMFs.
The fact sheet seems to be the best place to start.

Press release: https://www.sec.gov/news/press-release/2021-258
Full text of proposal (325 pages): https://www.sec.gov/rules/proposed/2021/ic-34441.pdf
Fact sheet: https://www.sec.gov/rules/proposed/2021/ic-34441-fact-sheet.pdf

If you want to submit a comment to the SEC, you can do so here:
https://www.sec.gov/rules/proposed.shtml (look for Money Market Reforms and its submit comments link)

Comments

  • edited December 2021
    These are for prime (non government) & muni m-mkt fund. Lot of assets have shifted from these to government m-mkt funds that are OK.
  • msf
    edited December 2021
    Actually, and as noted in the SEC proposal, "Government funds are [currently] permitted, but not required, to impose fees and gates." So technically some parts of the SEC proposal have scope beyond prime & muni m-mkt funds.

    Pragmatically, I doubt that any government MMF adopted¹ fees or gates. But by the same token, I'm not aware of any MMF that ever actually imposed them. Not that I've looked that hard though.

    The SEC proposal notes that "during the period of market stress in March 2020 ... no money market fund imposed a fee or a gate."

    ¹ The distinction I am drawing between "adopting" and "imposing" can be understood from a footnote in a Fidelity explanation of the current rules. I use "imposing" to mean "actually charging a fee or actually restricting withdrawals" as opposed to merely allowing a fund to do this. By default, government funds were not allowed to impose fees or gates unless they explicitly adopted them. From Fidelity:
    The final rules are clear that liquidity fees and/or redemption gates do not apply to U.S. Treasury or government money market mutual funds. The SEC is allowing U.S. Treasury or government money market mutual funds to add liquidity fees and/or redemption gates to a fund, but only after shareholders receive 60 days’ written advance notice.
  • edited January 14
    @LewisBraham has a piece in Barron's on this. My summary (advance preview):

    "FUNDS. Post-Financial-Crisis reforms are not working for some MONEY-MARKET FUNDS. GOVERNMENT money-market funds are doing fine (AUM grew to $4.1 trillion). But PRIME money-market funds have shrunk to $831 billion. These invest in commercial paper and CDs, can have redemption fees and/or gates and/or floating NAVs (institutional prime). When issues developed in 2020, these prime money market funds were reluctant to use their available tools and the FED had to step in with some liquidity backstops. So, now, the SEC has proposed new rules that will ditch redemption fees and gates in favor of SWING-PRICING (a form of floating NAV related to redemption level). The fund industry is opposing these new rules (Fido, Federated Hermes, Blackstone, BNY/Mellon, etc)."

    https://www.barrons.com/articles/money-market-funds-sec-regulations-51642183815?mod=hp_DAY_9
  • edited January 16
    Continuing on …

    It was a good article in Barron’s (By @LewisBraham):) as Yogi mentions. The details are rather complex and I don’t understand it as well as @msf (above).

    Anyone invested in short duration corporates must have noticed something “spooky” going on starting in mid March 2020. TRUBX, which I owned than, had been conservatively administered by TRP for years. Pegged at $10.00 it rarely budged - just a penny or two on rare occasions. But after the Covid-19 lockdowns & stock market fall began, it lost at least a dime very quickly - probably a bit more than that. And, it stayed down for a number of weeks afterward. A reflection of stress at the short end of the corporate bond ladder.

    My take from a cursory reading of the Barron’s piece was that these “reforms” are mainly to reassure (institutional / corporate) investors that delaying or postponing redemptions will not “shut the gate” on them and make it harder to access their money down the road. It was this fear that led many to “rush” the funds and try to get out ahead of everyone else.
  • edited January 16
    I think that the regulators are worried about the health of the COMMERCIAL PAPER market that companies rely on heavily. Dependence on commercial paper to fund operations is not a good thing but it is what it is. This market has lost a huge buyer as the money-market funds have mostly shifted to government paper. Only prime m-mkts funds now buy commercial paper and those are now tiny relative to government m-mkt funds.

    What is interesting is that the fund industry hated 2014/2016 m-mkt reforms, but now likes those better than the new proposed reforms (swing-pricing instead of redemptions/gates). I suppose that the Fed wants to do SOMETHING because it had to step in to provide some liquidity backstops for m-mkts in 2020, but will it be effective? Or, is it just spinning the wheel? Leave it alone, says the fund industry and its trade association ICI.
  • The once and future rules are different for institutional (both prime and muni) MMFs and retail prime and muni MMFs.

    Was:
    Institutional - floating NAV required, gating and redemption fees with thresholds
    Retail - floating NAV not required, gating and redemption fees with thresholds

    Will be:
    Institutional - swing pricing required
    Retail - nothing

    SEC 2014 Money Market Reform Final Rule

    As the SEC writes in the current (2021) proposal summary:
    The proposal would remove the liquidity fee and redemption gate provisions in the existing rule.... The proposal would also require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies
    So the change isn't quite "ditch[ing] redemption fees and gates in favor of SWING-PRICING". At least not for retail funds. Brookings has a good piece on swing pricing, written a few months before the SEC proposal came out:
    https://www.brookings.edu/blog/up-front/2021/08/03/what-is-swing-pricing/

    A problem with the 2014 rules is that they invite gaming. The most obvious is racing for the exits when liquidity drops. One would keep an eye out for falling liquidity that might trigger gates/fees (or NAV reduction on institutional funds). Then run for the hills and try to stay ahead of the stampede.

    The funds' countermove was to keep liquidity higher than necessary to prevent the stampede. What they could have tried instead (another gaming move) was challenge the SEC to enforce its rule.

    The rule gave the funds an out - at the first threshold they were permitted, but not required, to impose gates (or redemption fees). They were free to say simply that it was not in the best interest of the fund to do so. The result might be a race to the bottom (of liquidity).

    IMHO much of the exodus from retail prime funds was forced by the fund companies converting their prime funds to government funds. One wonders whether they would have done that had they foreseen that they were going to keep liquidity consistently high to prevent gates/fees from triggering.

    I've gamed the system a little myself. With both prime and government MMFs yielding the same one basis point, I've voluntarily moved to the nominally safer government MMFs. An added benefit is that the divs of those MMFs (esp. Treasury funds) are more likely to be fully state tax-exempt. Maybe I saved 3¢ in state taxes for 2021. I'll know when I file my returns.

    A couple of technical clarifications on Lewis' piece:
    - Some MMFs price multiple times a day. For them, the threshold for market impact calculations is 4% divided by the number of pricings per day. (Footnote 123 in proposal.)
    - While swing pricing was authorized in 2016 as Lewis wrote, that authorization only became effective in 2018. (This resolves the different dates in Lewis' piece and Brookings'.)
    SEC 2016 Swing Pricing Final Rule

  • edited January 16
    You are right about the institutional nature of the rules as they are the main investors for prime funds today. Part of this retail/institutional distinction has to do with brokers converting retail clients prime fund accounts into government fund or FDIC style cash accounts, so there is just less retail money in prime funds. Part of it has to do with retail investors having little interest in prime funds now because the yields on them are virtually nil. Part of the regulators view also is that retail investors don't trade these accounts as much as institutional ones, that during the March 2020 crisis they largely stayed put while it was institutions rushing for the exits--whether that institutional rush was caused by the previous rules remains debated--but it is true that retail investors tend to have more inertia. So, ironically, the regulators are worried about retail less from a liquidity perspective. The retail investor generally is not trying to game a few basis points of NAV or yield in an arbitrage by being the first one out. The technical details you mention I came across but space is limited in these articles and the goal is to try to make complex subjects understandable.
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