Members of the Securities and Exchange Commission voted earlier this week to change the rules governing money market funds, a decision that regulators and others say might cause some funds popular with institutional investors to lose assets or shutter. Regulators have struggled to rewrite the rules since 2008 when the government stepped into temporarily guarantee the funds during the global financial crisis.
Under the new rules, money market funds have higher liquidity requirements. Their total assets required to be easily-sold — liquid — on a daily basis increased from 10 percent to at least 25 percent, while their weekly liquidity threshold increased from 30 percent to at least 50 percent. Regulators said those changes will provide a more substantial buffer in the event that investors race to redeem their funds, as they did during the global financial crisis and at the beginning of the COVID-19 pandemic in March of 2020.
The new rules also forbid money market funds from temporarily suspending redemptions through a traditional gate or by charging investors fees if their weekly liquid assets fall below a certain threshold.
Additionally, the new rules will require institutional prime and institutional tax-exempt money market funds — those used by pensions, endowments, and other institutions — to charge investors liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets. Non-government money market funds will be forced to charge a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. Those changes will protect shareholders from dilution and “more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly,” regulators said.
The SEC commissioners voted 3-2 to approve the rules, which will be sent to the federal register and go into effect within 60 days. Funds will have 12 months from the effective date to comply with the rules.
Notably absent from the final rules was a proposal that a money market fund’s net asset value be adjusted downward by a swing factor when it has net redemptions — a change the industry adamantly opposed. SIFMA, the trade association for broker-dealers, investment banks, and asset managers, said in a public letter that it remains skeptical that anti-dilution measures are necessary but happy that the rule didn’t include the proposed swing pricing.
“I think that the liquidity fee was definitely a big shocker. Maybe to some real insiders, but to most it wasn’t even on the table. It wasn’t even available for public comment,” said Brandon Semilof, head of institutional sales at StoneCastle Cash Management. “I think that the industry did a really, really good job voicing their objection to that being passed because, purely from an operational perspective, it would be extremely difficult.”
But SIFMA also encouraged the regulator to closely monitor the impact of the new rules, which SEC commissioners also warned about.
The commissioners who dissented — Hester Peirce and Mark Uyeda — expressed concerns about the rules during an open meeting, including what effect they will have on institutional prime money market funds, which offer higher yields to qualifying investors such as corporations and state and local governments.
Before the vote on the rules, Peirce bluntly asked: “Are we trying to kill institutional prime funds?”
Regulators demurred that notion, reiterated that prime money market funds were a vulnerability in the financial system, and that the objective of the new rules was to protect investors.
The intention of the new rules might not be to eliminate institutional prime money market funds, but there is little doubt they will impact the group, which manages a significant part of the nearly $6 trillion in money market assets. (Institutional prime funds managed more than $550 billion in assets in 2022 when the Federal Reserve studied their vulnerability. But the amount has swelled since the rise in interest rates and the failure of Silicon Valley Bank and others.)
In recent years, institutional investors have been choosing to send an increasing amount of their cash to so-called government money market funds (which invest almost all their assets in the most liquid investments, like cash and government bonds) over prime funds. The new rules are going to support that trend, Stephen Cohen, a partner at the law firm Dechert, said.
“When the commissioners ask that question, what they’re really saying is: Aren’t we really just disincentivizing investors from going into institutional prime and forcing more investors to go into government money market funds?” Cohen said. “They’re not trying to kill them, but they’re certainly disincentivizing investments in institutional prime funds by adopting these reforms and not adopting something similar for government money market funds.”
Investment firms that have institutional prime money market funds, including J.P. Morgan Asset Management and UBS Asset Management, couldn’t be reached to comment on the future of their funds. BlackRock and Fidelity Investments declined to comment.
Regulators want to prevent the Fed from having to swoop in and save money market funds again like they did in 2008 and 2020. Over the years, rule changes have resulted in fewer choices for cash managers like StoneCastle and the latest changes are a continuation of that, Semilof explained.
“For a cash manager, after the reforms that were put in place because of 2008, the available options for managing your cash shrunk. After what was announced yesterday, have those options shrunk by one? Possibly,” Semilof said.
However, at the same time, more investors are wisening up to the risks of money market funds and better diversifying how they invest the cash they anticipate they’ll need again quickly, according to Semilof.
“When it comes to investing in your traditional asset classes, nobody is going to put all of their assets in a single equity. Nobody’s going to put all of their assets into a single type of vehicle, Semilof said. “That diversification is truly, truly critical. And the issues that we saw with money market funds in 2008 and 2020 just highlight the absolute critical need to diversify your cash into other vehicles.”
