Money market funds, despite low yields and pending regulatory reform, continue to play a key role in our economy. They provide a safe haven for retail investors’ portfolios, stable cash management and liquidity for businesses and institutional investors, and an affordable source of short term funding for our states, cities and municipalities.
At Boston Financial, we service many of the largest money market fund providers in the industry. We work to stay abreast of industry trends and pending regulations to assist our clients through any changes.
Recently I attended the annual iMoneyNet Money Market Expo to hear the latest on money market funds and pending regulatory reforms. The keynote speakers included former SEC Chairman Troy Paredes and Nancy Prior, President of Fidelity’s Fixed Income Group.
While the industry has an understanding of the fundamental construct of the proposed rules, there is still uncertainty over which of the two alternatives or a combination will be released in the final regulation. And within each of those alternatives, there continue to be areas of concern driving further industry dialog with the commission.
With the SEC’s pending money market reforms, much of the discussion focused around the two alternative proposals and their potential impact to the industry.
This proposal requires institutional money market funds to float their NAV. Retail and Government money funds would be exempt.
The second proposal would allow for liquidity fees and redemption gates. Government funds would be exempt from this but could opt in voluntarily.
Mr. Paredes commented that each of the proposed alternatives aligned with the fundamental goal of the regulation, which is to prevent a run of shareholder redemptions. His position was that a floating NAV would ultimately be unattractive to investors and be less of a deterrent to a run on the fund, while liquidity fees and gates would perform better as a deterrent to mass redemption activity.
Another goal of the regulation is to provide for additional transparency, thereby reducing the first mover advantage. Mr. Paredes cited that the enhanced disclosure requirements already in place provide for sufficient transparency for investors.
Mr. Paredes also spoke on how capital market regulators and banking regulators have different perspectives and each has their respective issues to address. In his opinion, banking regulation encroachment on capital markets may not be the best approach.
Ms. Prior’s comments focused on the proposed alternatives and areas of concern. First, there is a large contingent that believes municipal money market funds should have been excluded from any structural reform. These funds represent a total of $270 billion and should not be considered a systemic risk.
Municipal funds maintain a high degree of liquidity, typically 2½ times the required 30% threshold. Also, they play an important role in providing affordable short term funding for states, cities and municipalities. Without this funding source, there could be potential increases in costs of services leading to increases in taxes.
Another concern is the SEC’s definition of a retail money market fund. The proposal defines a retail fund as restricting redemption activity to $1million per day per shareholder. A joint comment letter was submitted by nine asset management firms recommending retail money market funds be limited to natural persons. Implementing this definition would reduce operational complexity and programming costs for Funds, distributors and service providers. Also, acquiring the necessary shareholder documentation is already part of the Funds’ AML/CIP procedures.
Ms. Prior also had a few recommendations:
- Reduce the proposed redemption fee from 2% to 1%, since based on their analysis, that should be sufficient to cover a Fund’s redemption costs.
- Change the required 4 digit NAV to a 3 digit NAV
- Resolve tax reporting issues before any proposal is implemented
- Include a three year implementation period in the proposal.
Money market reform is coming, but what form and how investors will react is still unclear. It is expected that final regulations will be released later this year. At Boston Financial we are continuing discussions with our clients and industry partners to evaluate and assess how these regulations will ultimately change the way we service money market funds in the future.