The SEC is proposing changes to MMFs. There are three key pieces (plus an enhanced reporting requirement):
- 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.
- 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.
- 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/2021-258Full text of proposal (325 pages):
https://www.sec.gov/rules/proposed/2021/ic-34441.pdfFact sheet:
https://www.sec.gov/rules/proposed/2021/ic-34441-fact-sheet.pdfIf 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
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:
"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
It was a good article in Barron’s (By @LewisBraham)
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.
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.
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: 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