SEC rules hit billion-dollar institutional prime money market funds
The SEC’s new rules for US money markets could significantly cut the number of institutional prime money market funds, even as money market assets climb on the news that the Fed will keep interest rates higher for longer.
The Securities and Exchange Commission (SEC) has been working on ways to stop investors running out on money market funds as they did in 2008 and again at the start of the pandemic in 2020. Large outflows from big prime funds force the funds to sell their assets at a discount, which then causes losses for the investors who hang in there.
Last year, the SEC decided on a sweeping overhaul of the rules for the $5.5 trillion industry, including new fees and liquidity levels.[1] The year’s grace to get in line with the rule changes will run out in October, and the Financial Times has reported that some cash managers would rather shut or convert institutional prime money market funds handling billions of dollars than comply.[2]
Changing funds
Cash managers including Federated Hermes, Capital Group and Vanguard told The Financial Times that they are planning to close institutional prime money market funds holding more than $220bn in assets, or convert them to another type of fund, before the mandatory fee on large redemptions comes into effect.
The new rules require institutional prime and institutional tax-exempt money market funds to charge investors liquidity fees if their daily net redemptions exceed 5% of net assets. The idea is that if investors have to pay significant fees to take large sums of money out, that will more fairly allocate costs for all shareholders and give investors pause when they’re thinking of stampeding out of the markets.
More generally, the new rules also require money market funds to have higher liquidity, with total assets that can be easily sold on a daily basis increased from 10% to at least 25%, while weekly liquidity increases from 30% to at least 50%.[3] Money market funds are also banned from temporarily suspending redemptions through a traditional gate or by charging investors fees if their weekly liquid assets fall below a certain threshold.
The liquidity fee is an alternative to swing pricing, which was vociferously opposed by the industry. But the new fee isn’t a crowd-pleaser either. One of the two dissenting SEC Commissioners at the time of the vote, Hester Peirce, said it was unlikely to gain the “full-throated endorsement” of the industry.[4]
Interest rate boost
The rule changes haven’t stopped investment flowing into money market funds recently on the back of the Federal Reserve’s elevated interest rates, and the news that these are to remain higher for longer has bolstered assets in the last month.
About $9.13 billion flowed into US money market funds in the week through April 24, according to Investment Company Institute data, and total assets rose to $5.98 trillion from $5.97 trillion the week prior.[5] Both the end of the US tax season and the expectation of continued high interest rates drove the rise.
The question is whether government and retail money market funds are now more attractive to investors than institutional prime funds given the liquidity fee. Cash managers are particularly aggrieved that after swing pricing was dropped as an option, the SEC didn’t allow for another period of consulting on liquidity fees.
Eric Pan, chief executive of the Investment Company Institute, told the Financial Times that many firms were still trying to figure out how to implement the rules, particularly given the demand for money market fund investment.[6]
“The rule should have been reproposed,” he said, “[The] SEC clearly did not understand the complexities and the difficulties in implementing a mandatory liquidity fee.”
Bibliography
[1] SEC Final Rule: Money Market Fund Reforms [2] ft.com Managers to shut or convert $220bn of US money market funds before rule change [3] SEC Final Rule: Money Market Fund Reforms [4] Bloomberg SEC Imposes Money-Market Fund Rules to Thwart Rapid Outflows [5] Bloomberg Money-Market Fund Assets Tick Higher as Tax Season Winds Down [6] ft.com Managers to shut or convert $220bn of US money market funds before rule change
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