Understanding SEC’s Money Market Reform Proposal (Release 33-9408)

A money market fund’s purpose is to provide investors with low risk/low return, easily accessible cash-equivalent assets.The fund holds an objective of maintaining a NAV (net asset value) of $1 per share. MMF portfolios are comprised of short-term securities representing “high quality, liquid debt and monetary instruments”.

Totaling approximately $2.6 trillion in assets, corporations often heavily rely on the funds as a source of short-term financing in their day to day business. MMFs drew initial interest from the SEC when the oldest money fund – and one of the biggest – the Reserve Primary Fund, dropped 3% in 2008 causing investors to panic. In the days following this decline the fund experienced investor withdrawals of over $300 billion. Bringing the short-term credit market to a halt, corporations were stymied in their efforts to pay critical expenses such as payroll, etc.

Since this panic, the SEC has been pressed to reform the rules under which these funds operate (despite ire from the mutual fund industry).

Intent on mitigating the financial system from economic shocks, the SEC released a milestone marking proposal detailing new rules for the industry.

The release outlining the reform puts forth two proposals. The first proposal calls to institute a floating NAV policy allowing MMF shares to fluctuate on prime institutional funds thus removing the special exemptions that used to allow MMFs to use amortized-cost accounting and rounding to maintain stable NAVs. By floating NAVs, funds are able to destigmatize changes in fund value and train investors to understand fluctuations. (It should be noted that retail and governments MMFs are not to be affected)

The second proposal is to limit redemptions or charge fees for full redemptions on MMF holdings. This proposal is designed to mitigate MMF’s susceptibility to heavy redemption during panic, improve MMF’s ability to manage and mitigate potential contagion from high levels of redemption, preserve maximum benefits of MMFs for investors and increase the transparency of risk in these funds.

Even with floating NAVs, volatility is expected to be minimal, yet it is still to be understood how these reforms could affect the industry. Comments have been made suggesting complications with overnight sweep accounts, gains/losses reporting in switchover from fixed NAVs, etc.

It is important to note that this is in fact just a proposal and is yet to be heavily weighed in upon by the money fund industry. Critics worry reform could press more investors to pull out of the market as it has already experienced a $1.3 trillion dollar decline since 2008. SEC commissioners will most likely vote on the proposal later this year.

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12 Responses to “Understanding SEC’s Money Market Reform Proposal (Release 33-9408)”

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