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Lower the Gates and Raise the Swing: SEC Proposes Amendments to MMF Rules


On Wednesday, Dec. 15, 2021, the U.S. Securities and Exchange Commission (“SEC”), by a 3 – 2 vote, proposed amendments to the rules governing Money Market Funds (“MMF”) intended, in the words of the SEC’s 325-page Proposal, to “improve the resilience and transparency of money market funds.” This SEC Proposal follows up on a Feb. 4, 2021, SEC Request for Comments on the Presidential Working Group (“PWG”) Report of Dec. 22, 2020, on MMF Reforms. I have previously written extensively about the Presidential Working Group Report and the SEC’s Feb. 4 Request in my Feb. 23, 2021 Blog “Bucking the Break: SEC Requests Comments on MMF Reforms.”

The SEC’s Dec. 15, 2021 Proposal includes most, but not all, of the Reforms discussed in its Feb. 4 Request. One of the more significant omissions, perhaps, is the rejection of any proposal for a Liquidity Exchange Bank, which could provide needed capital in extreme market conditions without federal government intervention, of the type that occurred in 2008 and again in 2020. The PWG, which issued the Dec. 22, 2020 Report cited above, was composed of members for whom private market solutions might well be consistent with private capital market objectives. The SEC as composed in December 2021, after the change in administrations in January 2021, is apparently lessattuned to private market solutions to capital liquidity problems, a situation underscored by the 3-2 vote of the Commissioners on the Proposal and the dissents of Commissioners Peirce and Roisman.

SEC Proposed Amendments

The SEC’s Proposal would cause a number of changes in how MMF’s, and especially MMF’s for institutional investors, are run. As discussed in my Feb. 23, 2021 Blog, there are several types of MMF’s: retail (what many of us might use); government (MMF’s that invest only in government securities – typically U.S. Treasuries and Agencies); and institutional (typically places where large businesses and other entities can “park” their excess funds, earn interest, and still have immediate access to them, i.e., “liquidity”). The changes proposed would eliminate a system of redemption restrictions and fees, known as fees and gates, to be imposed in times of stress in the capital markets. The system of fees and gates was instituted in 2014 as part of reforms undertaken after the Great Recession of 2007-2009. 

Generally speaking, fees and gates allowed a MMF to impose redemption costs and restrictions once MMF withdrawals reached a certain level. In March 2020, as the Covid pandemic broke and the economy was shutdown, MMF withdrawal accelerated virtually overnight. Subsequent analysis showed that institutional investors acted swiftly in the face of declining fund values and withdrew their monies BEFORE trigger thresholds were reached. So, the device intended to inhibit “runs” on MMF’s in fact stimulated them. As Commissioner Roisman said in his Dec. 15, 2021 Statement on the SEC Proposal:

We heard repeatedly at the onset of Covid-19 (and as market participants provided feedback thereafter) that this requirement … exacerbated institutional investors’ incentives to redeem their shares.

This “real-world” experience should provide a cautionary note about the risk of unintended consequences of regulatory action.

Reserve Requirements

The SEC Proposal would materially increase the financial buffers that MMF’s are required to have. Currently, applicable SEC rules require that a MMF hold a daily “reserve” of at least 10% of the MMF holdings, and a weekly “reserve” of at least 30% of the MMF assets. The Proposal would increase these to a daily “reserve” requirement of at least 25% and a weekly minimum of at least 50%. For these purposes, the “reserves” must be immediately available in cash or equivalents.

These enhanced “reserve” levels are intended to allow MMF’s to manage liquidity risks, even in a market crisis. The Proposal asserts that MMF managers managed their respective MMF’s to avoid hitting the weekly 30% threshold by (in some cases) selling portfolio securities to meet redemptions. Hence, the perceived need to heighten the thresholds. What the Proposal does not fully quantitatively address is how much these increased “reserve” requirements will reduce the ability of MMF’s to earn money to pay interest to their investors. It should be noted that tax exempt MMF’s are in general not subject to these “reserve” requirements.

Additional Changes to Reserve Requirements

In addition to tightening the “reserve” requirements for MMF’s (other than tax exempt MMF’s), the Proposal would revise the way in which the daily and weekly “reserve” requirements are calculated. Currently, according to the Proposal, MMF’s use different methods to calculate the requirements: a majority of MMF’s calculate the daily and weekly figures based on a percentage of the asset value of each security held in the MMF, but other MMF’s base their calculations on the amortized cost of each security. The Proposal would require all MMF’s to use the market value of the securities held. In addition, if the value of assets held in a MMF falls below 25% of the weekly liquid assets or 12.5% of the daily liquid assets, the MMF Board must be notified, and within one business day, so must the SEC.

There are also heightened reporting requirements concerning repurchase (“repo”) transactions. I have written previously about the relationship of repos to liquidity in the capital markets. See my Dec. 1, 2020 Blog “Treasury Transparency: Enhanced Regulations for Trading Government Securities“; my June 8, 2021 Blog “Fixing FICC: Agency Proposes Rule Changes to Encourage More Repo Clearing“; and my Aug. 10, 2021 Blog “Improving the Plumbing: The Fed Responds to the Group of 30 and Creates Two Standing Repo Facilities“. Under the Proposal, MMF’s would be required to identify the name of any repo counterparty, whether it will be centrally cleared, and, if so, the clearing agency involved, and the CUSIP number of the securities involved. These requirements are intended to make the repo market more transparent, especially as repo transactions involve MMF securities. 

Swing Pricing”

In 2016 the SEC proposed, and in 2018 finally adopted, regulatory adjustments allowing MMF’s to use, at their option, so-called “swing pricing,” which permitted MMF’s, on a voluntary basis, to impose an intraday adjustment to the Net Asset Value (“NAV”) of Fund shares because of material increases in the redemption of MMF shares. The concern (also a part of the fee and gates requirement) stemmed from the risk that the early exiters from a MMF might gain a considerable economic advantage – receiving a full payout – while the underlying assets in the MMF deteriorated in value, so that the remaining holders of a MMF would face a risk of loss of capital inconsistent with the vaunted liquidity of a MMF. “Swing pricing” requires a “haircut” of the value of MMF shares to be redeemed so that remaining MMF shareholders have a better chance of receiving back their full investment.

That optional device authorized in 2018, but NEVER used, would be made MANDATORY for institutional (both prime AND tax exempt) MMF’s if the Proposal is adopted. Government MMF’s would not be subject to MANDATORY swing pricing. The securities held in government MMF’s generally have readily discernable values, unlike institutional MMF’s that hold commercial paper, certificates of deposit, and other short-term securities, whose market value may be difficult to determine and whose values may deteriorate in periods of market stress. Swing pricing of the MMF’s NAV is to be overseen by a “Swing Pricing Administrator” appointed by the MMF Board, with reporting and compliance requirements.

The Proposal recognizes that the intraday adjustments called for in swing pricing would require revising: reporting of transactions to the MMF, especially by intermediaries; how to publish pricing and conclude same-day settlement; and investment in enhanced computational systems. The SEC suggests the use of earlier (in the day) NAV valuations, although the Commission does acknowledge that the use of swing pricing may reduce both the attractiveness of MMF’s to institutional investors and lead them to seek other (less volatile) cash management tools. It is both noteworthy and worth repeating that swing pricing was NEVER used after its authorization as an optional tool in 2018. Swing pricing has been strongly endorsed by the Task Force on Financial Stability, a private group affiliated with The Brookings Institution. 

Potential Consequences

So one might wonder how the Proposal wandered so far from the PWG Report that initiated this endeavor and what “unforeseen consequences” might flow from it. First and most obvious are the costs inherent in the Proposal: MMF’s would have to hold far more cash and/or cash equivalents in “reserve,” so that MMF’s would not earn as much (making them relatively less attractive, especially to institutional investors); second, the requirements of swing pricing for MMF’s would require extensive and expensive investments in computer capacity. Further, the swing pricing requirement DOES NOT apply to government MMF’s.

If one were a corporate Treasurer seeking a place to “park” large quantities of money, where a redemption from an institutional MMF is subject to “haircutting” of the redemption price due to market conditions, but a redemption from a government MMF is not so subject – where would one put the money? The yield on government MMF’s is significantly below institutional MMF’s (but when does the risk of a redemption price “haircut” outweigh the yield differential?). What do institutional MMF’s hold? Short-term securities, especially commercial paper (short-term borrowings, typically of 90 to 270 days in maturity), the source of daily liquidity for much of America’s businesses.

To quote from the Statement of Commissioner Peirce of Dec. 15, 2021:

The proposal, if finalized in its current form, likely would continue the trend of driving more money into government funds. Doing so may serve the government’s need for a buyer for its securities, but would leave investors, issuers of commercial paper, and markets worse off.

The SEC Proposal

The Proposal also would revise stress-testing requirements, impose special provisions to deal with negative interest rate securities, and materially increase the number and scope of reporting requirements. The SEC requests comments on the 325-page Proposal within 60 days of its publication in the Federal Register, a compressed time period that drew objection from the dissenting Commissioners. Portions of the proposed rule change would go into effect upon adoption; other parts would not become effective for differing time periods up to two years.

Some parts of the Proposal seem both reasonable and, in light of our collective experience in both 2007-2009 AND 2020, sagacious. But every revision of rules brings with it ancillary and often unforeseen consequences. Perhaps, despite the appetite of the current administration for government-designed solutions, one might reconsider whether there are ways to reduce risks to liquidity posed by MMF’s that can be designed and implemented by the capital markets themselves.

If you have any questions about this post or any other related securities or general business law matters, please feel free to contact me at