The London-based Institutional Money Market Funds Association (IMMFA) has given a guarded welcome to the US Securities and Exchange Commission’s (SEC) amendments to the rule governing the operation of money market funds (MMFs).
In a 3-2 vote by regulators on 23 July, the SEC passed a rule that will force institutional prime MMFs to move from a stable US$1 per share net asset value (NAV) – a longtime staple of the investment industry – to a floating NAV.
Additionally, the new rule also allows fund boards to impose two safeguards to stave off runs: liquidity fees of up to 2% on redemptions, and temporary suspensions of redemptions, or ‘gates’.
The SEC is seeking to minimise the possibility of a mass withdrawal from the funds in the event of a financial crisis.
The IMMFA said that it welcomed the fact that the SEC had noted several concerns raised by the MMF industry. Susan Hindle Barone, IMMFA secretary general, said: “A number of aspects of the new rule, in particular, the fact that government funds have been excluded and that for other funds a two year implementation period has been granted, are very positive for the sector.
“The SEC has engaged in a thorough rulemaking process and has considered the impact of the new rule on investors, for example by addressing tax and accounting issues and by allowing the retention of amortised cost accounting. Without these concessions, the switch to floating NAV products would have been far more challenging.
“However, it is very disappointing that forced conversion to floating NAVs is being imposed on prime MMFs. We will continue to argue that the principal systemic risk in the MMF sector, namely the threat of runs in MMF at times of market stress, can only be prevented with certainty by the imposition of fees and gates. We consider that the move to floating NAV will have no material impact on the diminution of this risk, and therefore imposes costs on investors for no benefit.
“It is clear the SEC is trying to mitigate future financial risks to the US and other major economies. In this vein, however, it is crucial that regulators and policy makers understand the importance of the MMF industry to the global economy, and consider carefully the impact that these new rules will have.”
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