Big changes are in store for the $2.7 trillion money market funds industry.Rules enacted by the Securities and Exchange Commission (SEC) are slated to take effect on October 14, 2016, and could lead to market volatility.
SEC’s Money Market Reform Rules
The new SEC money market rules require institutional money market funds to maintain a floating net asset value (NAV) for sales and redemptions based on the current market value of the securities in their portfolios. Traditionally, funds have maintained a constant $1 share price.
The SEC enacted the rules in response to the 2008 financial crisis, specifically when Reserve Primary Fund “broke the buck” (the net asset value of the fund fell below $1) due to heavy losses brought on from the collapse of Lehman Brothers. After a flood of redemption requests, the government was forced to step in to stabilize the money market industry. The SEC passed the new rules in 2014, but gave the industry two years to come into compliance.
More on the new SEC rules
The new SEC rules also provide non-government money market fund boards with new tools to address a run on the fund. The new tools – fees and gates – authorize fund boards to impose liquidity fees or to suspend redemptions temporarily (also known as “gate”) if a fund’s level of weekly liquid assets falls below a certain threshold.Specifically, if a money market fund’s level of “weekly liquid assets” falls below 30 percent of its total assets, the money market fund’s board can impose a liquidity fee of up to two percent on all redemptions. In addition, if a money market fund’s level of weekly liquid assets dips below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions.
Impact of New Money Market Rules on Investors
Government money-market funds (defined as any money market fund that invests 99.5% or more of its total assets in cash, governmental securities and/or repurchase agreements which are collateralized solely by government securities or cash) can still seek to maintain a $1 share price after SEC rules take effect, and they will not be subject to redemption fees or redemption gates. As a result, many money market funds have already transitioned to government funds, prompting government fund assets to exceed institutional funds for the first time ever this past May.
Over the past several months, money market funds have been required to disclose their per-share net asset values based on market prices, and there has been little fluctuation from $1. However, under the new rules, significant market changes, such as a change in interest rate by the Federal Reserve, could trigger investor losses.Investors should also be aware of other potential changes resulting from the new fees and gates. As highlighted above, investments could be locked up during times of extreme market stress. However, it is also important to note that funds cannot suspend redemptions for more than 10 business days within any 90-day period.
Are you unsure how these new SEC rules might affect you? Would you like to discuss the matter further? If so, please contact me, Robert Marisco, at 201-806-3364.