Invesco Global Liquidity on the SEC Proposals for Additional Money Market Fund Reform
The Securities and Exchange Commission (SEC) voted unanimously on June 5 to propose additional reforms to regulations governing US money market funds. The proposed reforms include the following:1
- Alternative 1. Floating the net asset value (NAV) for institutional prime money market funds, instead of using amortized cost to value portfolio securities. Government and retail money market funds2 would be exempt.
- Alternative 2. Standby Liquidity Fees and Redemptions Gates for money market funds during times of stress, while maintaining a stable $1.00 NAV. Government funds would be exempt.
- Potential combination of alternatives 1 and 2. Combining the floating NAV proposal (alternative 1) and the liquidity fees and redemption gates proposal (alternative 2) into one reform package.
These proposals suggest that while the SEC believes additional reforms are necessary to reduce the risk of runs during times of stress, it recognizes that money market funds should be preserved as a viable investment product.
Additional proposals were made to enhance disclosure requirements, improve reporting, enhance stress testing and strengthen diversification.
Guidance on timeline and implementation
The SEC offered stakeholders in short-term markets a 90-day period to provide comments and ask questions about the proposals. After careful consideration and review of the proposals, Invesco intends to submit a formal comment letter during this time. At the end of the comment period (likely early September), the SEC will begin reviewing and evaluating comments, which are expected to be extensive. At the end of this process, which could last several months at least, the SEC will finalize its proposals. This would mean a vote on a final rule by the end of this year, at best.
The timeline from this point on depends on what alternatives are ultimately adopted in the final rule. In its report, the SEC recommends:
- A two-year transition period to a floating NAV (alternatives 1 and 3).
- A one-year transition period for introducing liquidity fees and redemption gates (alternative 2).
- Nine months for the proposals for additional nonstructural reforms (i.e., disclosure, diversification), which could take anywhere from nine months to two years.
This would mean implementation in 2015, at the earliest.
In the interim, current requirements under SEC Rule 2a-7 will continue to govern and regulate the investments of money market shareholders at more vigorous levels than at any time since the industry's inception.
Invesco's commitment: A viable solution that meets all stakeholder needs
Invesco continues to believe that US money market funds have already implemented significant reforms focused on improved liquidity and credit quality as part of the amendments to SEC Rule 2a-7 in 2010. Importantly, as a result of these reforms, money market funds are among the most transparent investment vehicles. We believe these reforms have made the industry better positioned and more resilient to weather challenges.
Having said that, Invesco is committed to working with policymakers toward a viable solution that meets the needs of all stakeholders. We believe such a solution should be predicated on the following core tenets:
- Preserve the fundamental utility and core features of money market funds.
- Enhance the safety and liquidity of the product to stakeholders.
- Increase transparency and disclosure to stakeholders.
- Protect the competitiveness of the product in the marketplace.
We have always — and will continue to — uphold these tenets as benchmarks against which we evaluate any reform proposal. With this in mind, we believe these tenets are better reflected in the alternative of liquidity fees and redemption gates proposal (alternative 2) and the additional nonstructural reforms proposals.
With regard to alternative 1, the outstanding questions and unresolved accounting, tax and operational issues prevent us from being able to properly evaluate the proposal for a floating NAV for prime institutional money market funds (alternative 1 and any combination) at this time.
We recognize and commend the extensive research and analysis conducted by SEC staff in formulating the alternatives detailed in an extensive 698-page report. We believe the report and the proposals illustrate that the SEC is better positioned to issue such recommendations than the Financial Stability and Oversight Council (FSOC), as the FSOC has itself stated.
We remain committed to the money market business and the pursuit of helping our clients meet their cash management needs. We are also committed to keeping you updated about ongoing events in this process.
1 For additional details regarding the proposals, please see http://inves.co/gl0605_secrequestscommentsonmmrkt.
2 A government money market fund would be defined as any money market fund that holds at least 80% of its assets in cash, government securities or repurchase agreements collateralized with government securities. A retail money market fund would be defined as a money market fund that limits each shareholder's redemptions to no more than $1 million per business day.
The opinions expressed herein are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor.