Money Market Update: Securities and Exchange Commission requests public comments on proposed new rules for money market funds
June 5, 2013
On June 5, 2013 the Securities and Exchange Commission (SEC) convened a meeting and unanimously voted on a recommendation to propose additional regulations to US money market funds, designed to:
- Mitigate money market funds' susceptibility to heavy redemptions during times of stress.
- Improve money market funds' ability to manage and mitigate potential contagion from high levels of redemptions.
- Preserve as much as possible the benefits of money market funds for investors and the short-term financing markets.
- Increase the transparency of risk in money market funds.
The SEC proposed the following alternatives for reform:
Alternative 1: Floating Net Asset Value (NAV) for institutional prime money market funds, such that they will no longer be able to use amortized cost to value their portfolio securities or round to the nearest penny. Under the floating NAV proposal, prime institutional money market funds instead would be required to "basis point round" their share price to the nearest 1/100th of one percent (the fourth decimal place in the case of a fund with a $1.0000 share price).
Government and retail money market funds would be exempt. A government money market fund would be defined as any money market fund that holds at least 80 percent 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.
Alternative 2: Liquidity fees and redemptions gates from prime money market funds during times of stress, while maintaining a stable $1.00 NAV. If a prime money market fund's level of "weekly liquid assets" were to fall below 15 percent of its total assets (half the required amount), the money market fund would have to impose a 2 percent liquidity fee on all redemptions. However, such a fee would not be imposed if the fund's board of directors determines that such a fee is not in the best interest of the fund or that a lesser liquidity fee is in the best interest of the fund. Once a money market fund had crossed this threshold, its board of directors also would be able to impose a temporary suspension of redemptions (or "gate"). A money market fund that imposes a gate would need to lift that gate within 30 days, although the board of directors could determine to lift the gate earlier.
Potential combination of both alternatives: The SEC is considering whether to combine the floating NAV and the liquidity fees and gates proposals into a single reform package. If adopted in that form, prime institutional money market funds would be required to transact at a floating NAV and all non-government money market funds would be able to impose liquidity fees or gates in certain circumstances.
Additional proposals were made to enhance disclosure requirements, improve reporting, enhance stress testing, and strengthen diversification.
We look forward to seeing the details of the full SEC proposal, when it is released. After the proposals are released, a 90-day public comment period will follow. The SEC requested public comments on the benefits and drawbacks of a single reform approach. The comment period would also allow short-term market participants – investors, issuers, fund families – to respond to the proposals and provides them with an opportunity to articulate the central role money market funds have played in the smooth functioning of global short term credit markets for more than four decades. Invesco intends to comment on the proposals during this time. At the end of the comment period and after a review of the comments submitted, the SEC would then have to vote again to implement the proposals. The process from adoption to implementation is expected to extend at least into 2014.
Please note that current requirements under SEC Rule 2a-7 will continue to govern and regulate the investments of Invesco's money market shareholders at more vigorous levels than at any time since the industry's inception.
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, with monthly holdings available publicly on a regular basis, so investors know what the funds hold and the quality of those holdings. Consistent with this commitment, Invesco began disclosing the daily market net asset value per share for our US-domiciled prime money market funds in January 2013. We believe these reforms have made the industry better positioned and more resilient to weather challenges such as the eurozone debt crisis and prolonged zero interest rate environment.
As a leading sponsor of money market fund with more than 30 years of experience in the industry at $84.5 billion in assets under management1, Invesco supports the goal of regulators to protect investors' interests, and we're receptive to proposed changes that preserve the key characteristics that have made money market funds so valuable to investors, issuers and the economy. However, proposed changes must preserve a competitive marketplace for funds and fund sponsors to ensure investors have a choice, and should not increase risks to the financial system by concentrating assets in a few large institutions and/or by driving assets into alternative products that are far less regulated and transparent.
Invesco pledges to continue to work with policymakers toward a viable solution that meets the needs of all stakeholders. 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 Data as of May 31, 2013. Invesco Global Liquidity's total assets under management are composed of all cash management products, including global institutional, retail and customized vehicles.
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.