By Michelle Price
WASHINGTON (Reuters) – The United States Securities and Exchange Commission (SEC) on Wednesday proposed long-awaited regulations – including changes to liquidity, redemption and pricing rules – to improve the resilience and transparency of the securities industry. US money market fund of about $ 5,000 billion.
A critical source of short-term financing for businesses and municipalities, money market funds have been bailed out twice by the U.S. government in 12 years and are in dire need of reform, critics say.
WHAT ARE MONEY MARKET FUNDS?
Money market funds invest in high quality, short-term debt securities and offer daily redemptions. They are managed with the aim of ensuring price stability and immediate liquidity.
This has made them popular cash management vehicles for retail and institutional investors, as well as an important source of short-term funding for governments and businesses.
All of the major asset managers and banking groups, including BlackRock, Vanguard, Fidelity and Goldman Sachs, offer money market funds.
WHAT’S THE PROBLEM?
Since investors in money market funds generally expect immediate liquidity with little volatility, they are easily frightened when those expectations are not met during market stress, according to a Treasury Department discussion paper. American released last year.
As the pandemic shut down the economy in March 2020, investors reallocated cash assets and withdrew more than $ 130 billion from some money market funds, contributing to the strain in short-term funding markets, said the Treasury.
To calm runaway investors and stem a wider crisis, the Treasury and Federal Reserve have launched emergency liquidity facilities to support the market.
The panic was reminiscent of 2008, when a scramble for money market funds threatened to freeze global markets and prompted the government to back the sector.
In 2010 and again in 2014, the SEC introduced changes to reduce the risk of investor flight, but last year’s unrest showed those changes to be inadequate, critics say.
They say the industry now has an implicit government safety net that needs to be fixed.
WHAT ARE THE PROPOSED CHANGES?
The agency proposed changes to primarily address concerns about “blue chip” and tax-exempt money market funds, which are particularly likely to run in times of stress.
First, the SEC proposed to increase the liquidity of the funds so that they could more easily cope with redemptions.
Currently, at least 10% of total fund assets must be held in daily cash, and at least 30% of total assets must be held in weekly cash. The SEC brings that figure to 25% and 50%, respectively.
The SEC also proposed to remove redemption fees and suspensions. Currently, funds may charge fees of up to 2% or temporarily suspend redemptions if their weekly cash flow falls below 30% of their total assets.
While no fund imposed such restrictions in March 2020, regulators say fear they could have the procyclical effect of encouraging withdrawals.
The agency also wants the funds to adjust their value according to trading activity via “swing pricing”. This involves adjusting the current net asset value of a fund so that the transaction price effectively passes the costs arising from shareholder redemptions to the redeeming shareholders.
(Reporting by Michelle Price; Editing by Nick Zieminski)