SEC increases minimum liquidity requirements for money market funds

Rick Steves

“Money market funds – nearly $6 trillion in size today – provide millions of Americans with a deposit alternative to traditional bank accounts. Money market funds, though, have a potential structural liquidity mismatch.”

The Securities and Exchange Commission has announced it has adopted the new money market fund reforms and amendments to form PF reporting requirements for large liquidity fund advisers. 

The new rules that govern money market funds under the Investment Company Act of 1940 are designed to reduce the risk of investor runs on money market funds during periods of market stress.

Institutional prime must impose liquidity fees when net redemptions exceed 5%

Amendments will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions.

The new rules also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold.

Institutional prime and institutional tax-exempt money market funds will be required to impose liquidity fees when a fund experiences daily net redemptions that exceed 5 percent of net assets unless the fund’s liquidity costs are de minimis.

The amendments will also require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. These are designed to protect remaining shareholders from dilution and to more fairly allocate costs so that redeeming shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly.

“Money market funds have a potential structural liquidity mismatch”

SEC Chair Gary Gensler said: “Money market funds – nearly $6 trillion in size today – provide millions of Americans with a deposit alternative to traditional bank accounts. Money market funds, though, have a potential structural liquidity mismatch. As a result, when markets enter times of stress, some investors – fearing dilution or illiquidity – may try to escape the bear. This can lead to large amounts of rapid redemptions. Left unchecked, such stress can undermine these critical funds. I support this adoption because it will enhance these funds’ resiliency and ability to protect against dilution. Taken together, the rules will make money market funds more resilient, liquid, and transparent, including in times of stress. That benefits investors.”

Separately, the amendments will also modify certain reporting forms that are applicable to money market funds and large private liquidity funds advisers.

The rule amendments will become effective 60 days after publication in the Federal Register with a tiered transition period for funds to comply with the amendments. The reporting form amendments will become effective June 11, 2024.

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