SEC - New Money Market Fund Regulations - open for public comment

The SEC has proposed new regulations for money market funds and is even asking for public comments.

The proposed amendments would, among other things:

  • Require that money market funds have certain minimum percentages of their assets in cash or securities that can be readily converted to cash, to pay redeeming investors.
  • Shorten the weighted average maturity limits for money market fund portfolios (from 90 days to 60 days).
  • Limit money market funds to investing in only the highest quality securities (i.e., eliminate their ability to invest in so-called "Second Tier" securities).
  • Require funds to stress test fund portfolios periodically to determine whether the fund can withstand market turbulence.

The proposals also would:

  • Require money market funds to report their portfolio holdings monthly to the Commission and post them on their Web sites.
  • Require funds to be able to process purchases and redemptions at a price other than $1.
  • Permit a money market fund that has "broken the buck" and decided to liquidate to suspend redemptions while the fund undertakes an orderly liquidation of assets.

The SEC chair's speech gives a short history on the run on funds last fall. This was the key meltdown which was the impetus for immediate action.

Money market funds are mutual funds that serve as cash management vehicles for both retail and institutional investors. These funds, which hold roughly $3.8 trillion in investor assets, have become a mainstay of our capital markets. As of December 2008, about one-fifth of U.S. households' cash balances were held in money market funds. And as of January 2008, approximately 80 percent of U.S. companies used money market funds to manage at least a portion of their cash balances.

Money market funds seek to maintain a stable net asset value of $1.00 per share. But, because these funds are securities products, they are not immune from the risk of loss of principal.

This was evident last fall when the Reserve Primary Fund's net asset value fell below $1.00 or 'broke the buck.' That event spurred a significant wave of redemptions from money market funds, principally from institutional 'prime' money market funds that invested in short term commercial paper of corporate issuers. It also increased the instability in the credit markets and impacted thousands of investors who could not redeem their Reserve Primary Fund holdings at the $1.00 price they had come to expect.

In addition, there were ripple effects for other money market funds. For example, during the week of September 15, 2008, investors withdrew approximately $300 billion from prime money market funds, or 14 percent of the assets held in those funds.

Today the Commission is considering proposals that would strengthen money market fund regulation to help avoid the types of events experienced last fall. Most significantly, the proposals we are considering would enhance the risk-limiting requirements of rule 2a-7, the rule that principally governs the operations of money market funds. This is an immediate concern.

I think the most critical proposal is to give power to stop the selling of funds when it breaks a buck. That's an absolute show stopper for runs.

Another area is once again, relying on private credit ratings agencies. It does appear that ratings agencies functions, somehow, need to be put in an absolute, guaranteed accurate objective agency.

We don't know the specifics yet but Bloomberg has a few details.

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