SEC VOTES ON LIQUIDITY REFORMS FOR MONEY-MARKET INDUSTRY

The U.S. Securities and Exchange Commission’s voted Wednesday on rules in the moneymarket industry for the third time since 2008.

That’s when the Reserve Primary Fund, the original money market fund first created in 1970, was forced to reprice its shares below $1, in a shift that became known as “breaking the buck,” after investors pulled $40 billion in just two days.

Amendments voted on Wednesday will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The amendments will 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. These changes are designed to reduce the risk of investor runs on money market funds during periods of market stress.

To address concerns about redemption costs and liquidity, the amendments will require institutional prime and institutional tax-exempt money-market funds 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 minimal.

In addition, the amendments will 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 amendments 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 — nearly $6 trillion in size today — provide millions of Americans with a deposit alternative to traditional bank accounts,” said SEC Chair Gary Gensler. “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.”

The 2008 financial crisis exposed major issues with money funds, which are supposed to be ultra-safe havens for individuals and companies to park cash, and regulators spent years implementing measures intended to slow withdrawals during times of stress.

But the last round of changes instituted in 2016 didn’t prevent the kinds of outflows that occurred in March 2020 when the onset of the pandemic roiled markets. Instead, panicked investors yanked billions from one segment of money funds in less than two months, helping upend the entire commercial-paper market that provides a life-line to companies seeking to raise short-term cash.

That run prompted the Federal Reserve to intervene in 2020 and rescue money-market funds for the second time in 12 years.

Meanwhile, the cash parked at money-market funds climbed to a fresh record through the week ended July 5 as short-term rates above 5 percent continue to lure investors to money-market assets.

The rule amendments will become effective 60 days after publication in the Federal Register.