The Securities and Exchange Commission (SEC) made an important decision on Wednesday, abandoning a controversial proposal regarding payments received by investors who choose to cash out of money-market funds during times of financial panic. Instead, they opted for a new set of rules that will impose fees on institutional investors who quickly withdraw their money when liquidity becomes tight, thereby threatening the stability of money funds.
Supported by the increasing interest rates this year, assets in money funds have surged from $4.8 trillion to $5.5 trillion, with Chairman Gary Gensler noting that money-market funds now represent nearly $6 trillion.
The goal of these new rules is to bring stability to funds during periods of rapid withdrawals, which have historically occurred during financial crises, such as those in 2008-2009 and 2020.
The SEC’s reforms received the support of the commission’s three Democratic commissioners, while the two Republicans voted against them.
Under the new regulations, certain institutional money funds will be required to charge a liquidity fee to investors who are the first to withdraw their cash on days when redemption requests exceed 5% of the fund’s assets. It’s important to note that these fees will not be applicable to the 89% of money funds preferred by retail investors. Instead, they will affect funds that invest in tax-exempt municipal instruments and prime money funds that cater to businesses’ day-to-day cash management needs.
These newly adopted rules aim to strike a balance between protecting investors and maintaining the stability of money-market funds in times of financial stress, ultimately ensuring the overall resilience of the financial system.
Reforming Institutional Prime Funds: Key Changes Ahead
The future of institutional prime funds, which currently hold a total of approximately $300 billion, is causing concern within the industry due to the introduction of redemption fees. The Republican members of the commission share these concerns, with Commissioner Hester Peirce asking if the goal is to “kill prime funds” before voting against the proposed rule.
In addition to the redemption fees, the new regulations will require funds to maintain higher levels of cash and liquid assets. Currently, assets that can be converted to cash within one day must make up 10% of the total; this will increase to 25%. Likewise, assets that can be converted to cash within a week must rise from 30% to 50% of the fund’s assets.
However, it is important to note that these reforms will not take effect until October 2024.
The need for these reforms arose in 2021, following the financial disruptions caused by the Covid-19 outbreak in 2020. Originally, the proposal faced significant criticism from the mutual fund industry. The idea of penalizing redemptions during periods of financial panic through swing pricing was seen as problematic. Swing pricing would deduct the estimated cost of liquidity pinch from the payout price received by remaining investors in a fund.
Money-market fund advisors argued that swing pricing was overly complex to calculate accurately throughout the day. They emphasized that this change would remove the convenience factor that makes money funds attractive for businesses needing quick access to cash for daily requirements such as payroll.