U.S. asset managers are pushing back on draft rules aimed at fixing systemic risks in the $5 trillion money market funds industry, arguing that one of the proposed measures would kill off popular products, executives told Reuters.
After taxpayers bailed out money market funds, a key source of short-term corporate and municipal funding, for the second time in 12 years during the pandemic-induced turmoil of 2020, the industry is facing renewed regulatory scrutiny.
Money market funds invest in high-quality short-term debt instruments and offer daily redemptions. Investors expect immediate liquidity with little price volatility and are spooked when those expectations are not met during market stress.
As the pandemic shut down the economy in March 2020, investors pulled more than $130 billion from some money market funds, contributing to stress in the short-term funding markets, according to a Treasury analysis that is disputed by the funds industry.
SEC Proposes New Rules
In December, the Securities and Exchange Commission (SEC) proposed boosting money market funds’ resilience by, among other measures, adjusting a funds’ value in line with trading activity so that redeeming investors bear the costs of exiting a fund and don’t dilute remaining investors. In theory, this “swing pricing” reduces the incentive to run to the exit first.
The deadline to submit comments was April 11 and the industry is pushing back hard on the swing pricing measures, arguing they would be operationally challenging, impose excessive costs on fund sponsors, and reduce daily liquidity for investors.
“We really do believe that it would kill the product,” said Jane Heinrichs, associate general counsel at the Investment Company Institute, which represents the asset managers. “Funds would determine it’s not worth the changes necessary to make it work for a product that will no longer meet the needs of investors.”
The SEC has provided no data to support the idea, Heinrichs said.
While swing pricing is used by some European funds, it is an unfamiliar concept to U.S. investors, said Peter Yi, a director at Northern Trust Asset Management. “Without a doubt, swing pricing is going to be very difficult for investors to understand.”
Sifma, a trade association for broker-dealers, investment banks and asset managers, in its comment letter maintained swing pricing would unnecessarily restrict investors’ ability to use money market funds for cash management.
An SEC spokesperson did not immediately provide comment.
To calm fleeing investors and stem a broader crisis, the Treasury and Federal Reserve in March 2020 launched emergency liquidity facilities to backstop the market. The panic was reminiscent of 2008, when a run on money market funds likewise prompted the U.S. government to prop up the market.
That bailout led the SEC in 2010 and 2014 to introduce rules aimed at reducing the risk of investor runs. But 2020 showed those changes were inadequate, said regulatory experts.
Advocacy groups say money market funds are operating with an implicit government guarantee, without the stringent capital and liquidity requirements such guarantees usually require.
“The government is literally giving private business – the money market fund sponsors – billions and billions a year for nothing,” said Dennis Kelleher, president of the Washington-based advocacy group Better Markets. “And then when there’s market stress, they don’t have to cover the downside.”
His group is calling for wholesale reforms that go further than the SEC’s proposal, including bank-like capital buffers.
While the Investment Company Institute opposes swing pricing, it supports in principle the SEC’s proposal to raise funds’ liquidity requirements, and to allow fund boards more flexibility to charge for or suspend redemptions during stress, known as a fund “gate.”
In 2020, investor runs accelerated as funds approached a minimum liquidity threshold that, under the current rules, allows fund boards to gate redemptions. The SEC rule would eliminate that bright line.
“By de-linking the fees and gates from the liquidity thresholds and increasing the liquidity levels, you directly address the issues from 2020,” Heinrichs said.
This article was provided by Reuters. Rethinking65 added to this article.