US SEC Passes Tougher Proposals to Govern MMFs

The US Securities and Exchange Commission (SEC) has voted in favour of a change to Rule 2a-7 that would require prime money market funds (MMFs) used by institutional investors to report variable, market-based net asset values (NAVs).

In a letter issued to investors, Deutsche Asset & Wealth Management (DeAWM) comments that the proposal is designed to:

• Mitigate MMFs’ susceptibility to heavy redemptions during times of stress.
• Improve MMFs’ ability to manage and mitigate potential contagion from high levels of redemptions.
• Preserve as much as possible the benefits of MMFs for investors and the short-term financing markets.
• Increase the transparency of risk in money market funds.

The SEC has recommended the following alternatives for consideration that could be adopted alone or in combination:

Alternative One: Floating NAV – Under the first alternative, prime institutional money market funds would be required to transact at a floating net asset value (NAV), not at a $1.00 stable share price. Government and retail MMFs would be allowed to continue using the penny rounding method of pricing and maintain a stable share price.

Alternative Two: Liquidity Fees and Redemption Gates – Under the second alternative, money market funds would continue to transact at a stable share price, but would be able to use liquidity fees and redemption gates in times of stress. Government MMFs would be exempt from the fees and gates requirement. However, these funds could voluntarily opt into this new requirement.

DeAWM, which expects further details of the SEC’s proposal to be made public shortly, adds that in September 2009, its global liquidity team proposed that the SEC adopt a unique ‘two fund solution’ which would preserve and strengthen the familiar stable NAV, while permitting a floating NAV fund category as a complementary structure.

“We have long believed that this solution would help to mitigate systemic risk, improve transparency, and increase investor choice,” it comments.

DeAWM remains advocates of market based regulations that seek to preserve the stable NAV concept, which it says has been critical to the success of money market funds as a vehicle for capital for over three decades. Furthermore, given the significant changes impacting both issuers and investors in money market securities, a broader range of investment solutions will be required to meet both sets of needs.

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