U.S. money market funds say SEC draft rule would kill some products

People walk out of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, DC, U.S., May 12, 2021. REUTERS/Andrew Kelly/File Photo

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WASHINGTON, April 11 (Reuters) – U.S. asset managers are pushing back on proposed rules to fix systemic risks in the $5 trillion money market fund industry, arguing that one of the proposed measures would kill popular products , executives told Reuters.

After taxpayers bailed out money market funds, a key source of short-term funding for businesses and municipalities, for the second time in 12 years during the 2020 pandemic-induced turmoil, the industry faces a renewed regulatory review.

Money market funds invest in high-quality, short-term debt securities and offer daily redemptions. Investors expect immediate liquidity with low price volatility and are spooked when these expectations are not met during times of market stress.

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As the pandemic crippled the economy in March 2020, investors withdrew more than $130 billion from some money market funds, contributing to stress in short-term funding markets, according to a Treasury analysis disputed by the Treasury. fund industry.

In December, the Securities and Exchange Commission (SEC) proposed to strengthen the resilience of money market funds, among other measures, by adjusting the value of a fund based on trading activity so that investors requesting the redemption bear the costs of exiting a fund and do not dilute remaining investors. In theory, this “swing pricing” reduces the incentive to run for the exit first.

The deadline for submitting comments is Monday and the industry is strongly pushing back on swing pricing measures, arguing they would be operationally difficult, impose excessive costs on fund sponsors and reduce daily liquidity for investors.

“We really think it would kill the product,” said Jane Heinrichs, associate general counsel at the Investment Company Institute, which represents asset managers. “Funds would determine that the changes needed to make it work for a product that will no longer meet investors’ needs are not worth it.”

The SEC provided no data to support the idea, Heinrichs said.

Although swing pricing is used by some European funds, it is an unfamiliar concept to US investors, said Peter Yi, director of Northern Trust Asset Management. “Undoubtedly, swing pricing will be very difficult for investors to understand.”

An SEC spokesperson did not immediately provide comment.

To calm fleeing investors and stem a wider crisis, the Treasury and the Federal Reserve launched emergency liquidity facilities in March 2020 to support the market. The panic was reminiscent of 2008, when a run on money market funds also prompted the US government to prop up the market.

This bailout led the SEC in 2010 and 2014 to introduce rules aimed at reducing the risk of investor panic. But 2020 has shown those changes to be inadequate, regulatory experts said.

Advocacy groups say money market funds operate with an implicit government guarantee, without the strict capital and liquidity requirements such guarantees typically require.

“The government is literally giving private companies – the sponsors of money market funds – 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 hedge the downside.”

His group is calling for comprehensive reforms that go further than the SEC’s proposal, including bank-like capital buffers.

Although the Investment Company Institute opposes swing pricing, it supports in principle the SEC’s proposal to increase fund liquidity requirements and give fund boards more flexibility to charge or suspend redemptions in times of crisis, known as fund gates.

In 2020, investor races accelerated as funds approached a minimum liquidity threshold which, under current rules, allows fund boards to manage redemptions. The SEC rule would eliminate this clear line.

“By decoupling fees and barriers from liquidity thresholds and increasing liquidity levels, you directly address issues from 2020,” Heinrichs said.

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Reporting by Michelle Price; Editing by Leslie Adler

Our standards: The Thomson Reuters Trust Principles.

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