SEC Unveils Major Reform to Safeguard Money Market Funds
A slice of the $2.6 trillion money market fund industry would be required to fundamentally change how they price their shares in an effort to reduce the risk of runs, under a major proposal unveiled Wednesday by securities regulators.
The Securities and Exchange Commission's lengthy plan comes after more than a year of infighting at the agency over how to craft new rules for the industry.
The rules are in response to the events of 2008, when the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brothers debt and could not maintain its $1 per share price, known as "breaking the buck."
That ignited a run by investors across the money fund industry, cutting off a major source of overnight funding for many corporations. The run did not abate until the government stepped in to back the funds.
The SEC's new plan calls for two alternative proposals that the agency said could be adopted alone or in combination.
The first piece would require prime funds used by institutional investors to transition from a stable, $1 per share, to a floating net asset value—a change designed to reduce the risk of runs like the ones during the 2008 financial crisis.
To price the shares, the funds would be required to "basis point round" their share price to the nearest 1/100th of 1 percent. That is a departure from the current practice of "penny rounding" their share price to the nearest 1 percent.
The SEC said that retail and government funds, which are not considered to be at the same risk for runs, would not be forced to move to a floating net asset value.
Crane Data estimates that prime funds account for 55 percent of money market fund assets, with 31 percent institutional and 24 percent retail.
The second alternative in Wednesday's proposal would allow funds to maintain a stable share price, but they could utilize so-called "liquidity fees and redemption gates" during times of stress.
The SEC said a 2 percent liquidity fee on redemptions could be imposed if a fund's level of weekly liquid assets fell below 15 percent.
If the fund crossed this threshold, its board of directors would be allowed to impose the gates, or a temporary suspension of redemptions.
_ By Reuters