Enhancing Stability: SEC’s Proposed Rules for Money-Market Funds
In a pivotal Wednesday meeting, the U.S. Securities and Exchange Commission (SEC) is poised to vote on vital rules aimed at safeguarding money-market funds from cash shortages during times of crisis, such as the 2008 financial crisis or the Covid-19 outbreak in 2020.
While intended to fortify the industry that oversees nearly $6 trillion of invested funds, the SEC’s proposals have drawn mixed reactions. One area of contention revolves around the agency’s suggestion for implementing “swing pricing” adjustments on withdrawal days when a fund’s institutional investors collectively withdraw more cash than they deposit. The SEC believes swing pricing could discourage a panicked “run on the bank” by penalizing investors who rush to withdraw their investments first.
“There is a saying when you’re in the woods,” shared SEC Chair Gary Gensler during a May fund industry conference. “You don’t have to outrun the bear; you just have to outrun one of your fellow campers.”
Gensler claims that swing pricing would deter a frantic “dash for cash” by factoring in the liquidity costs incurred by those remaining in a fund when processing the fastest withdrawals. However, the SEC’s proposal only mandates swing pricing for select institutional and tax-exempt money-market funds. These funds collectively manage approximately $300 billion, invested primarily in illiquid assets such as certificates of deposit and commercial paper issued by banks, which pose challenges when seeking immediate liquidity.
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Interestingly, the money-market reforms now on the SEC’s agenda were initially proposed back in 2021. Money-market funds emerged in the 1970s as an alternative for depositors seeking higher interest rates than what banks could offer amidst inflation during that era. To weather liquidity crises in 2008 and 2020, these funds relied on government support. Surprisingly, in 2023, it was the banking sector that experienced a liquidity crunch, while money-market funds found themselves swimming in nearly $1 trillion in cash as investors withdrew their funds from banks.
Swing Pricing and Money Market Funds
Since swing pricing was first proposed in 2021, it has faced significant criticism from money fund managers. The likes of Federated Hermes (FHI), JP Morgan Chase (JPM), State Street (STT), as well as the Investment Company Institute, a mutual fund trade association, have roundly condemned the idea.
According to Stephen Bradford, spokesperson for the Investment Company Institute, adjusting the daily price of redemptions based on the SEC’s swing factors would be impractical and costly. He believes that fund managers in the industry are more than capable of managing redemption demands during times of panic.
However, the SEC’s proposal does offer an alternative solution to discourage runs. It suggests allowing funds to impose fees on withdrawals during periods of tight liquidity. The industry has expressed its willingness to accept this measure, as long as the discretion to set the fees remains with the fund.
Bradford also pointed out that there are other aspects of the SEC money-market proposal that the industry supports. Fund managers do not oppose the removal of their ability to temporarily suspend redemptions in times of liquidity crunches. Studies conducted on the financial dislocations experienced in 2020 revealed that the existence of this “gating” power actually encouraged investors to withdraw their cash.
Furthermore, the industry does not object to the proposed increase in the required level of liquid assets in funds. Currently, funds are required to maintain a minimum of 10% liquid assets if measured daily, and 30% if measured weekly. Bradford emphasized that money-market funds are already conservatively managed and that they fully support any additional measures to ensure even greater conservatism.
In conclusion, while swing pricing has faced widespread opposition from money fund managers, there are other aspects of the SEC’s proposal that the industry is willing to embrace. The focus is on finding solutions that promote stability and conservative management within money-market funds.
Written by Bill Alpert
