The Money Market Fund Reform Landscape

The Money Market Fund Reform Landscape

December 2014

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Money market funds have historically offered investors liquidity, preservation of capital, and yield (rate of return). Regulatory reforms for money market funds have been central to the activities of regulators in the U.S. and Europe for several years, following the 2008 financial crisis.

Overview

Money market funds have historically offered investors liquidity, preservation of capital, and yield (rate of return). Regulatory reforms for money market funds have been central to the activities of regulators in the U.S. and Europe for several years, following the 2008 financial crisis; an important backdrop in the events of the 2008 financial crisis included the bankruptcy of Lehman Brothers and the $62.5 billion Reserve Primary Fund breaking the buck, triggering impacts on global credit markets. The reform efforts of regulators have been chiefly focused on systemic risk mitigation in the form of enhanced prudential oversight and control for systemic risks in the financial marketplace.

Regulators in the U.S. and Europe responded to the events of the 2008 financial crisis with additional Money Market Fund (MMF) reforms in 2010. Subsequently, in the U.S., the Securities and Exchange Commission (SEC, or Commission) published a proposed rule for Money Market Fund Reform; and Amendments to Form PF on June 5, 2013; final rules following a public comment period were published July 23, 2014.1

In Europe, the European Commission published a Proposal for a Regulation on Money Market Funds on September 4, 2013, currently pending finalization.2

International policy recommendations with respect to the estimated US$4.4 trillion3 global MMF marketplace have also been published by the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO), reviewing MMFs within the broad themes of prudential oversight for systemic risk purposes, as well as focusing on MMFs as potential shadow banking entities in the financial markets.4

While these proposed and finalized regulations and policy recommendations contain differences, they focus on several key objectives:

  • Enhanced prudential oversight and control of potential systemic risks in the financial markets
  • Adequate prudential regulation and oversight of MMF activity
  • More stringent portfolio management requirements and investment guidelines and restrictions, aimed at better control of credit risks, interest rate risks
  • Additional disclosure of MMF portfolio management and corporate governance activities to the regulators

This paper reviews finalized 2014 MMF reforms in the U.S. and briefly at proposed reforms and policy recommendations in Europe and for the international regulatory landscape.

THE CURRENT LANDSCAPE

UNITED STATES
On July 23, 2014, the SEC approved by a majority vote a Final Rule on Money Market Fund Reform; Amendments to Form PF.

The SEC stated that the “rules build upon the reforms adopted in March 2010 that were designed to reduce the interest rate, credit and liquidity risks of money market fund portfolios. The new rules require a floating net asset value (NAV) for institutional prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools – liquidity fees and redemption gates – to address runs.”

EUROPE AND INTERNATIONAL
On September 4, 2013, the European Commission issued a ‘Roadmap” within a Communication for initiatives regarding shadow banking reforms, which disclosed the new rules for Money Market Funds, and also summarized reforms already undertaken in order to reduce shadow banking risks, as well as priority areas for possible further reform activities.

More on The Current Landscape

The United States: Closer Look at the Details of the Final Rule

Regulatory change as put forth by the SEC and the European Commission, as well as broader policy recommendations as put forth by IOSCO and the FSB, may have a significant impact on money market funds (MMFs), causing fund managers, service providers and investors to rethink what future MMFs will have in an evolving regulatory environment.

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End Note

Regulatory change as put forth by the SEC and the European Commission, as well as broader policy recommendations as put forth by IOSCO and the FSB, may have a significant impact on money market funds (MMFs), causing fund managers, service providers and investors to rethink what future MMFs will have in an evolving regulatory environment.

The question remains open with respect to how the present regulatory reform objectives, chiefly focused on further risk mitigation in the financial marketplace in the context of systemic risks and shadow banking concerns, will impact both money market funds as an investment product which has traditionally met the needs of investors seeking liquidity, preservation of capital and yield (rate of return), as well as broader market demands for cash management products, and potentially emerging product development opportunities to meet those demands.

A related question is how operational implications and related costs will be incorporated by fund managers and service providers, and how the money market fund industry will evolve in the course of these changes, as the full extent of those impacts become realized in the coming months.

Appendix

 

1 U.S. Securities and Exchange Commission (SEC), Proposed rule, Money Market Fund Reform; Amendments to Form PF (June 5, 2013); U.S. Securities and Exchange Commission (SEC), Final Rule, Money Market Fund Reform; Amendments to Form PF (July 23, 2014)

2 European Commission, Proposal for a Regulation of the European Parliament and of the Council on Money Market Funds (September 4, 2014)

3 Source: Investment Company Institute (ICI)

4 Financial Stability Oversight Council (FSOC), Proposed Recommendations Regarding Money Market Mutual Fund Reform, 77 Fed. Reg. 69455 (November 19, 2012)

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