10 things to know about money market fund reform
With new money market fund regulations set to take effect in October, Putnam has prepared this overview of the top 10 issues likely to be on the minds of investors and financial advisors. While intended to protect investors and stabilize markets, the regulations have prompted a shift from prime (credit-focused) funds to government funds that has contributed to greater pressure on the yields of short-term investments.
Several requirements, in place since 2010, focus on fund liquidity:
- The maximum WAM (weighted average maturity) of portfolio securities was shortened from 90 to 60 days
- Money market funds are required to keep 30% weekly/10% daily in liquid assets
- Funds are required to stress test their portfolio weekly and report their "shadow NAV" to the SEC
Since April 2016, key information, such as fund NAVs, liquidity, and asset flows, has been published daily on fund company websites.
Final regulatory changes go into effect October 14, 2016.
There are three kinds of taxable money market funds to know about. Fund companies are required to define them as "prime retail," "prime institutional," or "government."
- Prime retail money market funds can only be used by "natural persons"
- Institutional prime funds can be used by both institutions and "natural persons"
- Government funds can be used by both as well
Prime institutional money market funds are required to have a "floating" NAV based on four decimal places. Prime retail and government funds can maintain the $1.00 NAV.
Retail and institutional money market funds are required to implement liquidity fees and redemption gates under specific circumstances. Government money market funds are not required to, but are allowed to, impose fees
If a fund's weekly liquid assets fall below 30%, the fund's board of directors has the discretion to impose a 1%–2% liquidity fee on withdrawals. The board also has the discretion to suspend redemptions for up to 10 days (over a 90-day period). The gates automatically stop once the weekly liquid assets are back to 30%.
If a fund's weekly liquid assets fall below 10%, the fund's board of directors have the discretion to impose a 1% liquidity fee. The fees automatically stop once the weekly liquid assets are back to 30%.
Government money market funds are required to hold 99.5% in cash and U.S. government/agency securities.
The reforms are designed to enhance stability of the money markets and money market funds. Ever since instability arising from the financial crisis in 2008 caused the closure of several money market funds, the Securities and Exchange Commission (SEC) has been developing and implementing these new rules with the aim of making them safer and more liquid, as well as preventing "runs."