The SEC Proposed Money Market Fund Reforms
On Wednesday, June 5, 2013, the Securities and Exchange Commission (the “SEC”) voted unanimously to propose rules that would reform the way that certain money market funds operate in order to make them less susceptible to runs that could harm investors. The SEC’s proposal includes two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value per share (NAV) for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress. The proposal also includes additional diversification and disclosure measures that would apply under either alternative.
Under the floating NAV alternative, prime institutional money market funds would be required to sell and redeem shares at a floating NAV, not at a stable share price of $1.00. The main features of this alternative are:
Floating NAV — Prime institutional money market funds would no longer be able to use the amortized cost method of accounting to value their portfolio securities, except to the limited extent that all mutual funds are able to do so. Daily share prices of these money market funds would fluctuate along with changes in the market-based value of their portfolio securities.
Showing fluctuations in price — Prime institutional money market funds would also be required to price their shares using a more precise method. Currently, money market funds use an arithmetic convention to “penny round” their share price to the nearest one percent (to the nearest penny in the case of a fund with a $1.00 share price). Under the floating NAV proposal, prime institutional money market funds would instead be required to “basis point round” their share price to the nearest 1/100th of one percent (the fourth decimal place in the case of a fund with a $1.0000 share price).
Government and retail money market funds exempt — Government and retail money market funds would be allowed to continue using the amortized cost method of accounting and “penny rounding” method of pricing to maintain a stable share price of $1.00. A government money market fund would be defined as any money market fund that holds at least 80 percent of its assets in cash, government securities, or repurchase agreements collateralized with government securities. A retail money market fund would be defined as a money market fund that limits each shareholder’s redemptions to no more than $1 million per business day.
Under the liquidity fees and redemption gates alternative, money market funds would continue to sell and redeem shares at a stable share price, but would be able to use liquidity fees and redemption gates in times of stress. The main features of this alternative are:
Liquidity fees — if a money market fund’s level of “weekly liquid assets” were to fall below 15 percent of its total assets (half the required amount), the money market fund would have to impose a 2 percent liquidity fee on all redemptions. However, such a fee would not be imposed if the fund’s board of directors determines that such a fee is not in the best interest of the fund or that a lesser liquidity fee is in the best interest of the fund. Weekly liquid assets generally include cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, and securities that convert into cash within one week.
Redemption gates — once a money market fund had crossed the 15 percent weekly liquid asset threshold, its board of directors also would be able to impose a temporary suspension of redemptions (or “gate”). A money market fund that imposes a redemption gate would need to lift that gate within 30 days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 30 days in any 90-day period.
Prompt public disclosure — Money market funds would be required to promptly and publicly disclose the crossing of the 15 percent weekly liquid asset threshold, or the imposition and removal of any liquidity fee or gate, and include a discussion of the board’s analysis in determining whether or not to impose a fee or gate.
Exemption for government money market funds — Government money market funds would be exempt from the fees and gates requirement, although these funds could voluntarily opt into this new requirement.
The SEC is also considering whether to combine the floating NAV and the liquidity fees and gates proposals into a single reform package. If adopted in a combined form, prime institutional money market funds would be required to sell and redeem shares at a floating NAV and all non-government money market funds would be able to impose liquidity fees or gates in certain circumstances.
Beyond the principal alternative reforms, the SEC’s proposal includes:
Read the SEC press release
The Fed Approves Interim Final Rule Regarding the Application of Swaps Push-Out Provision to Uninsured Banks
On Wednesday, June 5, 2013, the Federal Reserve Board (the “Fed”) approved an interim final rule clarifying the treatment of uninsured U.S. branches and agencies of foreign banks under Section 716 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the so-called swaps push-out provision. Set to become effective on July 16, 2013, Section 716 generally prohibits the provision of certain types of federal assistance, such as discount window lending and deposit insurance, to swaps entities.
Insured depository institutions that are swaps entities are eligible for a transition period of up to 24 months to comply and for certain statutory exceptions. The interim final rule clarifies that, for purposes of Section 716, uninsured U.S. branches and agencies of foreign banks will be treated as insured depository institutions. Thus, they will be eligible to apply for a transition period and will be treated as insured depository institutions for purposes of the other provisions of Section 716. The interim final rule also establishes the process for state member banks and uninsured state branches or agencies of foreign banks to apply to the Fed for the transition period.
Read the Fed press release
The FDIC Publishes Final Rule Determining Criteria for Entities Predominantly Engaged in Financial Activities
On Monday, June 10, 2013, the Federal Deposit Insurance Corporation (the “FDIC”) published in the Federal Register a final rule that establishes the criteria for determining if a company is predominantly engaged in “activities that are financial in nature or incidental thereto” for purposes of Title II of the Dodd-Frank Act. A company that is predominantly engaged in such activities is a “financial company” for purposes of Title II unless it is one of the few entities specifically excepted. A financial company, other than an insured depository institution, may be subject to Title II’s orderly liquidation provisions if, among other things, it is determined that the failure of the company and its resolution under otherwise applicable law would have serious adverse effects on financial stability in the United States.
Read the FDIC rule