US money market funds avoided the threat of swing pricing on Wednesday, after regulators chose to impose mandatory fee and greater liquidity buffers in order to improve the market’s capability to withstand extreme stresses.
The Securities and Exchange Commission, divided by its own divisions, adopted new rules to prevent investor stampedes three years after March 2020’s wild market swings. The Federal Reserve had to intervene when investors rushed for cash and withdrew money from prime money funds that held short-term debt of companies and banks, as well as government papers.
The SEC did not impose swing pricing after the fund industry resisted. Swing pricing would have required funds to adjust their net asset values of withdrawals in order to reflect exit costs so that remaining investors are not burdened with that cost.
The three Democratic commissioners instead approved final rules requiring prime and tax exempt money market funds to charge a mandatory redemption fee when the fund’s daily withdrawals exceed 5% of its net assets.
If the board of the non-government funds decides that it is in their best interest, they will be required to charge a similar fee.
The fund managers will lose their power to “gate” or stop withdrawals when liquidity falls dramatically. This practice was implemented after the 2008 financial crash, but it led to a surge in outflows by 2020 as investors fled before any restrictions were imposed.
Gary Gensler, SEC chairman, said that the new rules would “provide a more substantial cushion in the event of rapid redemptions”.
Gensler stated that the watchdog has shifted from its initial proposals to fees as a result of feedback received on their first release in 2021. “I think that liquidity fees offer similar benefits to swing pricing and less operational burdens.”
Despite this, fund industry executives are still disappointed with the result. The SEC missed the mark in forcing money market funds, which are a major industry group, to charge investors a complex and expensive mandatory fee.
He said that the industry was not familiar with charging fees for liquidity. Money market fund resilience is an issue that should be fully considered. The decision [on Wednesday] does not appear to be a logical outcome of the proposal.
Hester Peirce, Mark Uyeda and other Republican appointees voted against it and asked in the open session if SEC staff were trying to destroy the money market funds industry.
Uyeda argued that the SEC did not give the industry sufficient time to respond to the proposed fee. Uyeda cited the SEC’s experience in adopting liquidity gates over the objections of industry, but now dropping them as part the new rules.
Uyeda stated that “this mandatory liquidity fee replaces proposed swing pricing requirements but has not been described in detail by the public. Therefore, unlike 2014, the Commission does not benefit from extensive public comments.” If today’s reforms had been limited to fixing problems that were widely accepted, I would have supported the recommendations.
Better Markets, a group dedicated to financial reform, criticized the SEC’s lack of action. Stephen Hall, its legal director, said that the regulator should’ve required funds to maintain capital like banks.
“MMFs are a real threat to the financial stability. They lack adequate insurance and financial cushioning to handle market stress. They pose a serious risk to Main Street and our economy,” said he.