The Securities and Exchange Commission (SEC) is to allow the boards of money market funds in the US to impose redemption fees to protect investors at times of market stress.
The announcement was made on Wednesday by the US regulator as part of an overhaul of the rules governing money market funds.
The boards of money market funds will be permitted to impose “liquidity fees” on exiting investors or to temporarily suspend redemptions if the amount of weekly liquid assets falls below a set threshold. This measure has been supported by a number of asset managers including BlackRock.
The SEC also introduced a floating net asset value (NAV) requirement, meaning money market funds must price their assets according to mark-to-market valuations. Previously most funds used “special pricing and valuation conventions”, the regulator said, to keep their NAVs from falling below $1—known as “breaking the buck”.
The new rules also include enhanced stress-testing, disclosure, and diversification requirements.
Government money market funds—which invest at least 99.5% in cash or government-backed securities—are exempt from the floating NAV requirement, as are retail funds.
SEC Chair Mary Jo White said the reforms “will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system”.
Norm Champ, director of the SEC’s Division of Investment Management, said: “[The] adoption of final money market fund reforms represents a significant additional step to address a key area of systemic risk identified during the financial crisis. These reforms are important both to investors who use money market funds as a cash management vehicle and to the corporations, financial institutions, municipalities and others that use them as a source of short-term funding.”
The changes follow the case of the Reserve Primary Fund, which “broke the buck” on September 16, 2008. Due to its exposure to securities issued by Lehman Brothers—which had declared bankruptcy the previous day—its net asset value fell below $1, even though the fund was designed to protect cash through “risk-free” investments. There were heavy withdrawals—estimated at a total of $300 billion—from this and other money market funds as investors were spooked by the losses.
The SEC introduced reforms to the money market fund sector in 2010, but the eurozone debt crisis in 2011 caused the regulator to reassess its guidance.
Funds will be given a two-year transition period to prepare for the changes, meaning the new rules will be fully in place by the end of 2016.
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