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MMMF Regulatory Reform: New Liquidity Risk Challenges for MMFs


The global financial landscape is constantly shifting, and new regulations and amendments are often the driving force. With decades of experience in navigating the complexities of multi-jurisdictional regulatory changes, we are equipped to guide you through the maze, by introducing our new blog series: Emerging Regulations Watch, where we provide insights & analysis on new rules.In this series, we’ll unpack the most impactful regulatory changes on the horizon, identify potential risk areas, and present practical strategies to help you navigate the evolving regulatory landscape.

Kicking off this series, we set our sights on the Money Market Mutual Fund (“MMMF”) Regulatory Reform and the challenges this places on Money Market Funds (“MMFs”) with regard to Liquidity Risk Control.


SEC’s Proposed Changes to Reform MMFs

In response to the COVID-19 pandemic and stresses in fixed-income markets the Securities and Exchange Commission (“SEC”) proposed changes to reform Money Market Funds (“MMFs”) on December 15, 2021. As a result, on July 12 2023, the SEC adopted amendments to Rule 2a-7 and other rules that govern money market funds under the Investment Company Act of 1940 (the “new MMF rules”). Between October 2023, and October 2024, the new MMF rules will be implemented through a tiered approach.Before examining the emerging regulation, let’s first examine some terminology used in the regulation:

  • Liquidity: the extent to which securities held by the fund can be quickly converted to cash. Liquidity is particularly important to MMFs and their investors alike, as it measures the fund’s ability to meet near-term shareholder redemptions.
  • Daily Liquid Assets: assets that can be readily converted to cash in one business day.
  • Weekly liquid assets: assets that can be readily converted to cash in five business days.
  • Stable-NAV fund: Government and Treasury, retail prime and retail municipal MMMFs that maintain a stable $1.00 net asset value per share (“NAV”).
  • Negative interest rate environment: central banks use a negative policy rate after exhausting conventional easing measures. A MMF with a stable net asset value (“stable- NAV”), in a negative interest rate environment, may see the gross yield of the portfolio turn negative, making it difficult for the fund to maintain a stable share price.
  • Reverse Distribution Mechanism (“RDM”): MMF reducing the number of its shares outstanding to maintain a stable NAV.
  • Weighted Average Maturity (“WAM”): the weighted average of all the maturities of the securities held in a fund. WAM is a measure of the fund’s sensitivity to interest rate changes and market changes. The SEC limits the overall weighted average maturity of an MMF to 60 days or less.
  • Weighted Average Life (“WAL”): the weighted average of the life of the securities held in a fund or portfolio and can be used as a measure of the fund’s sensitivity to changes in liquidity and/or credit risk. Generally, the higher the value, the greater the sensitivity. For MMFs, the difference between WAM and WAL is that WAM takes into account interest rate resets and WAL does not. The SEC limits the overall weighted average life of an MMF to 120 days or less.


What do the new MMF rules include?

Now turning to the emerging rule changes. The new MMF rules include the following changes:

  • Redemption gate provisions and the link between liquidity thresholds and liquidity fees are removed;
  • A modified fee framework will provide for both discretionary and mandatory liquidity fees. Funds have to impose a discretionary liquidity fee if deemed by the fund board to be in the non-government MMFs’ best interest (there is a discretionary opt-in for government MMFs). The discretionary fee is not to exceed 2% of the value of the shares redeemed.
  • Tax-exempt institutional prime and institutional municipal MMFs must implement a mandatory liquidity fee under certain conditions. The mandatory liquidity fee is required if a fund experiences net redemptions that exceed 5% of net assets on a single day (or smaller as the board determines).
  • A taxable MMF’s minimum daily liquid asset requirement has increased from 10% to 25% and the minimum weekly liquid asset requirement for taxable and municipal (tax-exempt) funds has increased from 30% to 50%. (This rule is to be implemented by April 2, 2024)
  • A reverse distribution mechanism (RDM) is permitted for (“stable-NAV”) government and retail funds to maintain a stable share price during a negative interest rate environment;

Further, the SEC has extended its regulatory reporting requirements to improve the SEC’s ability to monitor and assess MMFs. To reduce inconsistencies in the data reported to the SEC the new MMF rule specifies that MMFs must use the market value of each security in the fund’s portfolio when calculating WAM and WAL. This new MMF rule is scheduled for implementation on April 2, 2024. Form N-CR, Form N-MFP and board reporting enhancements due June 11, 2024.


Liquidity Risk Challenges Ahead for MMFs

All of this puts an added pressure on MMFs. Legacy liquidity risk control systems require an overhaul to meet the emerging regulatory changes. The overhaul is required in a very short period leaving many MMFs with only one option. Tactical solutions may be deployed in 2024 as the MMFs seek out longer-term robust and strategic solutions.AQMetrics, winner of Best Regulatory Reporting Solution at Hedgeweek’s 2023 US Awards, understands the complexities of the MMMF Regulatory Reform and can answer any questions you may have on the best practice preparation steps that can be taken by MMFs in 2024 to mitigate risk.


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