Amendments to the rules governing money market funds, adopted by the Securities and Exchange Commission (SEC) in July 2014 and July 2023, impose significant structural changes on the money market fund industry. According to the SEC, the rules address money market funds’ susceptibility to heavy redemptions in times of stress, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, their benefits.
The July 2014 amended rule allowed, or in certain circumstances required, money market funds to impose a liquidity fee or redemption gate if a fund’s weekly liquid assets fell below a certain threshold and if the fund’s board determined such action to be in the best interests of the fund. They also required institutional prime and institutional tax-exempt money market funds to transact with a floating net asset value (NAV) using basis point pricing (e.g., rounded to four decimal places). While not explicitly stated in the rules, some institutional fund asset managers began calculating more than one NAV per day to meet customers’ liquidity needs.
The July 2023 amended rule instituted changes and additional requirements, some of which unwound changes from July 2014:
- Removes the redemption gate provision from the 2014 amendments.
- Eliminates the tie between a fund’s liquidity level and potential imposition of liquidity fees.
- Mandates Institutional prime and tax-exempt money market funds, including those that are not publicly offered, to calculate a liquidity fee on any day the fund has daily net redemptions above 5% of net assets. If the fee exceeds 1 bp (basis point, or 0.01%), it is assessed to all redeeming investors. The mandatory fee is a one-day event.
- Requires non-government money market funds to have board-approved policies and procedures to impose a discretionary liquidity fee of up to 2% on redeeming investors. Government money market funds may opt into the discretionary fee, as determined by board action (e.g., policies, procedures, approval) and if disclosed to investors. Once imposed, a discretionary liquidity fee remains in effect until the fund’s board determines that imposing such fee is no longer in the fund’s best interest.
- Permits constant NAV (CNAV) money market funds to handle a negative interest rate environment by either converting from a stable share price to a floating share price, or by reducing the number of shares outstanding to maintain a stable NAV per share.
In connection with the amendments, NSCC collaborated with a working group of the Investment Company Institute’s (ICI) Broker/Dealer and Bank, Trust and Retirement Advisory Committees (BDAC and BTRAC, respectively; the “Working Group”) to propose recommendations for enhancing or modifying NSCC’s Mutual Fund Services to help our clients comply with amended Money Market Fund operational requirements. These enhancements allow for communication of (1) multiple price (NAV) strikes, (2) data points for funds to administer Liquidity Fees, (3) liquidity fees withheld by funds and (4) access to Money Market Fund related data points as specified in the funds’ Prospectuses.
Money Market Fund User Guide and Best Practices
This guide will focus on NSCC Mutual Fund Services that were enhanced with the purpose of helping our clients comply with the Money Market Fund operational requirements. Best practices referenced in this document were identified by the ICI Working Group and should be used in conjunction with the NSCC Mutual Funds Record Layouts.
Money Market User Guide
