On December 15, 2021, the SEC proposed amendments to the regulation (Rule 2a-7) governing money market funds.
The proposed amendments are intended to reduce run risk, mitigate the liquidity externalities transacting investors impose on non-transacting investors, and enhance the resilience of money market funds.”
The proposing release has not yet been published in the Federal Register, so we do not know when the sixty-day comment period will begin.
The most significant proposals would (1) eliminate the power of a money market fund’s board of directors or trustees (its “Board”) to temporarily suspend, or impose liquidity fees on, redemptions and (2) require money market funds with fluctuating net asset values per share (known as “institutional money funds”) to implement “swing pricing.” This post explains this swing pricing proposal.
Scope of the Swing Pricing Proposal
Swing pricing would be limited to institutional money funds. Money market funds that maintain a stable share price (government and retail money market funds) could not swing price.
The proposal would require swing pricing whenever an institutional money fund has net redemptions during a pricing period. A “pricing period” would be the period from the calculation of one share price to the next. For example, a fund that begins accepting orders at 9 a.m. and stops accepting orders at 4 p.m., and determines its price per share at noon and 4 p.m., would have two pricing periods: 9 a.m. to noon and 12:01 to 4 p.m.
Net purchases or redemptions during a pricing period would be determined at the fund, rather than class, level. The “swing price” would be the same as or lower than the share price the fund would have used for a pricing period without net redemptions. The result would be that redeeming shareholders might receive a lower price than they would have absent swing pricing. Swing pricing would not be triggered by net subscriptions.
Calculating a Swing Price
The amendments would require the fund to base the swing price on the estimated cost of selling a pro rata share of its entire portfolio to raise the money required to cover the net redemptions for the pricing period. If net redemptions amount to 2% of a fund’s net assets, the fund would need to estimate the cost of selling 2% of every investment it holds. These estimated costs must include:
- The spread, if any, between the value of the investment used to calculate the fund’s net assets and the value at which the investment could be sold (the “bid price”); and
- Brokerage commissions, custody fees, and any other charges, fees, and taxes resulting from such sales.
In addition, if net redemptions exceed the “market impact threshold,” the estimated costs must also include a “market impact factor.”
Market Impact Threshold
The “market impact threshold” would be 4% of the fund’s net assets divided by the number of pricing periods in a business day. A fund with only one pricing period would have a market impact threshold of 4% of its net assets, while a fund with two pricing periods would have a market impact threshold of 2% of its net assets.
Market Impact Factor
The “market impact factor” for each investment would be:
an estimate of the percentage change in the value of the security if it were sold, per dollar of the amount of the security that would be sold, under current market conditions.”
The fund may apply the same market impact factor to investments with substantially similar characteristics. The proposing release does not describe what characteristics should be similar, or how similar they should be, but does ask whether the SEC should:
provide additional guidance to support funds’ determinations as to whether securities have the same or substantially similar characteristics?”
The proposing release also opines that
it would be reasonable to apply a market impact factor of zero to the fund’s daily and weekly liquid assets, since a fund could reasonably expect such assets to convert to cash without a market impact to fulfill redemptions (e.g., because the assets are maturing shortly).”
Every institutional money fund would have to adopt swing pricing policies and procedures approved by its Board. The Board would have to designate a swing pricing administrator “reasonably segregated from portfolio management of the fund.” The swing pricing administrator may be the fund’s investment adviser, officers, or a group. The administrator may lower a fund’s market impact threshold.
The swing pricing administrator must provide a written report to the Board (at least annually) reviewing the adequacy of its policies and procedures and any material changes thereto. The report must include “information and data supporting the determination of the swing factors” used during the period covered by the report.
My next post will explore ambiguities in how a fund should determine the swing factor.