Yesterday I posted a summary of the Federal Reserve Bank of Boston’s Money Market Mutual Fund Liquidity Facility (the “Facility”). Today it expanded the Facility to include tax exempt money market funds and municipal securities. Rather than write a separate post, I updated my original post so all the information is in one place and up to date. The blog editor does not have search functions, so forgive me if I haven’t removed every reference to “Prime” or inserted “Muni” in every appropriate spot.

A favorite client has also furnished me with a companion no-action letter obtained by the Investment Company Institute (“ICI”). I cannot link to the letter because I have not found it on either the SEC’s or ICI’s website. The letter is summarized below.
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The Federal Reserve Bank of Boston (“FRBB”) has established a new Money Market Mutual Fund Liquidity Facility. (I’m not sure what acronym to use here; “mmm … Fund Liquidity” would work. Let’s just call it the “Facility.”) The Facility opened on March 23, 2020. This post summarizes the significant terms of the Facility and suggests an idea for fund boards to consider.
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The convergence of several events makes this an appropriate time to reassess the impact of the SEC’s 2014 money market fund reforms (the “Reforms”). First, the SEC has released official money market fund (“money fund”) statistics for October 2019, three years after the effective date of the Reforms. Second, total money fund assets are very near $4 trillion, just over $1 trillion higher than they were before the SEC adopted the reforms in July 2014. Third, prime money fund assets are back over $1 trillion. Finally, former Fed Chairman Volcker, an implacable opponent of money funds, recently passed away.

Money funds have demonstrated remarkable resilience in the face of zero interest rates, FSOC activism, and Chairman Volcker’s critiques. What else might we discern from the post-Reform state of money funds.


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In a previous post, I noted that recent changes to Rule 2a-7 hit tax exempt money market funds hard, with the loss of half of their pre-reform assets. There are reasons to think these funds will recover, however. Foremost, prior to the post-election surge in interest rates, tax exempt funds were out-yielding every other type of money market fund. According Crane Data, tax exempt funds (which are nearly all retail) out-yielded both institutional and retail prime funds, to say nothing of government funds. These are pre-tax yields; on an after-tax basis, tax exempt funds offer very competitive yields.

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(This post has been updated for October 31st data.)

The SEC released its money market fund statistics for the end of October, giving us a comprehensive view of the impact of the reforms which took effect on October 14th. We now have government, retail and floating NAV money market funds, the later two with the potential for liquidity fees and redemption gates. The Wall Street Journal has run a number of stories about the “unintended” consequences of the reforms. The impact on the funds has been entirely consistent with the comments the SEC received on the proposed reforms–so this outcome should have been expected. By the time the dust fully settles, FSOC may have momentarily succeeded in its objective of reducing the assets of prime money market funds to a level where they cannot pose a threat to the stability of the financial system, assuming they ever did.
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Two recent letters from the CFTC staff hold that, beginning October 14, 2016, its regulations will prohibit investment of client funds by futures commission merchants (“FCMs”) and derivatives clearing organizations (“DCOs”) in prime money market funds (“Prime MMFs”). Although the staff’s positions are clearly articulated, I found their relationship to Regulation 1.25 questionable.
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In my recent article on money market fund reforms, I observed:

The minimal credit risk determination for ABS [an Asset-Backed Security] should identify every entity on whose financial strength the fund will rely; the illiquid security determination should identify to whom the fund might sell the ABS in seven days. A fund may exclude any entity not so identified from further consideration as a potential guarantor of the ABS.

Wait a minute, writes a credit analyst:
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There are important changes to Rule 2a-7, Form N-MFP and Form N-CR that go into effect on April 14, 2016, and have nothing to do with fees, gates, retail shareholders or floating NAVs. At this point, every fund should be prepared to submit revised procedures to its board of directors for review. If you’re running

Yesterday, the SEC adopted what I hope will be the final amendments to Rule 2a-7 made during my career. For the first time in the history of Rule 2a-7, the SEC cut more than it added, reducing the length of the rule by over 12%. The amendments relate primarily to credit and diversification requirements, but also incorporate some of the staff’s FAQs on the 2014 reforms.
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