My previous post tried to explain how Rule 2a-7 limits the “leveraging effects” of “firm commitments” made by money market funds. This post will add some important qualifications, compare the approach taken by Rule 2a-7 to the proposed approach in Rule 18f-4 and discuss the need to reconcile these rules.
Continue Reading What Rule 2a-7 Tells Us about Re-Proposed Rule 18f-4

This post continues my consideration of why certain “unfunded commitment agreements” should be carved out of the valuation at risk limitations of re-proposed Rule 18f-4. My previous post explained why two of the justifications offered for this carve out do not bear scrutiny. My current view is that the scope of the carve out depends on the third proposed justification: that some commitments may not have “leveraging effects.” This requires an understanding of the leveraging effects regulated by Section 18 of the Investment Company Act.

I will use the example of money market funds to explore “leveraging effects” because (a) it allows me to answer a question raised in the proposing release and (b) it illustrates another means of limiting leverage.
Continue Reading Money Market Funds and Re-Proposed Rule 18f-4

On April 7, 2020, the Securities and Exchange Commission (the “SEC”) announced an update to the EDGAR system that would allow negative values to be entered in Item C.17 of Form N-MFP. Money market funds use Form N-MFP to report information to the SEC as of the end of each month. Item C.17 requires, for each security held by the fund, “[t]he yield of the security as of the reporting date.” The change was prompted by the recent downturn in rates for one-month and three-months Treasury bills, which may also have prompted some Treasury money market funds to restrict new investments.
Continue Reading A Negative Sign of the Times: Form N-MFP Can Report Negative Yields

On March 23, 2020, the Securities and Exchange Commission (“SEC”) issued a relief order (the “Order”) granting temporary short-term lending and borrowing flexibility to open-end funds and insurance company separate accounts (each, a “fund”) to assist such funds in dealing with market disruptions caused by the COVID-19 pandemic. The Order temporarily permits a fund to borrow from its affiliated persons. It also expands such fund’s flexibility for lending or borrowing under an existing interfund lending exemptive order (“IFL Order”); a fund without an IFL Order will be permitted to participate in an interfund lending arrangement under similar conditions. Lastly, a fund may temporarily engage in borrowing or lending arrangements that may deviate from its fundamental investment policies. The Order covers transactions involving second-tier affiliated persons as well (first and second tier affiliated persons are referred to as “fund affiliates”).

This temporary relief is in effect until at least June 30, 2020. After the effective period, funds will have two weeks to cease activities carried out in reliance on the Order, once the SEC issues a public notice terminating the Order. Before relying on this temporary relief, a fund will need to comply with the various conditions in the Order.
Continue Reading SEC Grants Mutual Funds Short-Term Borrowing/Lending Relief in Response to COVID-19

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.
Continue Reading Update on Money Market Mutual Fund Liquidity Facility & Related No-Action Letter

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.
Continue Reading Information on the Prime and Tax Exempt Money Market Fund Liquidity Facility (Updated 3/23)

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.


Continue Reading Money Market Fund Reforms Three Years On

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.

Continue Reading Why Tax Exempt Money Market Funds Should Make a Comeback

(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.
Continue Reading What Hath FSOC Wrought?