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.
Continue Reading CFTC Limits Investment of Client Funds to Government Money Market Funds

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:
Continue Reading What Does Liquidity Have to Do with Diversification?

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.
Continue Reading It’s a Miracle: Rule 2a-7 Gets Shorter

On August 4, the staff of the Division of Investment Management updated their 2014 Money Market Fund Reform Frequently Asked Questions (the “FAQs”). I’ll discuss these revisions in a series of posts, starting with an important question relating to beneficial ownership by natural persons.
Continue Reading Revised Money Market Reform FAQs—Good News for Retail Funds

Many have found Question 28 of the SEC staff’s 2014 Money Market Fund Reform Frequently Asked Questions frustrating. The question is whether a money market fund’s board of directors can determine to impose a liquidity fee or temporarily suspend redemptions (“gate” the fund) but delay the implementation. The delay would allow the fund to notify its shareholders and their intermediaries. Delay would also provide time to “close the gate” or start charging the fee.
Continue Reading Using Money Fund Gates in a (and as a) Clutch

Currently, managers and directors of money market funds are wrestling with the question of how to make certain that every intermediary selling their funds can implement a liquidity fee. Intermediaries, in turn, are worried about implementing different fees for different funds that may change continuously.

This series of posts asks a different question: How would intermediaries adapt to receiving redemptions proceeds net of any liquidity fee?
Continue Reading Why Intermediaries Can Stop Worrying About Money Fund Liquidity Fees—Part Three

Part One of this series of posts explained how intermediaries could avoid calculating, collecting and remitting liquidity fees to money market funds by (1) having the transfer agent (“TA”) calculate and retain the fees from the redemption proceeds paid to the intermediary and (2) prorating the proceeds received from the TA among the intermediary’s clients based on the dollar or share amount of each client’s redemption. This method should address an intermediary’s concern that it might need to impose multiple and constantly changing liquidity fees for various money market funds during a financial crisis. The only question is how to handle contemporaneous purchases by the intermediary’s clients, which ordinarily would be netted against the other clients’ redemptions.

Why Would Anyone Buy Shares Subject to a Liquidity Fee?

Before addressing this question, we should consider how unlikely it would be for anyone to purchase shares subject to a liquidity fee.
Continue Reading Why Intermediaries Can Stop Worrying About Money Fund Liquidity Fees—Part Two

I continue to hear about intermediaries fretting over whether and how to redesign their trading systems to accommodate the possibility of money market fund liquidity fees. This series of blogs will explain why this should be a problem only for the funds’ transfer agents (“TAs”). An intermediary should never need to collect and remit a liquidity fee.


Reforms adopted by the SEC in July 2014 permit the board of directors of a money market fund (including a majority of the independent directors, the “Board”) to:

  • suspend redemptions for a period of not more than 10 business days (known as “gating”), or
  • impose a fee of not more than 2% on all redemptions (a “liquidity fee”).

Continue Reading Why Intermediaries Can Stop Worrying About Money Fund Liquidity Fees—Part One