This is the third in my series of posts analyzing the SEC’s recent proposal to require money market funds with floating share prices (“institutional money funds”) to implement “swing pricing” for pricing periods in which the fund has net redemptions. This post illustrates how the proposal would operate when market impact factors are not required. Readers should refer to the first post for an explanation of the proposed swing pricing process and the second post for an explanation of how a swing price should be calculated.

This is my second attempt at the second in my series of posts analyzing the SEC’s recent proposal to require money market funds with floating share prices (“institutional money funds”) to implement “swing pricing” for pricing periods in which the fund has net redemptions. I removed some earlier posts because I am less sure how to interpret the proposed definition of a “swing factor.” This post explores the disparity between the proposed definition of a “swing factor” and the discussion of swing pricing in the proposing release.

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.

This post is the second installment of our discussion of the compliance requirements of new Rule 18f-4.

The comments on proposed Rule 18f-4 revealed a significant lacuna in the rule resulting from two unrelated changes to current regulations. First, the SEC will rescind Investment Company Act Release No. 10666 (“Release 10666”) as of August 19, 2022, the same day funds must comply with Rule 18f-4. Second, money market funds are excluded from the exemptions for derivatives transactions provided by Rule 18f-4. This post will explain why this was a problem and how the final rule addresses it.

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.

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.

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.

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.