Bingham writes in a recent "Legal Alert" entitled, "SEC Proposes Money Market Fund Reform," "On June 5, 2013, the U.S. Securities and Exchange Commission voted unanimously to propose significant changes to the regulation of money market funds. The SEC's proposal, which is lengthy and extremely detailed, includes two key alternative changes along with a number of other reforms. The SEC asks for comment on a large number of issues raised by the proposal. With the proposal the SEC may well have consolidated its position as the primary regulator of money market funds. It also appears that the SEC Commissioners, formerly divided as to whether further money market reforms are needed, have now united around the need for further action, making the adoption of some version of the proposal more likely."
The law firm says, "The proposal suggests two alternative amendments to the rule governing money market funds, Rule 2a-7 under the Investment Company Act of 1940. Each alternative could be adopted alone or in combination with the other. Under either alternative, all money market funds would be prohibited from using the amortized cost method to value their investments (except as permitted for all mutual funds in the case of securities maturing within 60 days). Instead, each money market fund would be required to calculate its net asset value per share ("NAV") using market prices on a daily basis and to disclose this information on its website."
They continue, "The first alternative ("Alternative 1") would require a non-government institutional money market fund to round to the nearest 1/100th of a penny ("basis point round") its market-based NAV (e.g., to $1.0004 or $0.9997). Alternative 1 would effectively require these funds to float their NAVs. However, "government" and "retail" money market funds could continue to round to the nearest penny ("penny round") under Alternative 1. The market-based NAVs of government and retail money market funds could drop up to one-half of one penny (50 basis points) and still round to an NAV of $1.00. This would allow shareholders of government and retail money market funds to continue to make purchases and redemptions at a constant $1.00 under normal circumstances -- currently a key feature of money market funds."
Bingham adds, "The second alternative ("Alternative 2") would require a non-government money market fund whose "weekly liquid assets" fall below 15% of the fund's total assets to impose a liquidity fee of 2% on all future redemptions. Under Alternative 2, the board of a fund whose assets fall below this threshold may decide to impose a smaller liquidity fee, or no liquidity fee, if the board determines that doing so would be in the best interest of the fund. In addition, when the fund falls below the 15% threshold the board would have the ability to temporarily suspend redemptions if the board determines that doing so would be in the best interest of the fund."
Finally, they say, "The proposal makes clear that the SEC will also consider implementing both Alternative 1 and Alternative 2 together. In addition, the proposal would make certain other changes to existing regulations regardless of the alternative adopted." Note that Crane Data's Peter Crane will be moderating a webinar for Board IQ at 11:30am Thursday morning featuring Jay Baris from Morrison & Foerster LLP and Stuart Fross of K&L Gates LLP. The recent SEC Proposals will also of course be a major topic at next week's Money Fund Symposium, which will be hosted by Crane Data June 19-21 at the Baltimore Hyatt.
In other news, J.P. Morgan Securities published its latest "Update on prime money fund holdings for May 2013" yesterday afternoon. Alex Roever & Co. write, "Prime MMFs continued to be active in their asset and sector allocation decisions in May, balancing liquidity needs with the search for yield. Funds increased their non-US bank holdings, particularly Eurozone banks. They also increased their municipal and corporate holdings while reducing their holdings of US Treasuries, US agencies, US banks, and ABCP."
The report continues, "Prime MMF total bank holdings increased by $15bn in May according to our estimates based on fund holdings reports, driven by increases in unsecured CP, CD, and time deposit holdings. Eurozone bank holdings grew by $12bn, led by growth in French bank CD and time deposit holdings. Non-Eurozone European bank holdings grew by $10bn, much of the increase driven by unsecured CP and time deposit holdings. On the other hand, Canadian and US bank holdings shrunk by $8bn and $3bn, respectively."
Roever adds, "Repo holdings declined by $15bn in May. At about $185bn, the current balance of prime MMF repo holdings is the lowest it has been since April 2011 when repo rates averaged in single digits when the new FDIC deposits insurance fee assessments became effective. We continue to think repo rates will struggle to break above single digits in the near term for any prolonged periods but we also think there isn't much room for prime MMFs to further cut their repo holdings, especially given the drop in VRDN yields as of late."
Finally, the report says, "Asset backed CP holdings continued to decline in May, dropping by $4bn on the month. Year-to-date, ABCP holdings are down by about $16bn. As we noted in our 2013 outlook, ABCP supply continues to be constrained due to regulatory pressures from Basel III's LCR. We've certainly seen this pressure on the repo front as MMFs have extended maturities on their repo holdings as dealers have been forced to extend maturities in order to become more LCR compliant. But as ABCP holdings have declined, collateralized CP holdings have risen. Year-to-date, CCP holdings have increased by about $5bn, offsetting about a third of the decline in ABCP holdings. As one of the rare sources of new supply, CCP has been a relatively popular product among liquidity investors and since CCP is set up to be LCR-compliant, it has been a popular funding vehicle for dealers as well. As of the end of 1Q13, we estimate total CCP outstandings to be about $26bn. We think that this figure could grow to about $36bn by the end of the year."
Note too: Crane Data's May 31 Money Fund Portfolio Holdings were sent out earlier this week and our Money Fund Portfolio Laboratory has been updated. But our Reports & Pivot Tables" were delayed and should be sent out later this morning.
