IMMFA on Gates and Fees
The London-based Institutional Money Market Funds Association, or IMMFA, which represents providers, servicers and investors of AAA-rated "U.S. style" money funds in Europe, recently published two "Policy Position" papers designed to influence the European Union's debate over regulating money market funds. The first, "IMMFA Recommendations for Redemption Gates and Liquidity Fees, argues "Redemption gates and liquidity fees are the most effective way of mitigating runs on MMFs," while the second, "Why Money Market Funds are not the same as banks," tells us, "while the price structure of MMFs might resemble the price structure of a bank deposit, the similarities between the two products are only superficial." IMMFA comments on "gates," "Fund managers have a fiduciary responsibility to treat all the investors in a mutual fund fairly and equally. Redemption gates and/or a liquidity fee are methods by which a fund manager, if experiencing difficulty due to extreme market circumstances, can control redemptions in order to ensure that all investors are treated fairly and that no 'first-mover' advantage exists. Investors can access their cash but must pay a liquidity fee to ensure that all those investors who remain in the fund are no worse off because of the actions of the redeeming investor(s). This is similar in concept to the decrease in value an investor would face were they redeeming from a VNAV fund or selling directly held debt instruments. Properly constituted, a liquidity fee will act as a "circuit-breaker" -- a decelerant and not an accelerant of investor redemptions. The liquidity fee creates a last-mover rather than a first-mover advantage, ensuring that those investors who want to remain invested in a MMF can do so as they are protected from any impact of investors who do redeem during a period of stress. Liquidity fees and redemption gates can be structured in a number of different ways. Based on feedback from the regulatory community and from investors in MMFs, IMMFA proposes the following: Trigger based – The liquidity fee or redemption gate should be triggered if the one week liquidity level in a MMF falls below 10% of the assets under management in the MMF (against the proposed regulatory minimum of 20%).... The 10% liquidity level gives the MMF sufficient time to repair and reduces the probability of the liquidity fee or gate being applied unnecessarily.... Floating fee – The liquidity fee should reflect the estimated cost of raising liquidity to meet redemptions. Consistent with treating shareholders fairly, it should be based on the estimated cost to the whole MMF and not merely the cost of selling the most liquid asset in the MMF portfolio. Calculated this way the fee is punitive to neither redeemers nor the investors which remain in the MMF."
