Today, we quote from the last of the 20 largest money fund managers' "Comments on Money Market Fund Reform" by reviewing letters from T. Rowe Price, HSBC and Western Asset, the 16th, 18th and 20th largest managers of money market funds. T. Rowe Price's Doug Spratley, Jonathan Siegel & Vicki Booth comment, "T. Rowe Price is a global investment adviser serving a broad array of clients, from individual savers to large institutions and funds, and has assets under management (AUM) of $1.54 trillion. We offer government money market funds to retail and institutional shareholders, and our prime and tax-exempt money market funds are offered to retail investors. Our money market funds are used by investors for a variety of purposes, such as supporting near- and longer-term savings, serving as an emergency fund for unexpected expenses and life changes, providing a safe haven from volatile markets, and being a low-risk vehicle for preserving capital coupled with some return potential. In addition, many of our products, including our proprietary mutual funds as well as many of our external client accounts, invest their excess cash in T. Rowe Price government money market funds that are not available for direct purchase by the public."
They explain, "We are writing to provide our perspectives on the SEC's December 2021 proposal to amend certain rules governing money market funds ('MMFs') under the Investment Company Act of 1940 (the 'Proposal'). As discussed in more detail below: We support the Proposal's removal of fees and gates from Rule 2a-7; We question the SEC's proposed increases to liquidity thresholds, especially in the case of retail MMFs; We do not believe swing-pricing is well-suited for MMFs, however if the SEC proceeds with this element of the Proposal in a final rule, we agree with the SEC that it should not apply to retail MMFs; We encourage the SEC to make certain refinements and clarifications to the Proposal's changes to stress testing as it relates to the role of the board and the frequency of reporting; and If a final rule is adopted, the compliance period should be 18-24 months."
HSBC Asset Management writes, "As members of the Investment Company Institute, our views are reflected in the comment letter submitted by that organization. In this comment letter, we will not focus on each aspect of the proposed reforms but instead add two specific comments. First, we believe the SEC should reconsider the proposed 'one-size-fits-all' approach to liquidity, in recognition that minimum liquidity levels are only one aspect of liquidity risk management. Instead, the SEC should consider linking minimum liquidity levels to individual investor concentration and/or investor type concentration with a minimum 'floor'. Second, we believe the proposed amendments, in particular the proposed swing pricing requirement, have the potential to limit new entrants to the market and to limit new product innovation to the detriment of investors and the stability of, and the competition within, the broader MMF industry."
They explain, "We agree that maintaining an understanding on how individual shareholders use a MMF can be helpful in managing liquidity risk and support Rule 2a-7's current 'know your client' requirement. In our view, however, there are limits to 'knowing your client.' Not only does it take time for fund managers to build an accurate profile of a MMF's shareholders and to understand an individual shareholder's liquidity preferences, but the use of 'omnibus accounts' masks individual shareholder activity and many investors, due to the nature of their business and their usage of MMFs, have unpredictable cash flow needs that even the investors cannot predict. 'Knowing your client' is certainly an imperfect science."
HSBC says, "A key tool we employ in the management of our MMFs globally, including for example our US 2a-7 MMFs and EU-domiciled USD Prime MMFs, to support liquidity risk management is through the monitoring and control of individual investor concentrations and investor type concentrations. For example, we seek to limit individual investor concentration in each MMF to a target maximum of 5% of the fund's assets. We also seek to limit aggregate investments from investors operating in two specific sectors that have historically shown greater volatility to a target maximum of 25% of the fund's assets."
They continue, "In our opinion, simply managing the liquidity profile of a fund's assets is only managing half of the risk. By monitoring and seeking to limit investor concentration, we are better able to manage the demand for liquidity plan accordingly. The current daily and weekly liquid asset requirements prescribed by Rule 2a-7 are a 'one-size-fits-all' approach that takes no direct consideration of the different levels of individual investor concentration or investor type concentration. The proposed reforms double down on this construct.... We believe the SEC should more carefully consider the impact of its proposals on industry concentration (which has increased over the last decade) and how such concentration will ultimately affect investors and the broader MMF industry in the long term."
Finally, Western states, "Western Asset strongly supports a number of the changes in the Proposing Release which we believe will strengthen the Rule 2a-7 framework and improve the resilience and transparency of money market funds. Specifically, we support: Revisions to existing liquidity fee and redemption gate provisions; Increases to daily liquid asset and weekly liquid asset minimum liquidity requirements from the current levels of 10% and 30%, but to levels of 20% and 40%, respectively (in place of the proposed levels of 25% and 50%), in combination with a thoughtfully constructed liquidity fee anti-dilutive mechanism; and Some of the amendments to reporting requirements on Form N-MFP and Form N-CR which improve the availability of information about money market funds."
They write, "At the same time, we are concerned that a number of the proposals will reduce the effective functioning of short-term funding markets, cause significant risks and unnecessary disruption to shareholders and the economy, and likely impair the usefulness of money market funds for both retail and institutional investors, without advancing the Commission's goals of improving the resilience and transparency of the product."
Western explains, "In particular, we do not support: The introduction of swing pricing requirements for institutional prime and tax-exempt funds; New requirements for fund companies to assess whether financial intermediaries are able to effect shareholder transactions at floating net asset values per share {NAVs) for retail and government money market funds, and to prohibit financial intermediaries from purchasing fund shares in nominee name should they be unable to do so; and Proposed time lines for conforming with rule changes, which do not realistically account for the complexity that would be involved with creating compliant systems and protocols and other related implementation challenges that will impact fund companies, intermediaries, service providers and other stakeholders."
They tell us, "Based on our assessment of the mechanics outlined within the Proposing Release, and feedback from our clients and industry participants, we see the likely outcome from the introduction of swing pricing to be sharp reductions in, if not substantial elimination of, the institutional prime and tax-exempt money market fund sectors with corresponding flows into bank deposits, government money market funds, ultra-short fixed income funds, separately managed accounts and direct securities."
Western adds, "In conclusion, we believe that the use of swing pricing is fundamentally counter to money market funds' utility as cash management products and their ability to support investors' primary objectives, namely capital preservation, availability of liquidity and competitive money market returns. We believe that the introduction of swing pricing is contrary to the best interests of shareholders in the products and overall may result in the elimination of the sector."
