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July 12, 2023

The SEC’s Money Market Reforms Do Not Go Far Enough

WASHINGTON, D.C.—Today, the U.S. Securities and Exchange Commission (SEC) finalized rules in an attempt to address the risks posed to investors and the economy by money market funds (MMFs).  Legal Director and Securities Specialist Stephen Hall released the following statement:

“The rules adopted by the SEC today include important reforms, but they do not go nearly far enough. The reality is that MMFs can pose a major threat to financial stability. They do not have either insurance or an adequate financial cushion to withstand market stresses. As a result, they pose a significant risk to our economy and Main Street. Twice over just the past 15 years, the federal government—the American taxpayer, in other words—has had to rescue this multi-trillion dollar market from potentially catastrophic collapse.  It happened during the 2008 financial crisis and again in March 2020 when markets were roiled by the Covid pandemic.  The SEC can and must do more to better protect the financial system and avoid another MMF bailout.

“Today’s rules suffer from at least two major gaps.  First, the SEC left in place the fiction that many MMFs have a stable share price or “NAV.” This fixed NAV creates the false impression—especially among retail investors—that MMFs cannot decline in value and that investors therefore cannot lose money.  But the truth is that MMFs remain subject to losses and run risk, especially when financial markets are undergoing periods of stress.  We saw it unfold in 2008 and 2020 as MMF shares lost value and edged toward breaking the buck. Millions of investors rushed to withdraw their funds, leading to a vicious cycle in which the funds sold assets to pay redeeming investors, asset prices dropped, and the runs continued.  In the future, the SEC must eliminate the stable NAV for all MMFs.

“The SEC has also once again rejected a capital requirement to help MMFs weather investor runs.    Although they are portrayed as having bank-like safety and stability, MMFs don’t actually carry any mandatory capital buffers or government insurance of the sort that protects bank deposits.  This leaves investors to fend for themselves.  Again, in both 2008 and 2020, U.S. taxpayers had to provide the “capital buffer” with trillions of dollars’ worth of backstops and liquidity assistance to prevent MMFs from collapsing.  The SEC must require that all MMFs establish capital buffers,  so that they have sufficient funds to satisfy investor withdrawals in both good times and bad.

“In addition to failing to bolster the rules it proposed by eliminating the stable NAV and establishing capital buffers, the SEC also weakened the final rules by eliminating the proposed swing pricing requirement for institutional prime and tax-exempt MMFs that would have applied when funds experienced net redemptions.  The final rules replace that proposal with mandatory liquidity fees when the fund experiences net redemptions that exceed 5% of net assets.  Yet the Commission recognized when it proposed these rules that mandatory liquidity fees would not create the same incentives that could help mitigate runs on a fund as would a swing pricing requirement.

“To be sure, the rules adopted today will help.  They remove the liquidity and gate fee provisions tied to a weekly liquid asset threshold for MMFs established in 2014, as the SEC concluded those measures can actually intensify investor runs.  The rules will appropriately increase the liquidity requirements from 10% in daily liquid assets and 30% in weekly liquid assets to 25% and 50%, respectively, which should also enable MMFs to cope better with investor runs.  And the mandatory liquidity fees when a fund experiences net redemptions that exceed 5% of net assets should reduce investor incentives to cash out and also help ensure that those who do redeem bear a fair share of the costs of the redemptions.  The rules also require reporting whenever a fund’s liquidity falls below half of the regulatory requirements.  And the rules establish additional reporting requirements for both MMFs and large liquidity fund advisers so the Commission can more effectively oversee the short-term financing markets and their participants.

“Nonetheless, this piecemeal approach is insufficient.  Without a floating NAV and capital buffers, it is almost certain that the adopted rules, although improvements, will be insufficient to avoid yet another MMF bailout during the next period of major market stress.  We have been advocating for reforms along these lines for over a decade and will continue to do so.”

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For more information:

Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies—including many in finance—to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.org.

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