What You Need to Know About Money Market Reform

Wednesday, October 19, 2016

By Nicole Calaro

MONEY MARKET REFORM IS HERE! WERE YOU READY?
Money Market Reform went into effect on October 14, 2016. Do you know if your plan or your investments are affected?

WHAT IS MONEY MARKET REFORM?
Money market funds are open-ended mutual funds that invest in short-term debt securities such as US Treasury bills and commercial paper. They are widely accepted as a “safe investment” and are highly liquid investments. Money market funds seek a stable net asset value (NAV) of $1.00.

Money Market Reform, formally known as Rule 2a-7, is a law created by The Securities and Exchange Commission (SEC). These changes were enacted to protect money market funds from a “run” if there’s another crisis like we saw in 2008.

WHAT CHANGES WERE MADE?
The SEC’s amendments address three major topics:

  1. Categorizing money market funds
  2. Requiring a floating Net Asset Value (NAV) for institutional money market funds
  3. Allowing the imposition of liquidity fees and redemption gates in certain circumstances

CATEGORIZING MONEY MARKET FUNDS The SEC broke down money market funds into three categories.

Retail money market funds: These are funds with policies reasonably designed to limit its investors solely to “natural persons” or individuals.

Institutional money market funds: These are funds designed for beneficial owners who are not “natural persons” or individuals, but entities such as corporations, partnerships, governments, or fiduciaries. These funds require high minimum investments.

Government money market funds: These are funds with 99.5% of its assets invested in cash, US government securities, and/or repurchase agreements that are “collateralized fully” by cash or US government securities.

REQUIRING A FLOATING NAV FOR INSTITUTIONAL MONEY MARKET FUNDS
Retail and government money market funds can use the amortized cost method or penny-rounding method when calculating the money market fund NAV.

Non-retail money market funds are now required to use a four-decimal NAV. The non-retail funds will float based on the four decimal NAV.

ALLOWING THE IMPOSITION OF LIQUIDITY FEES AND REDEMPTION GATES
Money market funds are now required to maintain 30% of their total assets in weekly liquid assets. This means that 30% of the assets must be in investments that can be converted into cash within five business days.

Liquidity fees are an additional expense when taking money out of the money market fund. There are two reasons why a liquidity fee can be imposed.

  1. If the fund does not meet the 30% mark, the mutual fund board can impose a liquidity fee of up to 2% if it’s in the best interest for the fund.
  2. If weekly liquid assets are less than 10% of the fund’s total assets, an automatic liquidity fee of 1% is imposed, though it can be up to 2% max. The board can lift this at any time and will automatically stop when the fund reaches the mandated 30% mark.

Redemption gates are temporary suspensions on redemptions from the fund. A redemption gate can be triggered if the fund does not meet the 30% mark. There are two limitations to redemption gates:

  1. This gate can only be imposed for the shorter of 10 days or until the weekly liquid asset level returns to at least 30%
  2. Can only be used for up to 10 days during any rolling 90 day period
Redemption gates can be lifted by the mutual fund board at any time.

ARE YOU USING MONEY MARKET FUNDS?
If you have not reviewed your plan or your investments for money market funds yet, now is the time to do it. Be aware of the investments on your plan or your portfolio. If you have any questions, be sure to contact the advisor on your retirement plan. If you want to know more about money market reform, contact us!