Money-market funds brace for biggest regulatory revamp in years

Conference rooms are being reserved and snacks stockpiled as participants in the $5.5 trillion space await the U.S. Securities and Exchange Commission’s vote Wednesday on rules reshaping the money-market industry for the third time since 2008.

That’s when the Reserve Primary Fund, the original money market fund first created in 1970, was forced to reprice its shares below $1, in a shift that became known as “breaking the buck,” after investors pulled $40 billion in just two days.

While proposed changes were revealed more than 18 months ago, it’s not clear what final rules will be approved. At one end of the spectrum are the low-hanging fruit, mainly removing the liquidity threshold that imposes fees on withdrawals and improving reporting requirements. On the other end lie more onerous policies, such as forcing investors to pay a fee to pull out funds.

“We’re all really waiting with bated breath to see where it’s going,” said Jon-Luc Dupuy, a partner at K&L Gates. “I’m not a betting person normally, so I couldn’t bet what it would be.”

The 2008 financial crisis exposed major issues with money funds, which are supposed to be ultra-safe havens for individuals and companies to park cash, and regulators spent years implementing measures intended to slow withdrawals during times of stress.

But the last round of changes instituted in 2016 didn’t prevent the kinds of outflows that occurred in March 2020 when the onset of the pandemic roiled markets. Instead, panicked investors yanked billions from one segment of money funds in less than two months, helping upend the entire commercial-paper market that provides a life-line to companies seeking to raise short-term cash.

That run prompted the Federal Reserve to intervene in 2020 and rescue money-market funds for the second time in 12 years.

It also prompted a new round of soul searching on how to stabilize the industry. Money-market participants were already bracing for more regulations after the SEC said in June a long-awaited overhaul was on its short-list. In its rulemaking agenda, the regulator said more strictures could come as soon as October. Then an announcement last week that a vote was coming on Wednesday caught the market off guard.

The best-case scenario for many in the industry would be if the SEC tackles those simpler changes like removing links between fees and liquidity levels first, with a pledge to continue working on the more complicated policies. This is similar to the post-financial crisis period when regulators adopted daily and weekly liquidity requirements, higher credit quality, and shorter maturity limits in 2010. It followed with the more onerous pieces like floating net asset values for institutional prime funds, and liquidity gates and fees in 2014.

Meanwhile, the cash parked at money-market funds climbed to a fresh record through the week ended July 5 as short-term rates above 5% continue to lure investors to money-market assets.

Despite countless meetings with commissioners and staff, fund managers like Deborah Cunningham are still unsure as to what will be revealed on Wednesday.

“I don’t know if it’s better if I should just get a conference room for popcorn and champagne, or to collectively cry,” the chief investment officer for global liquidity markets at Federated Hermes said.