Money Market Funds: Regulators Primed for Further Reforms - July 15, 2021 Stephen Cohen - Partner, Dechert LLP

Money Market Funds: Regulators Primed
for Further Reforms
Stephen Cohen – Partner, Dechert LLP

James Catano – Partner, Dechert LLP

Mary Anne Morgan – Associate, Dechert LLP

July 15, 2021

© 2021 Dechert LLP

Overview of Recent U.S. MMF Reforms

 MMFs during the 2007-2009 Financial Crisis
 2010 SEC MMF Amendments
 2012 SEC Staff Proposal
 2012 FSOC Recommendations
 2013 SEC Proposed Rule
 2014 SEC MMF Amendments
 2016 Implementation Date

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Overview of March 2020 Market Volatility and
Government Response

Redemptions in Institutional Prime Money Market Funds
 Fears around COVID-19 and its impact on the economy led to
 market volatility and lack of liquidity in money markets beginning
 Friday, March 13, 2020
 Many Institutional Money Market Funds were forced to sell their
 most liquid securities to meet redemptions, putting pressure on
 their weekly liquid assets (WLAs)
   – WLAs of 30% of total assets or less trigger a board’s consideration
     of liquidity fees and/or redemption gates
   – Some institutional investors have policies to redeem well before
     MMFs get to that level

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Overview of March 2020 Market Conditions and
Government Response (cont.)

Money Market Mutual Fund Liquidity Facility (MMLF)

   On March 18, 2020, the Fed announced that it was establishing the MMLF to provide support for the
    money markets
       – The MMLF helped to restore liquidity in the markets, reduce redemptions in Institutional MMFs and
         allow MMFs to increase their WLAs

   Under the MMLF, the Federal Reserve Bank of Boston began making nonrecourse loans available to
    eligible financial institutions secured by high-quality assets purchased by the financial institution from
    eligible MMFs (Prime, Single State and Other Tax Exempt MMFs)

   Eligible Assets/Collateral:
       –   U.S. Treasuries and Fully Guaranteed Agencies

       –   Securities issued by U.S. Government Sponsored Entities

       –   Asset-backed commercial paper, unsecured commercial paper and negotiable certificates of deposit that is issued by a
           U.S. issuer and meet certain credit-quality requirements

       –   U.S. municipal short-term debt (excluding variable rate demand notes) with a maturity that does not exceed 12 months
           and that meet certain credit-quality requirements

       –   Variable rate demand notes that have a demand feature that allows holders to tender the note at their option within 12
           months and that meet certain credit-quality requirements

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Overview of March 2020 Market Conditions and
Government Response (cont.)

SEC Staff No-Action Relief

 To address conflicting banking regulations to which certain MMF sponsors are
  subject (e.g., Sections 23A and 23B of the Federal Reserve Act and Regulation W),
  the SEC staff issued no-action relief to allow those sponsors to purchase securities
  from affiliated MMFs in reliance on Rule 17a-9
    – This no-action letter was recently withdrawn

Form N-CR Filings

 “Financial support” and certain other events, including the purchase of securities
  from a MMF by an affiliate, trigger the filing of Form N-CR with the SEC

 Several MMFs had to make Form N-CR filings (and related website postings) in
  connection with the purchase of securities by their affiliated sponsors

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President’s Working Group on Financial Markets
(PWG) Report

 On December 22, 2020, the PWG released a report on potential reform
 options for MMFs
 The PWG recommended that more should be done to address
 systemic risks and the structural vulnerabilities of MMFs to large-scale
 redemptions and the report presented 10 possible reform options for
 prime and tax-exempt MMFs to facilitate discussion among regulators,
 including the SEC
 The 10 options include: (1) removal of the tie between WLAs and fee
 and gate thresholds; (2) reform of conditions for imposing redemption
 gates; (3) imposition of a minimum balance-at-risk (MBR); (4) MMF
 liquidity management changes; (5) countercyclical WLA requirements;
 (6) floating NAV requirements for all prime and tax-exempt MMFs; (7)
 swing pricing requirement; (8) capital buffer requirements; (9)
 requirement for liquidity exchange bank (LEB) membership; and (10)
 requirements governing sponsor support

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Comment Letters on PWG Report

 SEC's Division of Investment Management requested feedback on the
 PWG Report's recommendations
 Fund groups and key trade associations commented on the PWG
 Report
   – Most MMF sponsors supported de-linking the 30% WLAs threshold
     from fees and gates
   – Two MMF sponsors supported a floating NAV for all non-government
     MMFs
   – Other comments included: (i) increasing the WLAs minimum; (ii)
     countercyclical WLAs requirements in times of stress; (iii) eliminating
     fees and gates for all types of MMFs; (iv) requiring corrective actions
     when WLAs fall below 30%; (v) requiring prime MMFs to hold a
     minimum investment in securities issued by the U.S. government; and
     (vi) improving commercial paper market structure

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Next Steps
   Not a question of “if” but rather “when”

   Fed Chair Powell comments on 60 Minutes
       – “There’s a structural issue and we know this, and it really is time to address it decisively.”

   FSOC Meeting and Statement June 11, 2021
       – SEC is reviewing comment letters on PWG report
       – FSOC monitoring this initiative to strengthen short-term funding markets
       – SEC Chair Gensler directed SEC staff to engage in a deeper review of MMF vulnerabilities, coordinate
         with other federal agencies and to report recommendations for further reforms to FSOC

   Future SEC rulemaking process would include
       – Formal proposal
       – Comment period
       – Formal rule
       – Compliance period

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