- As the world’s largest provider of institutional money market funds, J.P. Morgan Asset Management welcomes the new amendments to rules governing money market funds announced recently by the US Securities and Exchange Commission.
- We believe these “Money Market Reform” changes will help make the near USD 6 trillion money market fund industry more resilient in a crisis, transparent to clients and regulators.
- We do not expect to see any material difference in yields for clients once the amended rules go into effect.
On 12 July 2023, the US Securities and Exchange Commission (SEC) announced amendments to its rules governing money market funds (MMFs). The new rules will lead to changes for US domiciled MMFs, as well as specific changes impacting institutional (prime and tax exempt) MMFs, and government, Treasury and retail MMFs.
Changes to the rules governing US domiciled MMFs
Under the new SEC rules, US domiciled money market funds will be required to increase portfolio liquidity, suspend liquidity fees and gates, and increase reporting transparency.
Portfolio minimum liquidity requirements
Minimum exposure to daily liquid assets increases from 10% to 25%, and weekly assets increase from 30% to 50%. For J.P. Morgan MMFs, these increases necessitate little adjustment, as we currently maintain liquidity above the increased levels.
Liquidity fees and gates
MMFs can no longer impose a liquidity fee or temporarily suspend redemptions if the fund’s weekly liquid assets fall below 30% (and the fund’s board of directors determine that doing so would be in the fund’s best interest). While government and Treasury funds were never actually affected by these fees and so-called “gates”, their elimination is a significant change for prime and tax-exempt money market funds. The fees and gates had been intended to stop “runs” on funds; however, as we saw in March 2020, instead they created an incentive for investors to rush to redeem from institutional prime money market funds before any fees and gates could be imposed.
MMFs are required to increase certain reporting transparency by improving the availability of information to enhance investors’, and the SEC’s, monitoring and analysis of funds.
Changes impacting institutional (prime and tax-exempt) MMFs
Institutional and prime MMFs will be required to impose a mandatory liquidity fee on investors who seek to redeem when a fund’s daily net redemptions exceed 5% of its net assets—unless the fund's liquidity costs are negligible (“de minimis”). Although this new redemption fee has received a great deal of press, the likelihood of it being imposed is remote as it will only be triggered in the most extreme market circumstances.
Changes impacting government, Treasury and retail money market funds
Negative yield mechanism
Should market conditions result in negative fund yields, stable net asset value (NAV) MMFs would have the option of either converting to a floating NAV or using share class cancellation, commonly referred to as a “reverse distribution mechanism” (RDM). J.P. Morgan Asset Management has extensive experience using RDMs to manage negative fund yields, as this was a permitted option in the EUR MMF market prior to recent European money market fund reforms.
For non-government and Treasury MMFs, liquidity fees may be imposed if the fund’s board determines that a fee is in the best interest of the fund.
Timetable for changes
The new rules become effective based on a tiered approach 60 days after publication in the Federal Register, which we expect may occur sometime in August.
From that date, the changes will staggered according to the following timetable:
- Immediately—Removal of redemption gates, linking between liquidity fees and liquidity thresholds, and share cancellations in negative fund yield environments
- Six months later—Increased portfolio minimum liquidity requirements and discretionary liquidity fees will be required.
- 12 months later—Mandatory liquidity fees will be applied.
- 11 June 2024– Reporting form amendments become effective.
For MMF clients, this timetable means that there is a near-immediate disconnection of fees and gates from specific liquidity thresholds. However, there will be about 14 months until the mandatory liquidity fee for institutional prime and tax-exempt money market funds will be implemented.
Backdrop for these new rules
The new final rule was adopted by a vote of three to two, which approved amendments to “Rule 2A-7” as well as other rules that govern MMFs in the US under the Investment Company Act of 1940.
The new rules are designed to discourage runs on MMFs and shield remaining shareholders from liquidity costs sparked by high redemption levels.
The SEC dropped a much-discussed proposal to impose "swing pricing" on institutional prime and institutional tax-exempt MMFs, which the industry argued would have made these funds unattractive to shareholders and create operational complexities that would be too challenging for the funds themselves.
J.P. Morgan Asset Management remains committed to keeping you, our clients, informed. Please contact your J.P. Morgan representative if you have any questions.