At J.P. Morgan Asset Management, we’re committed to keeping you well-informed about the important SEC reforms affecting both institutional and retail money market funds (MMFs).
Until then, we continue to work closely with clients, intermediaries, industry participants and our Board to prepare for the changing regulatory landscape.
Summary of money market fund reforms
Some regulations are already in effect; others will phase in over the course of 2024. They are designed to enhance fund liquidity and transparency while shielding invested shareholders from the liquidity costs triggered by high redemption levels during market stresses.
Elimination of Redemption Gates
- MMFs can no longer temporarily suspend redemptions (i.e., impose a “gate”) after falling below a specified liquidity level.
- We consider this a positive change. The elimination of redemption gates removes a pain point for investors and enables fund managers to leverage their liquidity profile in times of market disruption.
Reverse Distribution Mechanism (RDM)
- During negative rate environments, government and retail MMFs can maintain a stable $1.00 NAV by reducing the number of outstanding shares (also known as “share cancellation”).
- How it works: Negative income would be applied against shareholder positions on a daily basis to reduce the number of shares in their account.
- We expect our flagship funds to adopt an RDM structure, assuming the Board determines it’s in shareholders’ best interests. It’s possible some of our other funds may employ a floating NAV to accommodate clients with different needs and preferences.
- The tax implications of RDMs are unknown at this time. We are working with regulators and the ICI to gain more clarity.
- J.P. Morgan pioneered the use of RDMs in our Luxembourg-domiciled MMFs when interest rates turned negative in Europe. Given current U.S. interest rates above 5%, RDMs should have no foreseeable impact on domestic investors.
- Continued Availability of Discretionary Liquidity Fees
- When mandatory fees don’t apply (see below), funds have the discretion to charge a liquidity fee to manage redemption pressures. Our interpretation is that investors would not face both mandatory and discretionary fees from the same fund.
- At J.P. Morgan, we expect to apply discretionary fees only to non-government funds.
- As allowed under new rules, we expect the Board to delegate this responsibility to us as fund adviser. We plan to form an independent committee focused solely on liquidity fees implementations and governance. The Board must approve policies before implementation and periodically review fee determinations and overall guidelines.
- Higher Minimum Liquidity Requirements
- All MMFs must increase daily liquidity requirements from 10% to 25% of total assets, and weekly liquidity requirements from 30% to 50%.
- Consequences of falling below minimum daily and weekly requirements will require a money market fund to notify its board within one business day when the fund has breached 50% decrease in its minimum requirements (i.e. DLA 12.5% and WLA 25%).
Enhanced Reporting Requirements
- Amendments to Form N-CR with respect to reporting of liquidity events and amends Form N-MFP to include additional information about shareholders, portfolio securities sold by institutional prime money market funds, liquidity fees, and use of share cancellation (RDM).
Mandatory Liquidity Fees Framework
- Unless cost of liquidity deemed de minimis (less than 0.01%), institutional prime and institutional tax-exempt MMFs must charge a liquidity fee when daily net redemptions exceed 5% of net assets. If a fund cannot make a good-faith estimate of such liquidity costs, it must apply a default fee of 1% of the value of the shares redeemed. We generally anticipate that a fund’s liquidity costs will be de minimis under normal market conditions.
- Retail money market funds and government money market funds are not subject to this requirement.
- Mandatory fees were adopted instead of swing pricing due to the operational complexities of adjusting NAV based on fund flows and wide opposition by the industry. The SEC Commission stated that it was influenced by commenters who suggested that a modified liquidity fee structure would serve as a better antidilution mechanism than swing pricing.
Who pays mandatory fees?
- Only redeeming investors would potentially pay the fee – and only on days when redemptions exceed the 5% threshold and if the cost of liquidity is greater than 0.01%
- Fees will likely be triggered under only the most extreme market conditions when liquidity supply is very limited and market prices are dislocated.
- How are mandatory fees calculated?
- Fees must reflect the fund’s good faith estimate of liquidity costs incurred if it sold a pro rata slice of each portfolio holding to satisfy net redemptions. This calculation includes transaction costs as well as market impact costs for each security.
- If a fund can’t make a good faith estimate, the default mandatory fee is 1% of the value of shares redeemed.
- J.P. Morgan is currently working with a pricing vendor to develop an industry-wide pricing grid for calculating mandatory fees. Because fees are based on portfolio holdings and most prime MMFs own similar assets, fee differences among managers may be minimal.
How will mandatory fees be handled in funds with multiple NAV strikes each day?
- We expect the industry to move toward single-NAV products to avoid the complexities of retroactively applying end-of-day fees to redemptions made during earlier pricing periods.
- While J.P. Morgan is likely to continue pricing shares at 3pm, other firms could contemplate earlier strikes to allow more time for fee calculations.
- How will clients be notified when mandatory fees are charged?
- In the highly unlikely event fees are triggered, they will be communicated to the transfer agent and applied to all redemptions wire for that day. We’ll also update clients and intermediaries via email distributions managed by the transfer agent, website, and mandatory regulatory filings in the Form N-MFP.
What’s next?
- As the regulation goes into effect on a tiered schedule, the next milestone is April 2nd with the increase of the DLA and WLA liquidity thresholds across all money market mutual funds.
- With Mandatory liquidity fee framework compliance date of October 2nd, we will remain in open dialogue with our investors as we progress on the roadmap.
For more information
Please bookmark JPM/MMReform.com for additional updates and solutions as we hit the various implementation dates throughout the year. If you have questions about money market fund reforms, please contact your J.P. Morgan representative or watch our recent webcast.