New Money Market Rules

Recently, the Securities and Exchange Commission approved a series of new rules designed to prevent investors from withdrawing funds from money market mutual funds in times of crisis. This vote came after years of debate regarding new regulations in the asset-management industry over black eye given to money market funds when the Reserve Primary Fund broke the buck in 2008. The new set of rules, which will go into effect in 2 years, set out to make these money market funds safer with the following measures…

Improved Liquidity

First, these funds must increase the amount of money they keep in liquid investments so that the assets can be easily converted to cash in order to pay those investors looking to redeem their shares. This new mandate is governed by both a daily and weekly requirement. In taxable funds, at least 10% of assets must be kept in cash, Treasuries, or short-term paper with maturity of 1-day. Weekly requirements for all funds mandate that at least 30% of assets must be in cash, Treasuries, or other government securities with maturities of 60-days or less. These funds will also have stricter limits on less-liquid security purchases. No more than 5% of the funds’ portfolio will be invested in illiquid investments. The term “illiquid” is redefined as a security that cannot be sold or disposed of within 7 days.

Higher Credit Quality

The new rules also place limits on the ability of funds to purchase securities of lower quality by restricting them from investing more than 3% of assets in Second Tier securities (the current limit is 5%). No more than 0.5% can be invested in such Second Tier securities that are issued by a single issuer (current restriction is the lesser of 1% or $1Million). Second Tier securities that mature in more than 45 days are no longer to be eligible for purchase.

Shorter Maturity Limits

The new rules shorten the average maturity limits for money market funds, which helps to limit the exposure of funds to certain risks such as sudden interest rate movements. Under this rule, the maximum average maturity is limited to 60 days (currently 90 day limit). This will prevent the funds from investing in long-term floating rate securities.

“Know Your Investor” Procedures

The new rules require funds to hold sufficiently liquid securities to meet foreseeable redemptions. Currently, there are no such requirements. In order to meet this new requirement, funds would need to develop procedures to identify investors whose redemption requests may pose risks for funds. As part of these procedures, funds would need to anticipate the likelihood of large redemptions.

Stress Tests

The new rules require fund managers to examine the fund's ability to maintain a stable net asset value per share in the event of shocks - such as interest rate changes, higher redemptions, and changes in credit quality of the portfolio. Previously, there were no stress test requirements.

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*First Tier Security

An eligible money market security which receives the top short-term rating from any two Nationally Recognized Statistical Rating Organizations (NRSROs). If only one NRSRO has rated the security, it must receive the highest short-term rating from that NRSRO to be considered First Tier. U.S. Government Securities are considered First Tier Securities.

*Second Tier Security

An eligible money market security which is not a First Tier security and receives one of the top two short-term ratings from any two NRSROs. If only one NRSRO has rated the security, it must receive the second highest short-term rating from that NRSRO to be considered Second Tier.