According to Chair Gensler, Move will increase money-market funds’ “resiliency”.
In an effort to stop any runs on their assets that would necessitate a public bailout, the Securities and Exchange Commission decided Wednesday to impose new rules on money-market mutual funds.
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When daily net redemptions surpass 5% of the fund’s assets, the new regulation mandates that institutional money-market funds charge redemption fees to investors. A contentious “swing pricing” proposal that would have raised the cost for institutional investors looking to withdraw their money during times of financial hardship was not included by the SEC in its final rule.
In accordance with the new regulations, funds will be required to maintain a greater amount of highly liquid assets that are simple to sell during times when there are a lot of redemption requests.
Money-market funds invest in debt with longer maturities while using investor money to purchase shorter-term debt instruments like government bonds, which increases the risk of a scenario resembling a bank run due to the mismatch between investors’ daily capacity to withdraw money and the funds’ investments in debt with longer maturities.
The popularity of the investment vehicles has increased as a result of bigger dividend payments made possible by growing interest rates for fund sponsors. According to fund flow data from EPFR, money-market funds now oversee close to $8 trillion in assets and have experienced higher inflows than any other significant fund group since the start of 2022.
SEC Chair Gary Gensler said in a statement that “when markets enter times of stress, some investors—fearing dilution or illiquidity—-may try to escape the bear.” He continued, saying that the revisions passed on Wednesday “will enhance these funds’ resiliency and ability to protect against dilution,” adding that “this can lead to large amounts of rapid redemptions”.
