GOLDEN, CO – July 17, 2023 – The removal of swing pricing in amendments to money market fund rules adopted by the U.S. Securities Exchange Commission (SEC) last week is a reprieve for institutional investors who use prime money market funds to earn higher returns on their cash investments, says ICD, provider of an independent technology portal for corporate treasurers investing in money market funds and other short-term instruments.
“We’re relieved that the SEC voted to eliminate the burden of swing pricing on institutional investors,” says ICD CEO Tory Hazard. “Had those rules been adopted, prime funds might have ceased to exist. This not only would have taken away a higher yielding, safe and liquid cash investment option for institutional investors, but it would have diminished a source of funding for corporations as prime funds account for a significant percentage of the total commercial paper market.”
In a March 2022 poll of ICD clients investing in prime funds, 40% of corporate treasury practitioners indicated that, should proposed swing pricing go into effect, they would either stop investing in prime money market funds or reduce their positions in these products. ICD’s comments to the SEC on April 11, 2022 outlines these issues and supports the regulator’s proposal to decouple liquidity minimums from fee and redemption gate provisions currently in Rule 2[a]-7 of the Investment Company Act of 1940, which governs money market funds.
The new rules, which aim to prevent mass redemptions in volatile markets, remove the regulatory ties to liquidity thresholds, which may instead exacerbate a run. However, the SEC created a new liquidity fee framework for institutional prime and institutional tax-exempt money market funds to impose a mandatory liquidity fee when a fund experiences daily net redemptions that exceed 5% of net assets. Funds will not be required to impose the liquidity fee, however, when liquidity costs are less than one basis point, which the SEC indicates will often be the case under normal market conditions.
“Although we are not convinced that the new liquidity framework for prime and tax-exempt funds is necessary, it is certainly less onerous than swing pricing,” Hazard says.
The SEC says amendments will become effective 60 days after publication in the Federal Register.