Strong

Billion

Trillion

With a market value of $674 Billion, the US institutional prime money market funds industry is predicted to decrease significantly by at least one-third this year.
Big investment firms are choosing to convert these funds or close their doors in response to new rules set by the Securities and Exchange Commission (SEC) that will take effect in early October. Managers are reassessing their fund structures and tactics in response to the new regulations, which mandate a fee for significant redemptions.
<h2 class="wp-block-heading" id="strong-the-impact-of-new-sec-regulations-strong">The Impact Of New SEC Regulations</h2>
Under the new SEC rules, institutional prime funds will be required to impose a fee on departures whenever net redemptions exceed five percent of total net assets in a single day.&nbsp;
The regulations aim to prevent investor stampedes like those seen at the beginning of the 2020 pandemic. During that time, large outflows led prime funds to sell assets at a discount, causing losses for remaining investors.
However, several large managers have decided to close down prime funds or convert them to government debt-focused vehicles exempt from the new rules. They argue that the new criteria are operationally challenging and highly prescriptive, leading to increased costs and complicated fund structures.
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<h3 class="wp-block-heading" id="strong-industry-concerns-potential-consequences-strong">Industry Concerns &amp; Potential Consequences</h3>
While the new requirements are intended to protect investors in prime funds, which offer higher returns than government money funds, some market participants warn of potential drawbacks.&nbsp;
The shrinking number of institutional prime funds may reduce portfolio diversification for investors and diminish the pool of buyers for the $1.3 Trillion commercial paper asset class.&nbsp;
As of January, prime funds held over $310 Billion in unsecured and asset-backed paper, accounting for approximately one-quarter of the entire market.
John Croke, Vanguard’s head of active fixed income, raised concerns about the new regulations’ cost-benefit ratio. He stated that the added costs for fund providers, custodians, and asset servicers might outweigh the benefits.
Vanguard is converting its $89 Billion internal fund from prime to government securities, while Capital Group is taking similar action with its $135 Billion internal fund.
<h3 class="wp-block-heading" id="strong-retail-prime-funds-remain-strong-strong">Retail Prime Funds Remain Strong</h3>
Despite the challenges faced by institutional prime funds, interest in retail prime funds, which are not affected by the new SEC liquidity fees, remains strong.&nbsp;
According to Crane Data, these funds saw a 48 percent year-on-year increase in net assets, reaching $750 Billion at the end of March.&nbsp;
However, fund managers are concerned about reduced institutional demand and the potential impact on companies that rely on commercial papers for financing.
<h3 class="wp-block-heading" id="strong-criticism-of-sec-s-approach-strong">Criticism Of SEC’s Approach</h3>
The<a href="https://www.thecoinrepublic.com/2024/04/10/uniswap-vs-sec-uniswap-receives-wells-notice-from-sec/" target="_blank" rel="noopener noreferrer nofollow"> SEC </a>has faced criticism from the industry regarding the implementation of liquidity fees. Initially, the regulator proposed swing pricing, which requires managers to include outflow impacts when calculating their funds’ net asset value.
After facing pushback from money managers, the SEC opted for mandatory liquidity fees without providing an additional consultation period.
Eric Pan, CEO of the Investment Company Institute, highlighted that firms are struggling to comply with the new rule. He suggested that the SEC should have re-proposed it to tackle the complexities of implementing a mandatory liquidity fee.
Chris Donahue, CEO of Federated Hermes, expressed frustration with the SEC’s approach, likening it to being threatened with death and waterboarded.
<h4 class="wp-block-heading">Conclusion</h4>
Large US investment firms are preparing for new SEC rules that will significantly change institutional prime money market funds. These regulations, including mandatory liquidity fees for significant redemptions, lead many managers to close or convert their prime funds. This is expected to shrink the sector by at least one-third.
While the rules aim to protect investors and prevent rushes to withdraw funds, concerns have been raised about potential drawbacks, such as reduced portfolio diversity and fewer buyers for commercial paper. The SEC has faced criticism for handling the regulations, with some saying the challenges must be fully understood.
As the October deadline nears, more fund managers will likely announce closures or conversions.&nbsp;
The long-term effects on the commercial paper market and investor portfolios are uncertain, but it’s clear the US money market funds landscape is changing significantly. Both managers and investors will need to adjust to the new rules.

US Money Market Funds: Managers Gear Up For New SEC Rules

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Thecoinrepublic.com

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