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July 13, 2023

SEC Announces Next Round of Money Market Fund Reforms

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July 13, 2023

SEC Announces Next Round of Money Market Fund Reforms


Press Release

SEC Announces Next Round of Money Market Fund Reforms

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July 13, 2023

 
 

On July 12, 2023, the Securities and Exchange Commission (SEC) voted 3-2 to amend Rule 2a-7, which governs money market funds. Several of the amendments, once implemented, will impact the operation of money market funds. One of the more substantial impacts will be to institutional prime and institutional tax-exempt money market funds, which will be subject to certain liquidity fee requirements. The new rules vary in terms of their effective dates ranging from sixty days after their publication in the Federal Register to six months to one year. 

 
 

The amendments are designed to enhance the resiliency and transparency of money market funds. The SEC believes institutional prime and institutional tax-exempt money market funds have demonstrated susceptibility to significant redemptions in times of market stress. This was the case in March 2020 when short-term funding markets exhibited a lack of liquidity at the onset of the pandemic as investors moved quickly to reallocate their assets into cash and short-term government securities.

The key amendments are:

  • Increased Portfolio Liquidity Requirements: The revised minimum daily liquid assets requirement will be 25% and the minimum weekly liquid asset minimum will be 50%. The increased thresholds are designed to provide a more substantial buffer to better equip money market funds to managed significant and rapid investor redemptions.
  • Removing Liquidity Fee and Redemption Gate Provisions: Elimination of the requirement for a Fund Board to consider imposing a liquidity fee or redemption gate when weekly liquid assets in a prime or tax-exempt money market fund falls below 30% on any given day. Additionally, elimination of the requirement of prime or tax-exempt money market fund to impose liquidity fee when weekly liquid assets fall below 10% unless the Fund Board determines it is not in the best interest of the fund to do so. These provisions, which were part of the round of money market fund rule amendments implemented in 2016, were counterproductive in March 2020 as they appeared to have contributed to investors' incentives to redeem from prime money market funds as their weekly liquid assets declined.
  • Liquidity Fee Requirement: Institutional prime and institutional tax-exempt money funds are required to impose a mandatory liquidity fee when a fund experiences daily net redemptions that exceed 5% of net assets, unless the fund's liquidity costs are de minimis. In addition, non-government money market funds would be required to impose a discretionary liquidity fee if the fund's board determines that a fee is in the best interest of the fund.
  • Alternatives to Operating in a Negative Interest Rate Environment: Money market funds may handle a negative interest rate environment by either converting from a stable share price to a floating share price or by reducing the number of shares outstanding to maintain a stable net asset value per share (otherwise known as a "reverse distribution mechanism").

The effective date of the amended rules is sixty days after publication in the Federal Register.

 
 
 

Source: Securities Exchange Commission

 
 

We look forward to the opportunity to discuss our views on these reforms with you. In the interim, should you have any questions, please contact your Global Liquidity Solution Relationship Manager. 

 
 
 
The Global Liquidity team aims to effectively meet clients’ unique cash and working capital needs, offering a broad range of money market funds, ultra short bond funds and customized separate account solutions.
 
 
 
 
 

FOR INSTITUTIONAL INVESTOR USE ONLY AND MAY NOT BE USED WITH THE GENERAL PUBLIC. 

RISK CONSIDERATIONS
Stable NAV Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds' sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. 

Floating NAV Funds: You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Funds' sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. 

The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm") or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers. 

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This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision. 

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Please consider the investment objectives, risks, charges and expenses of the portfolios carefully before investing. The prospectus contains this and other information about the portfolios. To obtain a prospectus, download one at www.morganstanley.com/ liquidity or call 1.800.236.0992. Please read the prospectus carefully before investing.

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Please be aware that liquidity instruments may be subject to certain additional risks. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In the current rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. Longer-term securities may be more sensitive to interest rate changes. In a declining interest-rate environment, the portfolio may generate less income.

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