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The SEC Expected to Vote on New Rules for Money-Market Funds
Increase in Liquidity Requirements
The SEC is set to vote on new rules for money-market funds, including an increase in liquidity requirements. Currently, money-market funds must have a certain percentage of their assets readily convertible to cash in order to meet redemption needs. The SEC is proposing to raise the daily and weekly liquidity requirements from 10% and 30% to 25% and 50% respectively. This change would provide a greater buffer for funds to meet larger and more frequent redemptions. While the financial services industry is opposed to these changes, the SEC believes it will reduce concerns about liquidity.
Removal of Fee and Gate Provisions
The SEC is also looking to remove fee and gate provisions for prime money-market funds. These provisions allow the board of a fund to impose fees if liquidity drops below certain levels. However, some investors have shifted their assets to government money-market funds to avoid these fees, causing concerns about redemption in prime funds. The SEC believes that by removing these requirements, it will encourage stability and reduce investor uncertainty.
Controversy Surrounding Swing Pricing
The most controversial aspect of the SEC's proposal is the implementation of swing pricing. This would require funds to calculate a "swing factor" that estimates the transaction costs associated with redemptions. The idea is that the fund, rather than the redeeming shareholders, would bear these costs, potentially diluting the remaining shareholder interest in the fund. The financial industry strongly opposes this proposal, arguing that the costs outweigh the benefits. Some lawmakers, such as Rep. Brad Sherman, have also voiced concerns about the fairness and practicality of imposing additional costs on those selling their funds.
Industry Opposition and Scrapping of Proposal
The financial services industry, along with industry trade groups like SIFMA, has expressed substantial concern about the SEC's proposal. They argue that the SEC has not proven the need for swing pricing and that funds generally have enough cash on hand to meet redemptions without incurring significant transaction costs. In response to this opposition, reports suggest that the SEC may scrap the swing pricing part of the proposal. However, no official comment or confirmation has been provided by the SEC at this time.
In conclusion, the SEC's expected vote on new rules for money-market funds has stirred a significant degree of controversy within the financial services industry. While the proposed increase in liquidity requirements aims to enhance the ability of funds to meet redemptions, industry players remain skeptical, arguing that existing levels are sufficient and that the changes will negatively impact market stability. Additionally, the removal of fee and gate provisions for prime money-market funds has raised concerns about potential redemption issues and investor uncertainty.
The most contentious aspect of the SEC's proposal is the introduction of swing pricing. This measure, intended to allocate transaction costs to the fund rather than individual shareholders, has faced vehement opposition from the financial industry. Critics argue that the costs outweigh the benefits and question the fairness of burdening those selling their funds with additional expenses.
For new businesses entering the money-market fund space, these forthcoming regulatory changes may have a significant impact. Increased liquidity requirements could lead to higher operational costs and necessitate more robust risk management strategies. Moreover, the potential implementation of swing pricing would potentially reduce the attractiveness of money-market funds to investors.
Ultimately, as the SEC votes on these rules, it will be important for new businesses to closely monitor the outcome and adapt their strategies accordingly. The shifting landscape of money-market funds will require careful navigation to ensure compliance and mitigate any potential negative consequences on business growth.
Article First Published at: https://www.cnbc.com/2023/07/12/sec-to-vote-on-new-money-market-rules-wednesday-that-industry-opposes.html