New SEC rules out to protect money market
New federal regulations have been adopted to protect money market funds against upheavals from the financial market.
The Securities and Exchange Commission laid down salient policies to make money market investments more liquid, enhance credit quality of portfolios, promote transparency, and review portfolios against market risks and vulnerabilities.
These new SEC directives were rooted from the September 2008 fall of Reserve Primary Fund when its net asset value plunged to below $1 per share. This became the first-ever retail money market fund loss.
Reserve’s feebleness, which became evident amid its credit exposure in the defunct Lehman Bros., reflected the woes of the entire money market business and became the SEC’s clarion call to examine such funds and see how they operate.
New regulations mandate funds to keep a small percentage of assets in highly liquid securities that are easily convertible to cash and redeemed by shareholders. In this case, taxable money market funds must maintain at least 10 percent of its assets in cash, treasury securities or other highly liquid securities that are cash convertible within one day.
Money market funds must also maintain 30 percent of its assets in cash, treasury or other government securities that are set to mature in less than 60 days, for conversion to cash in one week.
The rules also state that the money market funds can only hold on to five percent of ‘illiquid’ securities, or those that cannot be sold within the week at its carrying value.
Limits have been likewise set for funds to own lower-quality securities. Funds can no longer own more than three percent of its assets in Second-Tier securities. They are also not allowed to have more than 0.5 percent of its assets in Second-Tier securities issued by a single entity. These Second-Tier securities should also mature in 45 days.
New restrictions have also been imposed on a specific portfolio’s average maturity in order to prevent unnecessary exposure in unforeseen interest rate fluctuations. As such, a portfolio’s maximum weighted average is now cut down to 60 days from 90 days. Because of this, funds cannot pour investments into long-term floating rate securities.
New regulations now require funds to disclose “mark-to-market” net asset value each month on a delay of 60 days. Such “shadow” NAV’s are currently disclosed every six months with a lag of 60 days.
Stress tests are also mandated to ensure the fund’s capacity to keep a stable NAV per share and disclose holdings in its website.
The SEC also allowed funds to freeze subscriber redemptions as the NAV goes below $1 per share and order portfolio liquidation. Previously, funds had to request the SEC to freeze redemptions.
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