Money Fund Reform

Money Fund Reform – finalization of Round two is upon us

In July of 2014, the SEC announced new money market fund reforms. These reforms were introduced to strengthen the money fund industry and improve money fund resilience during periods of market stress and high volatility.

In September of 2008, the Reserve Primary fund broke the buck, which in turn led to the first round of money fund reform in May of 2010. The second round kicked off in July 2014 when the SEC made amendments to the new rules that govern money funds, and this final phase of round two is due to complete on October 14th of 2016.

Since the SEC’s announcement, money fund management firms have spent a significant amount of time and expense realigning their business, data, technology and processes to meet the new reform target models.

The impacts of the new rules fall broadly into 3 buckets:

  1. New product classifications and eligibility requirements
    • Clear distinction between retail and institutional investors
    • Funds will need to be classified as Retail, Institutional (& Retail) or Government
    • Retail money funds will be defined as funds with policies and procedures that limit beneficial ownership to those investors deemed as “natural persons
  1. Changes to valuation methodology and price disclosure
    • Retail and Government funds will continue to transact using a constant net asset value (CNAV) – the traditional one buck ($1.00) approach
    • Institutional funds will be required to transact using a floating net asset value (FNAV) with 4dp precision
  1. Updates to redemption rules
    • New rules are being introduced to facilitate application of redemption gates and liquidity fees
    • The new fees and gates are applied where the board of directors of the fund believe it is in the funds best interest
    • There are rules about which funds can have redemption gates and liquidity fees
    • Government including Treasury funds:
      • Gates and fees are permitted
      • They are though non-mandatory
    • Prime retail & institutional
      • Gates and fees are mandatory
    • Muni retail & institutional
      • Gates and fees are mandatory

Key points that all money fund managers should note:

Liquidity fees

Liquidity fees of up to 2% are allowed when weekly liquid assets fall below 30%

  • A 1% liquidity fee can be applied if weekly liquid assets fall below 10%, although the fee applied can be lower or higher – as directed by the board in best interests of the fund
  • Resolution is recommended on return to 30% weekly liquid assets – or – at a level determined by board as being in the best interests of the fund

Redemption gates

Redemption gates can be applied for up to 10d in any 90d period

  • Resolution (as with liquidity fees) is applied to return to 30% weekly liquid assets

The SEC ruling has a very clear definition of weekly liquid assets – in summary

  • Cash
  • Direct US Government obligations
  • Specific other US Government (or agency) securities
  • Positions in securities that mature or are subject to demand in the next 5bd
  • Amounts receivable and due w/o condition within 5bd from pending sales


Firms must comply with SEC guidelines with respect to the extent funds hold consolidated positions in securities issued by:

  • A specific entity
  • An affiliated group
  • A guaranteed by a specific sponsor
  • A demand feature provider.

Enhanced web disclosures: (live since April 2016)

  • Daily liquid assets – fund level
  • Weekly liquid assets – fund level
  • Net in/out flows – fund level
  • Current and market-based NAVs
  • Sponsor support events

Additional reporting

  • Enhanced reporting on Form N-MFP (new version)
  • Form N-CR disclosures
    • Redemption gate and/or liquidity fee application events
    • Security defaults
    • Sponsor support events
  • Market-based NAV drops below $0.9975 for retail and government funds

Infograph on Money Fund Reform below