Implementing Money Market Reform | 4 Areas of Focus

imPossible conceptWhile the most significant provisions of the SEC’s package of changes to money market regulation won’t take effect for 18 months, the investment industry is already moving full steam ahead on implementation.

Last month, at a client forum to discuss the industry’s progress on implementing money market reform, executives from BNY Mellon reviewed 4 areas that are currently getting attention:

Defining retail vs institutional

Most of the time it’s clear whether an account is “retail” — meaning that it’s owned by a natural person — sometimes it’s not. For example, is a rabbi trust — which is set up by a business for the benefit of an individual — retail or institutional?

An Investment Company Institute working group has taken on the task of classifying all of the NSCC social codes — which identify the type of client in several fund related systems — in one of the two categories. The group will be publishing the classifications shortly, though it is hoping for SEC guidance on some of the thornier issues first.

Dividing retail and institutional

Once it’s clear which accounts are retail and which are institutional, fund sponsors will need to make sure that all of the investors in constant NAV, non-government (prime) funds are retail only.

If an existing fund wants to become a CNAV prime fund, it would need to redeem all institutional accounts, an action which the SEC’s adopting release authorizes. But could those institutional investors instead be transferred into another fund? Would that require shareholders to opt in? Or would they only be offered the option to opt out? Or would be proxy vote be required?

CNAV prime funds will also need to establish ongoing monitoring to ensure that no institutional investors end up in the fund in error. But if they do, do funds have the regulatory authority to redeem those accounts?

Intraday pricing of floating NAV funds

Most institutional money market funds strike a NAV several times a day, to allow shareholders to purchase and redeem intraday. That was a relatively simple task when these funds amortized cost accounting and had a constant NAV, but it will become much more difficult to orchestrate when all holdings must be valued at market. For example, each pricing cycle must allow time for pricing challenges and other standard valuation processes. Procedures for handling pricing errors and as-ofs must be reviewed and refined for the floating NAV.

Given the challenges, BNY Mellon executives predicted that times for striking intraday NAVs will be largely standardized, with most funds setting prices at 9 am, noon and 3 pm, and then again at the close of day.

Gates and fees

The ability of the board to impose gates and fees to slow down redemptions in times of stress impose additional challenges. For example, because gates apply to any type of redemption, CNAV prime funds may be inappropriate for funds with check writing or for IRA accounts subject to a required minimum distribution. What happens if a board imposes a gate intraday? If a fund imposes a fee, is it in addition to the redemption amount, or is it deducted from the redemption? And how should funds handle as-ofs for errors made before the imposition of a gate or a fee, but discovered afterward?

But BNY Mellon executives cautioned that it will be hard to anticipate all the issues that might arise with the imposition of gates and fees — which will be used only in worst-case scenarios. Funds will need to develop a detailed playbook and engage in continuing discussion with fund boards about related operational issues.

For more background, read our prior post on this topic: “The 800-pound gorilla | Floating NAV creates operational challenges for MMFs.”

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