Comments on SEC Proposed Rule - Money Market Fund Reform

Sep 19, 2013

The SEC Proposed Rule, released in June 2013, presents two alternatives for addressing the dynamics that can lead to run-like behavior in Money Market Funds. In addition, the Proposed Rule introduces a richer set of stress testing guidelines than those required at present. We offer some thoughts and comment mostly on these guidelines. The main points of our comments are:

• The two alternatives—the floating NAV and the liquidity gates—both aim to reduce the likelihood of herd-like redemption behavior by addressing different types of “tipping point” dynamics in money market funds.

• Stress tests should address both valuation and liquidity, presently the two tipping point dynamics, regardless of which of the two alternatives is adopted.

• Stress testing can potentially act in concert with one or both alternatives and become an integral part of the new framework. For this to happen, however, the industry should put in place best practices for the implementation and communication of stress tests.

• A natural consequence of the establishment of best practices in stress testing will be for investors to demand disclosure of stress test results.