US SEC scraps contentious pricing proposal in final money market fund reforms

By John McCrank

NEW YORK (Reuters) -The U.S. Securities and Exchange Commission (SEC) on Wednesday finalized rules aimed at increasing the resilience of the $5.5 trillion money market fund industry but scrapped a proposed new pricing model that had been strongly opposed by asset managers.

The SEC’s decision not to impose so-called “swing pricing” represents a major victory for asset managers including BlackRock (NYSE:), Vanguard and Fidelity, which operate some of the industry’s largest money market funds.

The industry had argued the pricing mechanism, which aims to deter hasty investor redemptions in times of market stress, would make money market funds unattractive and would be challenging to implement.

Money market funds saw massive outflows in March 2020 at the onset of the COVID-19 pandemic, prompting the U.S. government to intervene to stabilize them. The panic was reminiscent of 2008 when a run on money market funds threatened to freeze up global markets and prompted the government to backstop the sector.

Critics have said money market funds, which are a key source of short-term corporate and municipal funding, now enjoy an implicit government guarantee.

In December 2021, the SEC proposed new liquidity requirements for money market funds, as well as scrapping redemption fees and restrictions.

It also proposed adjusting funds’ value in line with dealing activity, a process known as “swing pricing” which has drawn major pushback from the industry.

Swing pricing, which under the proposal would have been applied to institutional prime and institutional tax-exempt money market funds, requires redeeming investors, under certain circumstances, to bear the liquidity costs of their redemptions.

In theory, “swing pricing” reduces the incentive to run to the exit first.

Major asset managers, however, have said it is not appropriate for money market funds, which invest in high-quality short-term debt instruments and are designed to handle large amounts of flows for daily cash management purposes. They said the added cost of redeeming their cash would drive investors away from the funds.

“Based upon public feedback, today’s final rules will require liquidity fees instead of the originally proposed swing pricing requirement,” SEC chair Gary Gensler said in remarks prepared for an SEC open meeting on Wednesday.

“I believe that liquidity fees, compared with swing pricing, offer many of the same benefits and fewer of the operational burdens.”

Influential industry groups including the Securities Industry and Financial Markets Association, Investment Company Institute and the U.S. Chamber of Commerce strongly opposed swing pricing.

The new liquidity fee would instead require money market funds to impose mandatory liquidity fees when a fund experiences daily net redemptions that exceed 5% of net assets, unless the fund’s liquidity costs are negligible. It would also give the fund’s board the discretion to impose a fee if necessary.