Fidelity Investments publish many different guides and perspective on the investment markets, including the Money Market Fund Reform Communication Series. The August 2014 report on ‘Key Changes Ahead’ is an excellent and comprehensive summary of the Securities and Exchange Commission’s rules that will regulate the MMF industry from 14 October 2014. Although not everybody agrees about the new rules, Fidelity say, “The new rules are intended to increase transparency as well as give investors additional protection during rare periods of market stress, when redemptions in some money market mutual funds may increase significantly.”

SEC regulates four common types of Money Market Funds:

Source & Copyright©2014 - Fidelity Investments

New rules

Upon implementation, these rules will create new definitions for government funds and retail funds, and require institutional prime (general purpose) and institutional municipal money market mutual funds to price and transact at a “floating” net asset value (NAV). During periods of extraordinary market stress, the new rules permit some money market mutual funds to charge shareholders liquidity fees, payable to the fund upon redemption, as well as provide for redemption gates that would halt all withdrawals (see figure, below). Government and U.S. Treasury money market mutual funds will not be subject to any of the new structural changes.1 The new rules are specific to U.S. money market mutual funds registered with the SEC, and so do not impact UCITS (undertakings for the collective investment in transferable securities, i.e., investment funds regulated within the European Union), offshore accounts, or stable value accounts.

Overview of Final 2014 SEC MMF Rules

Source & Copyright©2014 - Fidelity Investments

The report traces the development of the new rules, lists the new definitions of each type of fund, describes the structural changes and new redemption restrictions. 

Fidelity’s position and future development

Although the investment powerhouses, such as Fidelity, and the corporate treasury associations, e.g. AFP, have protested and lobbied about the new rules, they essentially agree with the regulators that the financial system needs to be strengthened: “Fidelity ultimately shares the same goal as regulators and policymakers: to ensure the strength and stability of money market mutual funds and our financial system while preserving the benefits that these funds provide investors, issuers, and our economy.”

The issue for Fidelity, and all other Money Market Funds, is what to do about the new rules. Fidelity conclude their report with, “Currently, we are reviewing and assessing the effect of the new rules. At this time, there are no changes in the way money market mutual funds are managed or the way they operate, as the rules have a lengthy implementation period.” 

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CTMfile take: Corporate treasurers are expected to continue to use MMFs as part of their short term cash investments. The MMF providers will need, as always, to make their funds under the new rules as transparent and easy to use as possible.