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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices This may improve the usability of WLA buffers by making MMFs more comfortable in deploying their liquid assets in times of stress.
A soft or partial gate could reduce disruptions caused by the imposition of a gate by allowing shareholders to redeem a portion of shares as normal, with a portion held for a limited time to help the fund slow the rate of redemptions during stress periods without engaging in fire sales.
Potential drawbacks, limitations, and challenges:
If thresholds remain, they could still be focal points for runs on MMFs.
While this option could reduce the salience of a threshold that may trigger runs, it would do little otherwise to mitigate run incentives.
Reducing the likelihood that a gate may be imposed could reduce the potential utility of gates as a tool to slow investor redemptions.
Providing the SEC a role in granting permission for imposition of gates may result in less timely action than the current framework involving the MMFs board, particularly if multiple MMFs seek SEC permission in a short period of time, which could allow runs to continue or accelerate. Absent a threshold, it could be challenging to develop objective criteria in advance for quickly approving or denying such requests in a consistent and appropriate manner amid a fast-moving crisis.
If MMFs maintain fewer liquid assets by holding WLA levels closer to 30 percent as a result of this change, the funds may be less equipped to manage significant redemptions without engaging in fire sales.
Like other gates, a soft or partial gate may spur preemptive runs, but a soft gate may be less effective at slowing runs than a full gate, as investors can continue to redeem even after a soft gate has been imposed.
Soft or partial gates could introduce accounting and administrative complexities.
C. Minimum Balance at Risk An MBR is a portion of each shareholders recent balances in a MMF
that would be available for redemption only with a time delay to ensure that redeeming investors still remain partially invested in the fund over a certain time period. As such, even if the investor redeems all of her available shares, she would still share in any losses incurred by the fund during that timeframe. A strong form of MBR
would also put a portion of redeeming investors MBRs first in line to absorb any losses, which creates a disincentive to redeem. The size of the MBR would
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be a specified fraction of the shareholders maximum recent balance less an exempted amount. An MBR
mechanism could be used in a floating NAV fund to allocate losses only under certain rare circumstances, such as when the fund suffers a large drop in NAV or is closed.
Potential benefits:
A properly calibrated strong MBR
could reduce the vulnerability of MMFs to runs.
A strong MBR can internalize the liquidity costs of investors redemptions and thus reduce or eliminate the firstmover advantage for redeeming investors. It would do so by subordinating a portion of their shares to put them at greater risk if the fund suffers a loss. This can weigh against incentives to redeem in a stress event, so it can be particularly helpful as liquidity costs rise.44
The disincentive to redeem created by an MBR strengthens mechanically as stresses increase and put subordinated shares at greater risk. Hence, the MBR
does not create a threshold effect that might spur redemptions.
Under a strong form of MBR, the subordinated shares of redeeming investors provide extra loss absorption to protect the investments of nonredeeming investors.
An MBR could provide more transparency to shareholders regarding their risk, as shareholders account information could include their balances and the size of their MBRs.
Potential drawbacks, limitations, and challenges:
The MBR could present implementation and administration challenges. For example, MMFs, intermediaries, and service providers would need to update systems to: 1
Compute the MBR on an ongoing basis for each shareholder account and update the allocation of unrestricted, holdback, or subordinated holdback shares for each account to reflect any additional subscriptions or redemptions and the passage of time; and 2 prevent a shareholder from redeeming holdback or subordinated holdback shares in transaction processing systems.45 In 44 See, for example, FSOC Proposed Recommendations; Patrick E. McCabe, Marco Cipriani, Michael Holscher, and Antoine Martin, The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds, Brookings Papers on Economic Activity Spring 2013, available at https
www.brookings.edu/wp-content/uploads/2016/07/
2013a_mccabe.pdf.
45 Many MMF investors hold their shares through intermediaries such as broker-dealers, banks, trust companies, and retirement plan administrators that establish omnibus accounts with the fund. An intermediarys omnibus account aggregates shares
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addition, a strong form of MBR may create the need to convert existing MMF
shares or issue new subordinated shares to comply with typical state law limitations on allocating losses to a subset of shares in a single share class.
An MBR mechanism may have different and unequal effects on investors in stable NAV and floating NAV MMFs. During the holdback period, investors in a stable NAV MMF
would only experience losses if the fund breaks the buck, but investors in a floating NAV MMF are always exposed to changes in the funds NAV and would continue to be exposed to such risk for any shares held back.
The MBR is an unfamiliar concept in the fund industry that may result in investor discomfort or confusion, particularly when it is first introduced.
Calibrating the appropriate size for an MBR could be a challenge; an MBR
that is too small may not create sufficient disincentives to redeem in stress events, but one that is too large would unnecessarily reduce the liquidity of the funds shares.
D. Money Market Fund Liquidity Management Changes MMFs currently are subject to daily and weekly liquid asset requirements and must disclose the amount of daily and weekly liquid assets each day on the funds website. Changes to liquidity management requirements could include a new category of liquidity requirements. For example, instead of focusing solely on daily and weekly liquid assets, creating an additional category for assets with slightly longer maturities e.g., biweekly liquid assets could strengthen funds near-term portfolio liquidity when short-term funding markets become stressed.
As another alternative, an additional threshold, such as a WLA threshold of 40 percent, could be set to augment current liquidity buffers. If a funds WLAs fell below this threshold, penalties such as requiring the escrow of fund management fees until the level of WLA is restored could be imposed on fund managers, rather than investors.
This effectively would require funds to maintain a larger amount of WLAs than currently required.
Potential benefits:
An additional tier of liquidity may make MMFs more resilient to significant redemptions by ensuring they maintain assets that will soon become WLAs.
Additional liquidity requirements also held on behalf of its underlying clients or beneficiaries, and the fund does not have access to information about these underlying clients or beneficiaries. As a result, intermediaries would be involved in implementing MBR reforms.

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