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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices fluctuate very little in value under normal market conditions. However, from fund to fund, MMFs vary significantly. They hold different types of investments, serve investors of different types i.e., institutional and retail, and pursue different investment objectives. For example, tax-exempt MMFs hold short-term state and local government and municipal securities, while government MMFs almost exclusively hold obligations of the U.S.
government, including obligations of the U.S. Treasury and federal agencies and instrumentalities, as well as repurchase agreements collateralized fully by government securities. Traditionally, prime MMFs invest mostly in private debt instruments, including CP and NCDs. With regard to investor characteristics, there are three types of MMFs: 1 Retail MMFs, which are limited to retail investors; 2 publiclyoffered institutional MMFs, which are held primarily by institutional investors and offered broadly to the public; and 3 non-publicly-offered institutional MMFs.12 Variations in portfolio holdings also correspond with investorspecific factors such as taxing jurisdictions and, to some extent, risk/
return preferences.
Another significant difference among different types of MMFs is how they price the purchase and redemption of their shares. All government MMFs, as well as retail prime and retail taxexempt MMFs, are permitted to price their shares at a stable net asset value NAV per share typically $1.00
without regard to small variations in the value of the assets in their portfolios.
These MMFs must periodically compare their stable NAV per share to the market-based value per share of their portfolios or market-based price. If the deviation between these two values exceeds one-half of one percent 50
basis points, the funds board must consider what action, if any, to take, including whether to adjust the funds share price. If the repricing is below the funds $1.00 share price, the event is commonly called breaking the buck.
In light of the importance investors place on a stable $1.00 share price, such an action can lead to a loss of confidence in the fund and, if it is expected to extend beyond one fund, could lead to a loss of confidence in all similar funds. As discussed below, following the SECs 2014 reforms, institutional prime and institutional taxexempt MMFs are required to price their shares using a floating NAV, which 12 For example, funds not offered to the public include central funds that asset managers use for internal cash management.

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reflects the market value of the funds investments and any changes in that value, thus reducing the risk of an adverse signaling effect from breaking the buck.
As investors commonly use MMFs for principal preservation and as a cash management tool, many MMF investors may have a low tolerance for losses and liquidity limitations. However, MMFs offer shareholder redemptions on at least a daily basis and in some cases at a stable NAV, even though a potentially significant portion of portfolio assets may not be converted into cash in that timeframe without a reduction in value.
When the MMF does have to sell portfolio assets at a discount, the funds remaining shareholders generally bear those losses. These factors can lead to greater redemptions if investors believe they will be better off by redeeming earlier than other investorsa so-called first mover advantagewhen there is a perception that the fund may suffer a loss in value or liquidity. Historically, amid periods of stress for MMFs, institutional investors, who may have large holdings and the resources to monitor risks carefully, have redeemed shares more rapidly and extensively than retail investors.
B. 2010 and 2014 Reforms The SEC has implemented a number of reforms over the past decade aimed at making MMFs more resilient to credit and liquidity stresses and addressing structural vulnerabilities in MMFs that were evident in the 2008 financial crisis, particularly the substantial reforms the SEC adopted in 2010 and 2014.13 The 2010 reforms focused on, among other things, enhancing transparency and reducing credit, liquidity, and interest rate risks of fund portfolios to make MMFs more resilient and, in the case of stable NAV funds, less likely to break the buck. For example, the amendments introduced new liquidity requirements: At the time an MMF acquires an asset, it must hold at least 10 percent of its total assets in daily liquid assets DLA and at least 30 percent of its total assets in weekly liquid assets WLA.14 These 13 See Money Market Fund Reform, Investment Company Act Release No. 29132 Feb. 23, 2010 75
FR 10060 Mar. 4, 2010 SEC 2010 Reforms, available at https www.sec.gov/rules/final/2010/
ic-29132.pdf; SEC 2014 Reforms.
14 All MMFs are subject to these DLA and WLA
standards, except tax-exempt MMFs are not subject to DLA standards due to the nature of the markets for tax-exempt securities and the limited supply of securities with daily demand features. If a MMFs portfolio does not meet the minimum DLA or WLA
standards, it is not in violation of rule 2a7.
However, it may not acquire any assets other than DLA or WLA until it meets these minimum standards.

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requirements are designed to work in combination and ensure that a MMF has the legal right to receive enough cash within one or five business days to satisfy redemption requests. To address credit risks, the amendments added a new 120-day limit on funds portfolio weighted average life to limit exposure to credit spreads, as well as a reduction in the limit on funds portfolio weighted average maturity from 90 days to 60
days to limit interest rate risk.15 The 2010 reforms increased transparency by requiring MMFs to publicly disclose portfolio holdings each month. In addition, the amendments addressed other important issues such as stress testing, orderly fund liquidation, and repurchase agreements.
The SECs subsequent 2014 reforms focused on the structural vulnerabilities that make MMFs susceptible to runs and provided tools intended to slow runs should they occur.16 These reforms included a floating NAV requirement for all prime and tax-exempt MMFs sold to institutional investors as a means of mitigating first mover advantages for investors who redeem from these funds when the value of their assets decline.
Under the floating NAV requirement, these MMFs must sell and redeem their shares at prices based on the current market-based value of the assets in their underlying portfolios rounded to the fourth decimal place e.g., $1.0000.
Prior to the 2014 reforms, rule 2a7
Daily liquid assets are: Cash; direct obligations of the U.S. government; certain securities that will mature or be payable through a demand feature within one business day; or amounts unconditionally due within one business day from pending portfolio security sales. See rule 2a7a8.
Weekly liquid assets are: Cash; direct obligations of the U.S. government; agency discount notes with remaining maturities of 60 days or less; certain securities that will mature or be payable through a demand feature within five business days; or amounts unconditionally due within five business days from pending security sales. See rule 2a 7a28.
15 See SEC staff report, Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, November 2012 at pp. 1830, available at http www.sec.gov/news/studies/2012/
money-market-funds-memo-2012.pdf.
16 Prior to the 2014 reforms, the Financial Stability Oversight Council FSOC proposed recommendations regarding MMF reforms to address structural vulnerabilities of MMFs that the SECs 2010 reforms did not address. These proposed recommendations, which FSOC made pursuant to Section 120 of the Dodd-Frank Act, included alternatives on a floating NAV, a riskbased NAV buffer of 3 percent to provide explicit loss-absorption capacity, and a minimum balance at risk. See Financial Stability Oversight Council, Proposed Recommendations Regarding Money Market Mutual Fund Reform, November 2012
FSOC Proposed Recommendations, available at https www.treasury.gov/initiatives/fsoc/
Documents/Proposed%20Recommendations %20Regarding%20Money%20Market%20Mutual %20Fund%20Reform%20-%20November%2013, %202012.pdf.

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