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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices Institutional prime MMFs with floating NAVs still experienced runs in March; floating NAVs do not prevent runs.
Additional considerations:
Floating NAVs could result in a reduction in the size of retail prime and retail tax-exempt MMF sectors by making retail MMF shares less cash-like, which could reduce investor demand.
As noted above, a reduction in the size of the prime and tax-exempt MMF
sectors could affect the resilience and functioning of short-term funding markets in a variety of ways.
G. Swing Pricing Requirement Under current rules, MMF investors redeeming their shares in a prime or taxexempt fund typically do not incur the costs associated with this redemption activity. Instead, these costs are largely borne by other investors in the fund, and this contributes to a first-mover advantage for those who redeem quickly in a crisis. Swing pricing effectively allows a fund to impose the costs stemming from redemptions directly on redeeming investors by adjusting the funds NAV downward when net redemptions exceed a threshold.47 That is, when the NAV swings down, redeeming investors receive less for their shares. A swing pricing requirement could help ensure that redeeming shareholders bear liquidity costs throughout market cycles i.e., not only in times of market stress. In the United States, an optional swing pricing framework is permissible for certain mutual funds, but not for MMFs.
Although swing pricing is largely untested for MMFs, it has been helpful for other types of non-U.S. mutual funds.48
Potential benefits:
A properly calibrated swing pricing mechanism could reduce the vulnerability of MMFs to runs.
Swing pricing can internalize the liquidity costs of investors redemptions and thus reduce or eliminate the firstmover advantage for redeeming investors. By making redemptions costly, swing pricing can weigh against incentives to redeem in a stress event, so it can be particularly helpful as liquidity costs rise. Swing pricing also 47 If a fund has net inflows above the swing threshold, swing pricing would instead adjust the funds NAV upward.
48 See, for example, Jin, Dunhong, Marcin Kacperczyk, Bige Kahraman, an Felix Suntheim, Swing Pricing and Fragility in Open-end Mutual Funds, IMF Working Paper WP/19/227 2019;
Association of the Luxembourg Fund Industry, Swing Pricing Updae 2015 Dec. 2015 ALFI
Survey 2015 at 21, available at http www.alfi.lu/
sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015FINAL.pdf.

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benefits investors who do not redeem by reducing dilution to the value of a funds shares and insulating these investors from the effects of others redemption activity.
Swing pricing can improve long-run fund performance by reducing dilution.
If swing pricing is available and used occasionally in normal times, its use can help investors understand that they bear liquidity risks in a MMF.
Moreover, regular deployment of swing pricing would make its use in stress events less unsettling for investors.
Potential drawbacks, limitations, and challenges:
Eligible U.S. mutual funds have yet to implement swing pricing, largely because implementation would require substantial reconfiguration of current distribution and order-processing practices. MMFs could face similar challenges.
Unlike other mutual funds, some MMFs strike their NAVs more than once per day and allow intraday purchases and redemptions for any orders received prior to a given NAV strike. The potential management of swing pricing considerations multiple times per day could be particularly challenging in times of market stress.
It may be challenging to design and calibrate a swing pricing mechanism that can effectively internalize liquidity costs for redeeming investors, especially during stress events.
H. Capital Buffer Requirements Capital or NAV buffers, which could be structured in a variety of ways, can provide dedicated resources within or alongside a fund to absorb losses and can serve to absorb fluctuations in the value of a funds portfolio, reducing the cost to taxpayers in case of a run.49 For a floating NAV fund, capital buffers could be reserved to absorb the funds losses only under certain rare circumstances, such as when it suffers a large drop in NAV or is closed.
Potential benefits:
A capital buffer adds ex ante lossabsorption capacity to a MMF that would mitigate MMF shareholders risk of losses and their incentives to redeem in a stress event.
A buffer would mitigate the MMF
industrys reliance on discretionary, ex post sponsor support by assuring that 49 See, for example, Craig M. Lewis, Money Market Fund Capital Buffers, April 6, 2015, available at https papers.ssrn.com/sol3/
papers.cfm?abstract_id=2687687; Samuel G.
Hanson, David S. Scharfstein, and Adi Sunderam, An Evaluation of Money Market Fund Reform Proposals, May 2014, available at https
www.imf.org/external/np/seminars/eng/2013/mmi/
pdf/Scharfstein-Hanson-Sunderam.pdf.

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MMFs already have resources in place to absorb losses.
Owners of capital will have incentives to mitigate risk-taking by the fund. For example, if capital is provided by the funds sponsor, the sponsor will have an explicit incentive to manage portfolio risks to preserve the capital.
Potential drawbacks, limitations, and challenges:
A capital buffer financed from unaffiliated investors could be complex to administer.
Sizable capital buffers are costly to finance, and building adequate capital buffers from MMF income could take substantial time, particularly in a low interest rate environment, and could disadvantage current MMF investors for the benefit of future MMF investors.
Calibrating the appropriate size for a capital buffer could be a challenge;
MMFs would continue to be vulnerable if the buffer is too small, but one that is too large would be unnecessarily costly.
A capital requirement could increase MMF industry concentration because provision of initial capital would be a substantial burden for some asset managers and could cause them to exit the industry. In addition, such a requirement may favor bank-sponsored funds.
Additional considerations:
The costs of financing a capital buffer would be borne by MMF sponsors and investors, and these costs could result in a reduction in the size of the prime and tax-exempt MMF sectors. As noted above, a reduction in the size of these MMFs could affect the resilience and functioning of short-term funding markets in a variety of ways.
I. Require Liquidity Exchange Bank Membership To provide a liquidity backstop during periods of market stress, prime and tax-exempt MMFs could be required to be members of a private liquidity exchange bank. The LEB
would be a chartered bank. Under one LEB proposal, MMF members and their sponsors would capitalize the LEB
through initial contributions and ongoing commitment fees. During times of market stress, the LEB would purchase eligible assets from MMFs that need cash, up to a maximum amount per fund. The LEB would not be intended to provide credit support.
Potential benefits:
The existence of a liquidity backstop provided by an LEB could diminish investors incentives to run.
An LEB would commit private resources, including bank capital, ex ante to provide liquidity to MMFs. This
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