SEC鈥檚 reforms on money markets had profound impact, says OFR report
01 November 2017 Washington DC
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The US Securities and Exchange Commission's (SEC鈥檚) 2014 reforms on the money market industry had a profound impact on the composition of money market funds, according to a report by the Office of Financial Research (OFR).
The report's authors, Kenechukwu Anadu and Viktoria Baklanova, suggested that this shift was driven primarily by money fund investors鈥� preference for stable net asset value (NAV) funds against myriad new regulations.
The OFR report stated: 鈥淚n the nine months leading to 14 October 2016, assets in prime funds declined by over $1 trillion (or 64 percent) to $562 billion, while those in government funds increased by a similar magnitude.鈥�
The International Securities Lending Association鈥檚 (ISLA) market report, published in September, highlighted that money market mutual funds and pension plans account for 65 percent of the global lending pool, representing the largest proportion of assets made available for lending globally.
This reallocation from prime to government funds has contributed to the increased demand for debt issued by the US government and government-sponsored enterprises, such as the FHLBank System.
Specifically, NAV funds, which are not subject to liquidity fees and redemption gates, make a 鈥渇unding run seem unlikely鈥� with their link to the US government.
SEC鈥檚 2014 reforms were intended to strengthen liquidity and run risk in money market funds.
The two main components of the amendments were: 鈥渁 requirement that institutional prime and tax-exempt funds transact at a floating NAV from the then-stable NAV structure鈥�; and, 鈥済rant the board of a non-government fund the ability to impose liquidity fees and redemption gates if it breaches certain liquidity thresholds鈥�.
Some of this increase in large US banks鈥� borrowing from the FHLBank System is attributed to the liquidity coverage ratio (LCR) requirement, which requires banks to hold an amount of highly-liquid assets, equal to or greater than their net cash outflow over a 30-day period.
Borrowing from the FHLBank System is also driven by other incoming regulations, such as Basel III and the second Markets in Financial Instruments Directive II (MiFiD II) .
SEC announced on 27 October that it would allow US brokers temporary relief regarding research payment obligations under MiFiD II.
The division of investment management issued three no-action letters, providing 30 months relief under the Investment Advisors Act of 1940, allowing US broker-dealers to receive payments in hard dollars, or through MiFID II-governed research payment accounts, from MiFID II-affected clients, without being considered an investment advisor.
The relief will also allow investment advisers to continue to aggregate orders for the purchase and sale of securities, with some clients paying different amounts for research, but all receiving the same average price for security and execution costs.
The news has been welcomed by an industry scrambling to make final arrangements for MiFID II research unbundling.
SEC Commissioner Kara Stein, who is central to US regulatory reform, raised concerns over the no-action letters, saying it 鈥渕erely kicks the can down the road鈥�.
The report's authors, Kenechukwu Anadu and Viktoria Baklanova, suggested that this shift was driven primarily by money fund investors鈥� preference for stable net asset value (NAV) funds against myriad new regulations.
The OFR report stated: 鈥淚n the nine months leading to 14 October 2016, assets in prime funds declined by over $1 trillion (or 64 percent) to $562 billion, while those in government funds increased by a similar magnitude.鈥�
The International Securities Lending Association鈥檚 (ISLA) market report, published in September, highlighted that money market mutual funds and pension plans account for 65 percent of the global lending pool, representing the largest proportion of assets made available for lending globally.
This reallocation from prime to government funds has contributed to the increased demand for debt issued by the US government and government-sponsored enterprises, such as the FHLBank System.
Specifically, NAV funds, which are not subject to liquidity fees and redemption gates, make a 鈥渇unding run seem unlikely鈥� with their link to the US government.
SEC鈥檚 2014 reforms were intended to strengthen liquidity and run risk in money market funds.
The two main components of the amendments were: 鈥渁 requirement that institutional prime and tax-exempt funds transact at a floating NAV from the then-stable NAV structure鈥�; and, 鈥済rant the board of a non-government fund the ability to impose liquidity fees and redemption gates if it breaches certain liquidity thresholds鈥�.
Some of this increase in large US banks鈥� borrowing from the FHLBank System is attributed to the liquidity coverage ratio (LCR) requirement, which requires banks to hold an amount of highly-liquid assets, equal to or greater than their net cash outflow over a 30-day period.
Borrowing from the FHLBank System is also driven by other incoming regulations, such as Basel III and the second Markets in Financial Instruments Directive II (MiFiD II) .
SEC announced on 27 October that it would allow US brokers temporary relief regarding research payment obligations under MiFiD II.
The division of investment management issued three no-action letters, providing 30 months relief under the Investment Advisors Act of 1940, allowing US broker-dealers to receive payments in hard dollars, or through MiFID II-governed research payment accounts, from MiFID II-affected clients, without being considered an investment advisor.
The relief will also allow investment advisers to continue to aggregate orders for the purchase and sale of securities, with some clients paying different amounts for research, but all receiving the same average price for security and execution costs.
The news has been welcomed by an industry scrambling to make final arrangements for MiFID II research unbundling.
SEC Commissioner Kara Stein, who is central to US regulatory reform, raised concerns over the no-action letters, saying it 鈥渕erely kicks the can down the road鈥�.
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