By Michelle Price

WASHINGTON (Reuters] – Wednesday’s long-awaited regulation by the U.S. Securities and Exchange Commission was published. It includes liquidity, redemption and pricing rules changes. This is to enhance the resilience and transparency in the $5 trillion U.S. Money Market Fund industry.

The money market funds, which are crucial for short-term municipal and corporate financing, have been saved twice by the U.S. in just 12 years. Industry critics say they badly need to be reform.

WHAT ARE MONEY MARKET FUNDS?

Money market funds are short-term, high-quality debt instruments that offer daily redemptions. These funds are designed to provide liquidity and price stability.

This has made them a very popular option for short-term funding for government and business, and a great cash-management vehicle for retail and institutional investors.

BlackRock, Vanguard, Fidelity, Fidelity, Goldman Sachs, and Vanguard are all big asset managers that offer money market funds.

WHAT IS THE PROBLEM?

Money market fund investors are accustomed to expecting liquidity and little volatility. According to U.S. Treasury Department’s discussion paper last year, these expectations can be easily misplaced when market stress occurs.

According to Treasury, panic caused by the pandemic in March 2020 led investors to shift assets into cash.

The Federal Reserve and Treasury launched emergency liquidity facilities in an effort to stop investors fleeing and prevent a wider crisis.

It was an echo of 2008’s panic caused by run-on money market funds, which threatened to cause global financial meltdowns.

The SEC made changes in 2010 and 2014 to reduce the risk of investor run, but critics say that these changes weren’t enough.

The industry is now dependent on an implicit government backingstop, which they claim must be corrected.

WHAT ARE THE PROPOSED MODIFICATIONS?

The agency has proposed changes to primarily address concerns about “prime” and tax-exempt money market funds, which are particularly susceptible to runs in times of stress.

The SEC first proposed increasing funds liquidity to make it easier for them to meet redemptions.

At the moment, 10% must be in daily liquid assets and 30% must be in weekly liquid assets. SEC intends to increase that limit by 25% and 50%.

SEC proposed eliminating suspensions and redemption fees. Funds can impose up to 2% fees or suspend redemptions temporarily if their weekly liquid assets are below 30%.

Although no such restrictions were imposed by any funds in March 2020 (regulators say they did not), regulators fear that the fears could have the pro-cyclical impact of encouraging withdrawals.

Also, the agency wants funds to be able adjust their value according to dealing activity through “swing price.” This involves the adjustment of a fund’s net asset value to reflect costs resulting from redemptions by shareholders.