By now, you are likely well aware that new SEC-approved money market reform rules will soon be implemented. The regulatory environment is changing daily as new reforms and rules are expected to carry a significant impact on the qualified plan space and open architecture platforms. These changing regulations create new and unique challenges and opportunities from a compliance, product, sales, operations, and technology perspective.
Even with the wall-to-wall financial news coverage regarding money market reform, you may still have lingering questions. Michele Coletti, Sr. Vice President of Mid Atlantic Retirement Plan Services, recently compiled answers to some important and frequently asked questions concerning money market reform. Please click the button next to the questions below to view a detailed explanation.
What is money market reform?
In 2014, the SEC approved new rules under the Investment Company Act of 1940, amending the operation of money market mutual funds. The SEC is requiring Institutional money market funds to sell and redeem shares based on the current market-based valuation of the portfolio, rounded to the fourth decimal place. The rule also allows fund boards new flexibility to control heavy redemption demands to protect remaining shareholders. The goal of these new regulations is to preserve the integrity of money markets as instruments of liquidity and to ensure that the valuation of each fund is transparent to investors.
What are the new classifications of money market funds?
Effective on or before October 14, 2016, each money market fund will be required to classify itself as one of the following: Government, Retail, or Institutional. The classifications are tied to the underlying portfolio.
Government funds must hold 99.5% or more of their assets in cash or government based securities. Retail money markets will be restricted only to beneficial owners who are natural persons. Institutional funds are funds that do not qualify as retail or government.
What is the effective date?
What are the implications of the fund classifications?
Each fund’s classification has impact on shareholders, custodians, dealers, and recordkeepers. First and foremost, the classification dictates the requirements for stable versus floating NAV (referred to as “FNAV”), as well as the imposition of liquidity fees and gates.
|Money Market Funds|
|Floating NAV (FNAV)||No||Yes||No|
Secondly, the classification impacts the types of entities that can hold a position within the fund. Account eligibility is based on social code (account type), as compared to the money fund classification. In the case of retirement plans, the SEC has ruled that participants are the beneficial owners and natural persons; therefore, retirement plans are eligible to hold Retail funds. However, Retail funds are subject to fees and gates, making them potentially complex investments for daily valued defined contribution plans.
When will I learn the classification of each money fund?
Mid Atlantic is being notified separately by each issuer as the issuer’s board and portfolio managers evaluate accounts under management, portfolio composition, and future strategy. Mid Atlantic is evaluating these notices and working with the fund companies to identify accounts that might require liquidation or mapping to alternative investments. Your relationship manager will then be in touch to provide support.
Mid Atlantic has modified the TNS investment screener to validate prospective account setups against money market category and account social code to identify eligibility. Mid Atlantic has also rolled out new reports to identify holdings that will require liquidation or transfer into alternate securities or products.
When will the new TNS money market categories be populated?
What if my plans are holding positions in funds that will be ineligible on or before 10/14/16?
Since account eligibility is based on a comparison of social code and fund category, some existing accounts will become immediately ineligible to hold positions they have already funded. In those scenarios, we see a variety of potential outcomes:
- Some funds will make advance notice of force liquidations and then close the ineligible accounts on a set date.
- Some funds will map ineligible accounts into a “like fund” that supports the social code.
- Some funds will leave the account open but delist from NSCC, thereby creating a pseudo-close where no electronic trading, pricing, reconciliation, or dividend processing can occur, requiring voluntary liquidation of the account. As Mid Atlantic is notified of funds taking this approach, we will get in touch quickly to allow you as much time as possible to wind down the position. As of today, six issuers have delisted Institutional funds: Wells Fargo, Fidelity, Federated, JP Morgan, BlackRock, and Goldman Sachs. Those notices have been distributed as Service Announcements and are also posted on the MATC homepage under the Announcement section.
How many NAV strikes a day are permitted for floating NAV funds?
Will the Mid Atlantic price file contain multiple strike prices?
So how do I know what price each money market trade will receive?
Each institutional money market trade with a floating NAV fund will receive the strike price of the next NAV computation after receipt of the trade. For intraday trades, a strike price of 9:00 a.m. might be transmitted to NSCC at 10:30 a.m., and a strike price of 11:00 a.m. might be transmitted to NSCC at 12:30 p.m. A trade received by the fund at 10 a.m. would receive the 11:00 a.m. strike price.
Institutional fund trades sent during the evening hours may receive either the end of day NAV strike or the first NAV strike of the next business day, subject to the rules of each individual fund per its prospectus filing. That is why institutional fund strike times are also referred to as trade cutoff times. For this reason, we highly urge you to NOT perform price-dependent processing for any institutional money market positions.
Government and retail funds will continue to price based on end of day NAV.
When would a liquidity fee or gate occur?
How would I be notified of a fee or gate?
At this time, there is no automated mechanism for a fund to notify the industry of a fee or gate. Notification to Mid Atlantic will occur via call or email from the fund. Mid Atlantic will in turn send notifications and alerts as soon as the details of the fee or gate are confirmed with the fund.
The notice from the fund will usually be retroactive to prevent a run on the fund (i.e. an 11 a.m. gate could be announced at 11:30 a.m.), although funds can optionally announce an end of day effective time.
How do funds impose fees or gates?
When trading in funds that have fees or gates, the platform sets a flag on each sell order indicating to the fund whether the fund should impose the fee or gate or whether the intermediary will be calculating the fee and imposing the gate at the beneficial owner level. Funds also retain the right to “hard gate” a fund and ignore the intermediary’s request, thereby rejecting all sell trades to prevent a run on a fund.
The imposition of a fee or gate is determined relative to the timestamp when the trade is “in good order”. The definition of “in good order” is discretionary and determined based on who is assessing the fee or gate.
What timestamp will be used on money market liquidations?
What happens if a fund assesses a fee?
Why will Mid Atlantic not permit recordkeepers to use their own timestamping and calculate their own fees?
The new rules impose considerable compliance oversight if a contracted dealer such as Mid Atlantic allows underlying firms to timestamp orders and to independently compute liquidity fees or assess gates. Liquidity fees must be estimated on trade date, before the next NAV strike, with proceeds to be delivered to the funds via wire (outside NSCC settlement) on the next business day. Due to the extremely manual processes of liquidity fee management, and the extensive oversight by the funds of any fees not computed by the fund, Mid Atlantic is standardizing all trades as fund-assessed.
Each underlying Mid Atlantic client performs recordkeeping on many different software systems and many versions/releases of those systems. Given the potential variances across underlying firms based on software systems and internal controls, allowing an underlying firm to monitor fees and gates is not feasible since Mid Atlantic will be subject to very stringent audit controls and oversight by the funds specific to money market trading.
What is the impact to same day/cross family transfers and exchanges?
Will Mid Atlantic custody or trade money markets in a super omnibus account?
What if my firm is a bank/trust with omnibus positions?
What is the impact to fee disclosures and fact sheets?
What other system changes should I anticipate with money market reform?
Note that money market NAVs can now run to four decimal places, thereby impacting calculations throughout all trading, transfer agency, and sub systems for confirmations, dividends, transfers, and other activity. Reports will also require updating to accommodate the longer price precision.
All account valuations will be performed at end of day NAVs, but accounts with FNAVs may have specific trades performed at values not reflective of the end of day NAV.
Mid Atlantic will not edit any inbound or outbound client file layouts. Some systems already read the “fee” field in a confirmation record and others do not. If you remain in funds subject to fees and gates, please consult with your system vendor to determine if your confirm import will recognize a liquidity redemption fee in a confirmation or settlement record.
What happens next?
One alternative platform solution available through Mid Atlantic Trust Company (MATC) to help accommodate these new reforms is DepositxChange™, an FDIC insured service. DepositxChange™ seamlessly connects 401(k) participants and banks to provide participants with a cash deposit within their retirement account, whether it is part of a qualified defined contribution plan space model or a standalone investment.