What the SEC’s new rules on money-market liquidity mean for financial stability
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Brendan Lynch/Axios
Corporations are likely to face potential penalties on withdrawing cash from money-market funds during a crisis, according to a new proposal from the Securities and Exchange Commission.
Why it matters: Large corporations keep enormous sums of money in money-market mutual funds — MMMFs — since they have far too much cash to be covered by FDIC deposit insurance.
Between the lines: Those MMMFs are a bit like banks. They offer intraday liquidity to their customers — but often the securities they invest in are quite illiquid.
- Thus is the scene set for the money-market equivalent of bank runs, where customers dash to get their money out first.
- Early customers exiting the funds are paid out with the proceeds from the sale of liquid securities like Treasury bonds, leaving the slower customers over-exposed to illiquid securities at times of great stress.
- As SEC chair Gary Gensler explained in a May speech, the "liquidity mismatch" at MMMFs is an inherent part of how they operate.
Flashback: The government had to step in to rescue MMMFs not only in 2008 but then again in 2020.
Driving the news: The SEC is now proposing that whenever an MMMF sees withdrawals of more than 5% of its assets in a single day, it will have to impose an "exit fee" on the customers exiting the fund.
The other side: Eric Pan, the CEO of the Investment Company Institute, which represents MMMF providers, says that the SEC's proposed fee is "expensive and clunky."
- The ICI also suggests that withdrawals of 5% of assets are "pretty normal" at times when corporations need to write large checks — on corporate tax day, say.
- MMMFs will now be forced to have 25% of their assets be highly liquid, up from 10%, which on its own should assuage liquidity concerns, says the ICI.
The big picture: Exit fees and liquidity minimums notwithstanding, the market still assumes — correctly — that the government will step in to backstop MMMFs in case of emergency, says TD Cowen analyst Jaret Seiberg.
The bottom line: The real problem is that Congress is unwilling to make MMMFs' implicit government support explicit.
- If it were formal, then the government could charge for access to the Federal Reserve's discount window and other sources of liquidity. As it is, the SEC is forced into second-best solutions like exit fees, which probably wouldn't even work in a major crisis.
