More US money market reforms would decimate ‘prime’ funds

The third attempt by the Securities and Exchange Commission U.S Reforming the nearly $ 5 trillion money market industry may further challenge the existence of funds that invest primarily in credit assets.

Last week, the regulatory agency proposed amendments to the rules governing money market funds to address concerns about ‘prime’ and tax-exempt funds that rose to prominence in the turbulence caused by the pandemic in COVID in financial markets in March 2020. The changes include increasing liquidity requirements and the implementation of so-called “oscillating prices”, which would force investors to redeem their amortization costs.

The 2008 financial crisis exposed major problems with money market funds, which are supposed to be boring places to park cash, and regulators spent years implementing a number of mechanisms aimed at slowing investors’ cash withdrawals in times of stress. . Yet at the start of the pandemic, panicked investors withdrew billions from prime funds in less than two months, helping to trigger a crisis across the commercial paper market.

The strategists of Wall Street They broadly agree that some of the proposed amendments would strengthen the resilience of the sector. They also agree that if a swing pricing provision is included in the final rules, this would lead to capital outflows from prime funds and would widen short-term credit spreads. However, JPMorgan analysts said the commercial paper market will survive and allow other investors to intervene.