On Thursday, July 6th, there were reports that the U.S. Securities and Exchange Commission (SEC) is set to implement a series of new rules for the money market mutual fund industry, which could potentially conflict with the industry giants that dominate this $5.5 trillion market.
The SEC plans to hold a meeting on July 12th to finalize these rule changes. The new regulations aim to prevent market turmoil and massive outflows of funds that occurred during the initial outbreak of the COVID-19 pandemic in March 2020. The volatile situation at that time prompted the intervention of the Federal Reserve, which once again rescued the money market funds following the 2008 financial crisis, and also led to calls for stricter regulations by the SEC.
When the plan to establish new regulations in December 2021 was proposed, it immediately faced opposition from the industry. The proposal includes the implementation of swing pricing requirements, which critics argue could increase the costs and reduce the attractiveness of the funds. The final regulations, which will be disclosed next week, may differ from this proposal.
Market participants have been preparing for the new regulatory requirements. As part of the administrative process, the SEC will take into account industry comments on the proposal before holding a vote to finalize the rules.
If the new regulations are passed in the version proposed in December 2021, the new rules will:
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Increase the percentage of total assets that funds must maintain in the form of cash or other highly liquid assets - overnight liquidity will increase to 25% and weekly liquidity will increase to 50%.
Cancel the ability of funds to impose redemption fees or temporarily limit redemption fees if the level of liquid assets falls below a certain threshold.
Require institutional prime and tax-exempt funds to use a floating net asset value pricing mechanism. The SEC states that this mechanism will force redeeming shareholders to bear the costs of withdrawals.
Require government funds to adopt a floating net asset value if the federal funds rate becomes negative.
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Since the banking crisis in March this year, a large amount of deposits has flowed into money market funds, attracting significant attention to this type of fund. The size of the current money market fund industry has increased by nearly $1 trillion compared to the end of last year. The level of funds flowing into money market funds during this round is almost on par with the influx of approximately $917 billion during the outbreak of the COVID-19 pandemic in 2020, driven by panic.
The continuous net inflow of funds into money market funds is due, on the one hand, to the continuous increase in market interest rates following the Federal Reserve's continuous rate hikes, which has expanded the advantage of deposits. Currently, the yield of U.S. Treasury bills is above 5%. On the other hand, the &#34;small bank deposit risk&#34; brought about by the banking crisis has led funds to move towards safer money market funds.
Money market funds hold various short-term liquid instruments, including cash, certificates of deposit, and U.S. Treasury bills, and they must comply with federal regulatory requirements regarding quality, maturity, liquidity, and diversification. According to current regulations, these funds must allocate at least 10% of their assets to overnight liquidity and 30% to weekly liquidity.
These funds have a historical value of $1 per share and pay interest. However, they cannot guarantee that investors will not lose money because they are not insured by the Federal Deposit Insurance Corporation (FDIC). But if the net asset value falls below $1, they usually lose their attractiveness quickly.

The U.S. Securities and Exchange Commission (SEC) is set to vote on this new regulation next week, which mainly includes enhancing the liquidity of money market funds and implementing swing pricing requirements. Critics argue that this could increase the cost of funds and reduce their attractiveness.

Affecting a $5.5 trillion market, the US SEC will introduce new regulations for money market funds.