For weeks, we've been discussing comment letters to the SEC in response to its "Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report. Today, we finish off the remainder of letters from the 20 largest money fund complexes, and cite missives from SSGA, Invesco, T. Rowe Price and Western Asset. The 12th largest MMF manager, State Street Global Advisors, writes, "The market volatility observed in March and April of 2020 was a real-life stress test for global financial markets and the post-2008 regulatory frameworks under which they operate. As the effects of the COVID-19 pandemic rippled through the global economy, the exceptional and unprecedented demand for liquidity resulted in particularly acute pressure being felt in short-term funding markets. The MMF sector, as a highly-visible and transparent constituent of short-term funding markets, also faced liquidity challenges, although this experience was not homogenous across the various types of MMFs. While government MMFs received exceptional inflows, suggesting they were the vehicle of choice for investors in their search for a safe haven, institutional prime MMFs faced substantive outflows. The market volatility seemingly only abated following the actions taken by the U.S. Federal Reserve to stabilize markets, including the introduction of the Federal Reserve's Money Market Mutual Fund Liquidity Facility (MMLF). This experience has once again brought policymaker scrutiny onto prime MMFs."

They explain, "State Street Global Advisors is supportive of efforts being undertaken by policymakers to improve the resilience of short-term funding markets, including money market funds. However, it is important to recognize that the challenges faced by market participants were not limited to MMFs and, as such, an effective solution will not be found through further reforms to Rule 2a-7 alone. In our view, the outcome of the review process and any subsequent reforms should also be targeted at addressing the underlying issues observed during the pandemic-related market stress, which was inherently a liquidity-driven episode caused by extreme uncertainty and market volatility spikes that led to dislocations, temporary shortages of liquidity and valuation issues in parts of the market. In addition, future reforms to money market funds should not undermine the ongoing viability of prime MMFs."

SSGA's letter adds, "As described in more detail in our response, we believe prime MMFs continue to play a valuable and crucial role, whether as an investment vehicle for investors, as a source of funding for issuers and the real economy, and as facilitators of liquidity for financial markets more broadly. Nevertheless, we acknowledge the challenges faced by short-term funding markets during March and April 2020 and provide some key observations in this regard. Finally, as part of our response, we propose a number of key principles that we believe should underpin future reforms, paying due regard to the options outlined in the PWG Report."

It also tells us, "[W]e believe that eliminating prime MMFs, either directly or indirectly through new regulatory requirements that are not commercially feasible, would have a material detrimental impact on investors and the real economy. We are concerned that some policymakers may be making the assumption that cash typically invested in prime money market funds could simply move to other investment vehicles, such as government MMFs or bank deposits, with no harm or distress to the system. However, post-global financial crisis (GFC) reforms to prudential requirements for banks has resulted in their becoming less willing to accept short-term operational cash, given this is relatively more capital intensive to accommodate. Similarly, the comparatively low yield offered by these products may result in some investors seeking opportunities in less transparent and more thinly regulated investment vehicles. Given the highly-regulated and highly-transparent regulatory framework for MMFs, we believe this would be a sub-optimal outcome from a public policy perspective."

State Street's Matthew Steinaway comments, "The final principle is that reforms should avoid the need for external support, whether that be from the public sector or indeed the fund sponsor and/or its affiliates. With regards to the former, while we do not have specific solutions at this stage, we are confident and willing to work with policymakers to develop a robust framework that ensures the viability of prime MMFs while reducing the potential need for future support from public authorities. Notwithstanding this, we believe there should be recognition that during periods of extreme market stress, or 'black swan' events, normal functioning may only be restored through policymaker intervention. We note that this was reflected in comments made by Mark Carney, former Governor of the Bank of England and Chair of the Financial Stability Board, and Gary Cohn, former Director of the U.S. National Economic Council during the SEC's Roundtable on Interconnectedness and Risk in U.S. Credit Markets in October 2020."

Another comment letter, submitted by Invesco, tells us, "Invesco has a tremendous commitment to the money fund industry not only in the US, but across the globe [and] appreciates the opportunity to provide the Commission with our perspective on the PWG Report.... Invesco recognizes that there are critical adjustments that need to be made to previous money market reform measures to make MMFs more resilient to market disruptions so they may continue to provide safe and liquid investments to retail and institutional investors. Invesco generally supports and is largely aligned with the positions expressed by the Investment Company Institute and the Securities Industry and Financial Markets Association in their separate comment letters to the Commission regarding the Request. We believe the regulatory focus should be on issues which would improve market structure and liquidity for all participants in the short-term funding markets and reduce shareholder uncertainty in MMFs by delinking fees and gates from specific portfolio liquidity levels."

They write, "As has been noted in other comment letters, Invesco agrees with the exclusion of government MMFs from future rulemaking. Government MMFs provide an important liquidity vehicle for retail and institutional investors, and in reviewing investor behavior during and since the 2020 financial crisis, government MMFs have performed well and are not in need of additional reform. With respect to floating net asset values ('NAVs') on all prime and tax-exempt money market funds, we agree with our colleagues at the ICI and SIFMA that floating NAVs for retail funds would be confusing to individual investors, would not change investor behavior in times of market stress and thereby would not attain the desired goals of the Commission. It is our view that retail investors would withdraw from floating NAV MMFs in lieu of either stable NAV government funds or bank products."

Invesco states, "In reviewing and assessing any potential structural changes to institutional prime MMFs, it is important to conduct the review in light of and informed by the market events of late February and early March 2020 in order to ascertain the root cause of the market disruption and whether any change to MMFs would provide more stability to investors. Money market funds did not cause market instability and they were only one of many participants in the short-term funding markets; rather it was the unprecedented 'dash for cash' more broadly and uncertainty about access to cash in institutional prime MMFs that influenced investor behavior which exacerbated an already unstable market. We believe changes to policy and rulemaking should be thoughtful and healthy for the industry with a goal of also avoiding further consolidation in an already highly concentrated field."

They also say, "As markets and participants struggled to manage events impacting their personal and professional lives, uncertainty reigned, and cash was required at any price. The Fed, in conjunction with the Treasury Department, acted quickly and announced multiple programs such as the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF) and the Money Market Mutual Fund Liquidity Facility (MMLF). 'The facilities gave investors confidence that they could access their cash when needed and that companies would be able to roll over CP when needed, relieving selling pressures'.... [T]he mere announcement provided stability to the markets ahead of actual implementation, and given the low take-up of the facilities, the existence versus actual usage of support, provided assurance and certainty."

Invesco adds, "The increased transparency requirements have allowed investors to make better informed decisions with respect to their investments in MMFs. Money market funds are safer and more transparent than any other type of mutual fund, which is a benefit not only to investors but also to regulators to help track and monitor risks in what can be an opaque market. The short-term funding markets will always exist in some form and having a transparent market participant with the structure and characteristics of money market funds provides a benefit to all market participants. Reforms that make MMFs less viable from a business perspective, more bank-like in nature, and less competitive from a yield perspective will in effect eliminate the usage and efficacy of MMFs and not eliminate any short-term funding risk in the markets."

T. Rowe Price's comment letter says, "It is undoubtedly worthwhile to study the unprecedented March 2020 events in the financial markets and assess whether the resiliency and strength of our markets can be improved. We also recognize the importance of money market funds to institutional and retail investors, and the role these funds play in the broader economy. Accordingly, we appreciate the efforts of the President's Working Group to identify policy changes for consideration and the opportunity afforded by the Securities and Exchange Commission to comment on those ideas with respect to money market funds. We also encourage policymakers to evaluate other segments of and participants in the short-term markets to determine if other areas should be adjusted to mitigate risks."

It explains, "We are writing to provide our perspectives on the de-linking of fees and gates, the distinction between institutional and retail money market funds, and the feasibility of swing pricing in different contexts. As discussed in more detail below: We believe the ability of a money market fund to impose fees and gates should be de-linked from the 30% weekly liquid assets threshold; Beyond this de-linking, we do not believe further policy measures should be considered for retail money market funds; and While we do not support swing pricing for US money market mutual funds, we think the concept continues to warrant study for other US open-end mutual funds."

Finally, Western Asset comments, "We stress, however, that we consider it unlikely that amendments to Rule 2a-7 could avert a systemic market crisis of the scale and type triggered by the COVID-19 pandemic while still preserving money market funds and their benefits.... In considering changes to Rule 2a-7 we strongly urge policymakers to consider the structure of the short-term funding markets, including an assessment by market participants of possible improvements to increase liquidity for the commercial paper (CP) and other relevant short-term sectors, or changes in financial services regulation beyond money market funds, including regulations related to bank liquidity coverage, funding and leverage ratios that might more effectively support dealer intermediation in times of crisis."

They add, "Western Asset manages a number of prime money market portfolios, including funds complying with Rule 2a-7, and the European Union Money Market Fund regulations.... Western Asset's trading counterparties consistently stated that they had little to no capability to act as principal on transactions due to internal risk constraints and regulatory requirements.... We recommend the following for institutional and retail prime and tax-exempt money market funds: De-linking of fees and gates and liquidity thresholds.... Limited use of redemption gates.... Enhance Fund Boards' discretion over use of fees and gates.... Adoption of detailed policies and procedures for fees and gates.... [and] Consideration given to increasing WLA threshold."

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