leadership series

MARKET PERSPECTIVES

August 2014

Money Market Reform

Communication Series

Money Market Mutual Fund Reform 2014:

Key Changes Ahead
On July 23, 2014, the Securities and Exchange Commission (SEC)the primary regulator of money
market mutual fundsissued final rules that will further regulate the money market mutual fund
industry. The new rules will be implemented within the next two years, and are intended to increase
transparency as well as give investors additional protection during rare periods of market stress,
when redemptions in some money market mutual funds may increase significantly.

Nancy Prior

Upon implementation, the new rules will create new definitions for government funds and retail
funds, and require institutional prime (general purpose) and institutional municipal money
market mutual funds to price and transact at a floating net asset value (NAV). During periods
of extraordinary market stress, the new rules permit some money market mutual funds to charge
shareholders liquidity fees, payable to the fund upon redemption, as well as provide for redemption
gates that would halt all withdrawals (see Exhibit 1, below). Government and U.S. Treasury money
market mutual funds will not be subject to any of the new structural changes.1 The new rules are

NEW SEC RULES:

President, Fixed Income

Kevin Meagher
Senior Vice President,
Deputy General Counsel

Exempt government and

U.S. Treasury money market
mutual funds from structural
reform

Create a new distinction

between retail and
institutional prime
(general purpose) and
municipal money market
mutual funds

Require institutional prime

and institutional municipal
funds to have a floating net
asset value (NAV)

Permit prime and municipal

money market mutual funds
to impose liquidity fees and
redemption gates in rare
periods of unusually heavy
redemptions, regardless of
whether they are retail or
institutional

Require the changes listed

above to be implemented by
Oct. 14, 2016

EXHIBIT 1: Overview of Final 2014 SEC Rules

Fund Type

Net Asset Value (NAV)

Liquidity Fee

Redemption Gate

U.S. Treasury

Stable

No

No

Government

Stable

No

No

Retail Municipal/Tax-Exempt

Stable

Yes

Yes

Retail Prime/General Purpose

Stable

Yes

Yes

Institutional Municipal/Tax-Exempt

Floating

Yes

Yes

Institutional Prime/General Purpose

Floating

Yes

Yes

Money Market Mutual

Fund Reform
Floating NAV

Final Rule

Implementation
Date

Applicable funds will price and transact at a net asset value

per share that can change, or float, based on pricing the
underlying fund holdings out to four decimal places ($1.0000)

October 14, 2016

If a funds weekly liquid assets were to fall below 30%,

funds board may impose a 2% fee on redemptions
Liquidity Fee

Redemption Gate

Retail Fund Definition

If a funds weekly liquid assets were to fall below 10%,

redemptions will be subject to a 1% fee, unless funds board
determines otherwise
If a funds weekly liquid assets were to fall below 30%,
funds board may suspend redemptions for up to 10 days
Retail funds limit shareholders to beneficial ownership by
natural persons (individuals)
Institutional funds are open to any shareholders, including
individuals, small businesses, and large corporations

October 14, 2016

October 14, 2016

October 14, 2016

EXHIBIT 2: The four common types of money market mutual

funds under current SEC regulations.
Money Market
Mutual Fund
Type

Typical Instruments Held

Treasury

U.S. Treasury securities and repurchase agreements

collateralized by U.S. Treasury securities.

Government

U.S. Treasury securities, other government securities,

and repurchase agreements collateralized by U.S.
Treasury or other government securities.

Municipal/Tax
Exempt

Tax-exempt securities issued by state and local governments and nonprofit entities.

Prime/General
Purpose

Any eligible money market instrument as defined by

SEC Rule 2a-7, including all types listed above as well
as commercial paper, certificates of deposit, corporate notes, and other debt instruments.

specific to U.S. money market mutual funds registered with

the SEC, and so do not impact UCITS (undertakings for the
collective investment in transferable securities, i.e., investment
funds regulated within the European Union),2 offshore accounts,
or stable value accounts.
The rules are the culmination of several years of deliberation by
the SEC. In 2010, the SEC introduced significant changes to the
management of money market mutual funds. These included
mandated daily and weekly liquidity levels, more stringent credit
quality requirements, shorter portfolio maturities, and stress testing. Then, in 2012, the SEC conducted a study that recognized
key differences among the four main types of money market
mutual funds: U.S. Treasury, government, municipal, and prime
(see Exhibit 2, above). Another finding was that retail investors in
money market mutual funds behaved differently than institutional
investors during periods of market stress.

The study laid the foundation for a June 2013 proposal for
structural reform, as well as the recently announced changes. The
SEC received more than 1,400 comment letters in response to
the proposal. Ultimately, the recently adopted structural changes
incorporated new definitions and tools designed to further
enhance the high degree of safety and liquidity in money market
mutual funds.

New definitions
Government fund
The SEC created a new definition for government money market
mutual funds and exempted those funds from structural reform.
Government money market mutual funds will be defined as those
that invest 99.50% of their total assets in cash, government
securities, or repurchase agreements collateralized by government securities. U.S. Treasury and U.S. Treasury Only funds are
expected to meet this definition.
Government and U.S. Treasury money market mutual funds will
be eligible to price and transact at a stable $1.00 NAV, and will
not be subject to liquidity fees or redemption gates.
Retail fund
The rules also created a new definition for retail funds, which
apply to prime and municipal money market mutual funds.
A retail fund will be defined as a money market mutual fund
that has policies and procedures reasonably designed to
limit beneficial owners to natural persons, meaning individual
investors, or human beings. The action was based on the SECs
conclusion that, historically, unlike institutional investors, retail
investors have been less likely to make large redemptions from
money market mutual funds during times of market stress. The
SEC definition differs from how the terms are commonly used in
todays marketplace. Currently, fund advisors self-classify funds
as either retail or institutional based on varying criteria.

EXHIBIT 3: Examples of types of retail and institutional accounts.

Examples of Types of Retail Accounts

Examples of Types of Institutional Accounts

Natural persons represent the beneficial

ownership interest of these accounts

Natural persons do not represent the beneficial

ownership interest of these accounts

Individual accounts (brokerage or mutual fund)

Retirement accounts, including workplace defined

contribution plans

Accounts with registrations based on a tax identification

number with the beneficiary not being a natural person

Small business accounts

College savings plans

Defined benefit plans

Health savings plans

Endowments

Ordinary trusts

Accounts sold through intermediaries with the underlying

beneficial ownership being a natural person

Any prime or municipal money market mutual fund that does not
meet the retail fund definition will be considered an institutional
fund. Natural persons will, however, be able to purchase institutional funds. Examples of both retail and institutional accounts
are listed in Exhibit 3 (see page 2).

money market mutual funds will not be subject to the wash-sale

rule.3 As for accounting and settlement, the SEC stated that floating NAV money market mutual funds will be considered a cash
equivalent, and also could be eligible for same-day settlement by
pricing fund shares multiple times within a single day.

As noted in Exhibit 3, funds may look through to the end investor to

determine whether beneficial ownership is limited to natural persons.
As long as each end investor is an individual, the fund will meet the
retail definition. This means that many omnibus accounts will be
eligible to invest in retail funds. The same is true for ordinary trusts,
although trusts will need to be reviewed on a case-by-case basis.

The new SEC rules will require money market mutual funds to provide
additional disclosure. By July 2015, each fund must disclose daily on
its website: the funds daily market NAV, reported out to four decimal
places ($1.0000); daily and weekly liquid assets as a percentage of
the funds total assets; and the funds net flows from the previous day.

New redemption restrictions

Structural changes
Stable versus floating net asset values
While retail prime and retail municipal money market mutual
funds will be eligible to use amortized cost accounting, and to
price and transact at a stable $1.00 NAV, the SECs new rules
require all institutional prime and institutional municipal money
market mutual funds to have a floating NAV. Floating NAV money
market mutual funds will not be able to use amortized cost
accounting, except to the extent it is available to all mutual funds.
Instead, institutional funds will price and transact their shares to
four decimal places, a practice known as basis point rounding.
Basis point rounding may cause a shareholder to experience a
gain or loss if the per-share value of the fund changes by 1/100th
of a penny. For example, if a shareholder owned 10,000 shares
priced at $1.0000, a 1 basis point change in a floating NAV fund
would result in a gain or loss of $1.00.
Floating NAV tax, accounting, and disclosure matters
Concerns were raised during the SECs public comment period
regarding the tax, accounting, and same-day settlement issues
the new rules would create. For example, under existing tax law,
any gains or losses in a floating NAV fund could create taxable
events for shareholders. The U.S. Department of the Treasury
(Treasury) and the Internal Revenue Service (IRS) provided guidance that floating NAV shareholders will be able to report a single
net number for the gains and losses over the course of a year,
rather than reporting individual transactions. This will significantly reduce tax recordkeeping for shareholders. Additionally,
the Treasury and the IRS made it clear that sales of floating NAV

Liquidity fees and redemption gates

The new rules enable prime and municipal fundsboth retail
and institutionalto impose liquidity fees and/or redemption
gates in rare periods of unusually heavy fund redemptions. Government and U.S. Treasury money market mutual funds will not
be subject to liquidity fees or redemption gates.
The trigger for the potential imposition of liquidity fees or
redemption gates is the level of weekly liquid assets, a term
defined under current money market fund regulation. SEC rules
require money market mutual funds to hold at least 10% of total
assets in securities that are convertible into cash within one
business day, whether through maturity or exercise of a demand
feature4 in one business day (daily liquid assets) and 30% of
total assets in securities that are convertible into cash within five
business days (weekly liquid assets), as detailed in Exhibit 4.
The liquidity fee is designed to transfer the costs of liquidating
fund securities from the shareholders who remain in the fund to
those who leave the fund during periods when liquidity is scarce.
All fees are payable to the fund.
In particular, if a prime or municipal funds weekly liquid assets
were to fall below 30%, the funds board of directors may either
charge a liquidity fee of up to 2% on shareholder redemptions or
impose a halt on all shareholder redemptions (known as a gate)
for no longer than 10 days. If weekly liquid assets were to fall below
10%, a prime or municipal fund must impose a liquidity fee of
1%, unless the funds board determines that such a fee is not in

EXHIBIT 4: Types of money market mutual fund assets that satisfy SEC requirements for daily and weekly liquid assets.
Daily Liquid Assets
Cash

Weekly Liquid Assets

Daily liquid assets (see column to left)

Direct obligations of the U. S. government6

Government agency discount notes with remaining maturities of 60

days or less

Securities that will mature or are subject to a demand feature that is

exercisable and payable within one business day

Securities that will mature or are subject to a demand feature that is

exercisable and payable within five business days

Receivables scheduled to be paid within one business day

Receivables scheduled to be paid within five business days

the funds best interest. The board also will have the authority to
impose a lower fee or even no fee at all if, in its opinion, that is in
the best interests of the fund. The fee would be lifted when weekly
liquid assets return to 30% or when the funds board determines
that a liquidity fee is no longer in the best interests of the fund.

Money market mutual funds are an integral part of Fidelitys

business. We continue to be vigilant in keeping our money market
mutual funds safe and liquid, and in protecting the $1.00 NAV,
which has always been our number-one objective in managing
these funds.

In addition to imposing a liquidity fee, the new SEC rules permit

the funds board to impose a temporary suspension of all
redemptions if weekly liquid assets were to fall below 30%. The
gate would be lifted when weekly liquid assets return to 30%
or when the funds board determines a gate is no longer in the
best interests of the fund. Redemptions could be suspended
for 10 consecutive days or 10 days in total over the course of a
90-day period.

Currently, we are reviewing and assessing the effect of the new

rules. At this time, there are no changes in the way money market
mutual funds are managed or the way they operate, as the rules
have a lengthy implementation period. Fidelity will continue to
communicate with our customers, keeping them well informed by
providing information, updates, and perspective.

The new rules promote transparency, requiring that investors

have ready access to information regarding liquidity fees and
redemption gates. Once the new rules are implemented, a money
market mutual fund will have to disclose daily on its website the
daily and weekly liquid assets as a percentage of the funds total
assets. A fund also must disclose promptly and publicly whether
a redemption gate has been imposed or removed, as well as a
discussion of the boards analysis in determining whether or not
to impose or remove a gate.

Shared goals and communication

Fidelity Investments is well prepared for the new rules and we
are ready to make any changes to our product offerings and
fund operations that may be needed to comply with them.
Throughout the debate on money market fund reform, Fidelity
has been engaged with regulators, policymakers, and business
leaders, advocating on behalf of our fund shareholders as the
discussion developed. Fidelity ultimately shares the same goal
as regulators and policymakers: to ensure the strength and
stability of money market mutual funds and our financial system
while preserving the benefits that these funds provide investors,
issuers, and our economy.

For more information about the SECs final rules, please read the
Fidelity Investments Money Market Reform Communication Series
to include:

Key Money Market Mutual Fund Regulations 2014:

Overview of Final SEC Rules

Glossary of Key Terms for Money Market Mutual Fund Regulation

Understanding Government and U.S. Treasury Money Market

Mutual Funds

Comparing Retail and Institutional Money Market Mutual Funds

Comparing Stable and Floating Net Asset Value Money Market

Mutual Funds

Redemption Restrictions in Money Market Mutual Funds:

Liquidity Fees and Redemption Gates

Government Money Market Mutual Funds:

An Attractive Option for Institutional Cash Management

Understanding Liquidity in Money Market Mutual Funds

Authors
Nancy Prior

Kevin Meagher

President, Fixed Income

Senior Vice President, Deputy General Counsel

Nancy Prior is president of Fidelitys Fixed Income division, where

she has strategic oversight of Fidelitys Global Bond and Money
Market groups.

Kevin Meagher is senior vice president, deputy general counsel for

Fidelity Investments, where he is responsible for leading the Fixed
Income Legal Team.

Fidelity Thought Leadership Vice President and Senior Investment Writer Maggie Stenman provided editorial direction.
4

Before investing, consider the funds investment objectives,

risks, charges, and expenses. Contact Fidelity for a prospectus
or, if available, a summary prospectus containing this
information. Read it carefully.
An investment in a money market fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government
agency. Although the fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing
in the fund.
Views expressed are as of the date indicated, based on the information
available at that time, and may change based on market and other
conditions. Unless otherwise noted, the opinions provided are those
of the authors and not necessarily those of Fidelity Investments or
its affiliates. Fidelity does not assume any duty to update any of the
information.
Investment decisions should be based on an individuals own goals,
time horizon, and tolerance for risk.
Past performance is no guarantee of future results.
Endnotes
1
The final rules are clear that liquidity fees and/or redemption gates do
not apply to U.S. Treasury or government money market mutual funds.
The SEC is allowing U.S. Treasury or government money market mutual
funds to add liquidity fees and/or redemption gates to a fund, but only
after shareholders receive 60 days written advance notice.
UCITS are investment funds that are regulated at the European Union
level. They represent a significant share of collective investments by small
investors in Europe.

A wash sale occurs when a security is sold at a loss and within 30 days
prior to or after that, a substantially identical stock or security, or a
contract or option is purchased by the same individual, the individuals
spouse, or a company controlled by the individual.

A demand feature is an embedded attribute of a security that entitles

the holder to redeem the security at a price that approximates its
amortized cost plus any accrued interest at the time of exercise. Most
securities with a demand feature in the money market universe have an
exercise price of 100% of face value (plus accrued interest), and tend to
trade at or near par.

In the money market mutual fund industry, cash is broadly

understood to take the form of demand deposits at banks.

U.S. Treasury bills, notes, and bonds.

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