MMF Redemption Fees, Liquidity-Risk Mitigation

The SEC has significantly revised its proposed MMF-reform standards, eliminating a controversial swing-pricing approach to reduce first-mover advantage in favor of new redemption fees at institutional prime and tax-exempt funds.  These and most other funds now also come under stiff new liquidity requirements, which may combine to impose new and costly disciplines that may enhance the relevant appeal of bank deposits without early-redemption risk.  Changes in MMF liquidity requirements may also alter demand for commercial paper, municipal obligations, bank debt, and other assets widely held by these funds, perhaps increasing funding cost in certain short-term funding markets as demand from MMF drops.  MMF use of the Fed’s overnight reverse-repo facility could also grow to facilitate liquidity compliance, creating new risks for the Federal Reserve and its longstanding goal of reducing its role as a dominant market maker.