"Based on our own investor discussions, it is also likely that such a structure would encourage a heightened level of restlessness across the investor base and thereby enhance the likelihood of a run," said Maleski. "If a portion of investor balances were held back for 30 days and subordinated, investors will seek to anticipate the possibility of systemic risk causing them to suffer an economic loss in their holdback position and attempt to request their full balance well ahead of the anticipated market event, resulting in a serious of 'self-induced' runs triggered by market headlines or slight dips in market sentiment."
Stakeholders suggested an alternative that would impose liquidity-triggered redemption gates and fees on MMFs during times of market stress.
"If regulators' ultimate goal is to stop significant redemptions on the types of funds that they have identified as susceptible to runs (prime funds owned primarily by large, institutional investors), then regulators should consider redemption gates and/or fees, which are the only effective means to achieve that goal," Goebel wrote.
Under this approach, in the event a MMF's weekly liquidity level fell below a set threshold, the fund would institute a temporary restriction that would automatically suspend redemptions for a period of time for a fund to restore its health. If the fund's weekly liquidity level continued to fall, shareholders could have the option to redeem by paying a fixed redemption fee of 1%.
"After a MMF has been gated (temporarily closed) during a period of market stress, it would no longer be subject to immediate redemption pressure, unlike a fund that remains open," Goebel wrote. "Because the gated fund would not be forced to sell assets to meet redemptions, it would not be contributing to potential disruption of the short-term markets. Moreover, as the fund builds liquidity by allowing its holdings to mature, it would act as a market stabilizing force by reinvesting the proceeds of its maturities over a horizon consistent with its targeted re-opening date."
BlackRock, one of the leading asset management firms, overseeing roughly $3.7 trillion on behalf of institutional and individual clients globally, similarly proposed an alternative solution, which would include a stable net asset value fund with a standby liquidity fee that would preserve the benefits of money funds as a liquidity management tool for investors.
"We recommend that a fee of 1% be imposed on withdrawals occurring after the gate has been put in place," wrote Barbara Novick, vice chairman of BlackRock. "This rate has been chosen to create incentives for investors not to run. The SLF rate is likely to be in excess of the cost of selling securities to raise cash to meet redemptions, and the excess would remain in the fund and accrue to the benefit of the remaining shareholders."
Taking such an approach, Novick wrote, clients would be given a choice in a crisis and those that required liquidity to meet payments or those who wanted their cash could get it by paying a fee for that access.
"Those investors choosing to access their cash will pay a fee which is comparable to the situation they would face if they owned another instrument and decided they must sell into a distressed market situation," Novick wrote. "On the other hand, if a client can wait for their liquidity, they are not disadvantaged by remaining in the fund."