portfolio, weighted by each security's percentage of net assets. These
calculations are an important determinant of risk in a portfolio, as a
longer WAM and WAL may increase a fund's exposure to interest rate
risks. We have found that funds use different approaches when
calculating WAM and WAL under the current definitions in the rule. For
instance, we understand that a majority of money market funds calculate
WAM and WAL based on the percentage of each security's market value in
the portfolio, while other money market funds base calculations on the
amortized cost of each portfolio security. This discrepancy can create
inconsistency of WAM and WAL calculations across funds, including in
data reported to the Commission and provided on fund websites.\251\
Although these inconsistencies are likely to be small, they could
confuse investors that review funds' WAM and WAL and create
inefficiencies for the Commission's monitoring of money market funds.
Accordingly, we are proposing to amend rule 2a-7 to require that money
market funds calculate WAM and WAL based on the percentage of each
security's market value in the portfolio. We are proposing to require
funds to use market value because all types of money market funds
already determine the market values of their portfolio holdings for
other purposes, while only certain money market funds use amortized
cost.\252\ Thus, we believe all money market funds can use this
calculation approach with information they already obtain. We believe
that these amendments will enhance the consistency of calculations for
funds, while allowing the Commission to better monitor and respond to
indicators of potential risk and stress in the market.
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    \250\ See proposed amendments to rule 2a-7(d)(1)(ii) and (iii).
    \251\ See Items A.11 and A.12 of Form N-MFP; 17 CFR 270.2a-
7(h)(10)(i)(A).
    \252\ Money market funds that use a floating NAV use market
values when determining a fund's NAV, while money market funds that
maintain a stable NAV are required to use market values to calculate
their market-based price at least daily.
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    We request comment on the proposed clarification of WAM and WAL
calculations, including the following:
    99. Should we require all money market funds to calculate WAM and
WAL based on the percentage of each security's market value in the
portfolio, as proposed? Should certain types of money market funds be
excluded from this requirement or subject to a different requirement?
If so, why? For instance, should we require money market funds that
maintain a stable NAV to calculate WAM and WAL using the amortized
costs of the portfolio?
    100. Are there benefits to calculating WAM and WAL based on
amortized cost of the portfolio instead of market value?
    101. Are there other changes or additions that would improve the
accuracy or consistency of the calculations of WAM or WAL? Should we
provide additional guidance related to the proposed amendment?

F. Amendments to Reporting Requirements

1. Amendments to Form N-CR
    Money market funds are required to file reports on Form N-CR when
certain specified events occur.\253\ Currently, a money market fund
typically is required to file Form N-CR reports if a portfolio security
defaults or experiences an event of insolvency, an affiliate provides
financial support to the fund, the fund experiences a deviation between
current net asset value per share and intended stable price per share,
liquidity fees or redemption gates are imposed or lifted, as well as
any optional disclosure made at the fund's discretion. We are proposing
to add a new requirement for a money market fund to file a report on
Form N-CR when the fund falls below a specified liquidity threshold. We
also propose to require funds to file Form N-CR reports in a structured
data language. Further, we are proposing other amendments to improve
the utility of reported information and to remove reporting
requirements related to the imposition of liquidity fees and redemption
gates under rule 2a-7.
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    \253\ See 17 CFR 270.30b1-8 (rule 30b1-8 under the Act).
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a. Reporting of Liquidity Threshold Events
    We propose to amend Form N-CR to require a fund to report when a
liquidity threshold event occurs (i.e., the fund has invested less than
25% of its total assets in weekly liquid assets or less than 12.5% of
its total assets in daily liquid assets).\254\ Currently, money market
funds are required to provide information about the size of their
weekly liquid assets and daily liquid assets on a daily basis on their
websites.\255\ We believe it is appropriate to require that a fund
report when it falls below half of its 25% daily liquid asset and 50%
weekly liquid asset minimum liquidity requirements, as this drop
represents a significant decrease in liquidity. We believe this
reporting would help investors, the Commission, and its staff monitor
significant declines in liquidity, without having to monitor each money
market fund's website.\256\ The reports also would provide more
transparency, as well as facilitate our monitoring efforts, by
providing the related facts and circumstances of any liquidity
threshold event.
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    \254\ Proposed Part E of Form N-CR.
    \255\ 17 CFR 270.2a-7(h)(10)(ii)(A) and (B). Under these
provisions, a money market fund must post prominently on its website
a schedule, chart, graph, or other depiction that provides the
percentages of the fund's total assets invested in daily liquid
assets and in weekly liquid assets. This website disclosure must be
updated each business day, as of the end of the preceding business
day, and cover each business day during the preceding six months.
    \256\ See JP Morgan Comment Letter (suggesting that money market
funds be required to report to the Commission when they fall below a
liquidity threshold).
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    Upon falling below either of the liquidity thresholds, the proposed
amendments would require a fund to report certain information about the
liquidity threshold event. When reporting a liquidity threshold event,
the fund's report on Form N-CR would be required to include: (1) The
initial date on which the fund falls below either the 25% weekly liquid
asset threshold or the 12.5% daily liquid asset threshold; (2) the
percentage of the fund's total assets invested in both weekly liquid
assets and daily liquid assets on the initial date of a liquidity
threshold event; and (3) a brief description of the facts and
circumstances leading to the liquidity

threshold event.\257\ The proposed reporting requirement would apply
when a fund falls below either threshold. Although a fund may not
necessarily fall below both thresholds, we are proposing to require
funds to disclose the percentages of both weekly liquid assets and
daily liquid assets as of the initial date that either threshold is
crossed.\258\ We believe that reporting both weekly liquid asset and
daily liquid asset levels would provide insight into a fund's short-
term and immediate liquidity profile. The brief description of facts
and circumstances would include additional details about the liquidity
threshold event, which would better inform investors, the Commission,
and our staff of events that lead to significant declines in
liquidity.\259\
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    \257\ Proposed Items E.1 through E.4 of Form N-CR.
    \258\ Proposed Item E.3 of Form N-CR.
    \259\ Proposed Item E.4 of Form N-CR.
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    Consistent with the timing of current Form N-CR reporting items,
the proposal would require a money market fund to file a report within
one business day after occurrence of a liquidity threshold event;
however, a fund could file an amended report providing the required
brief description of the facts and circumstances leading to the
liquidity threshold event up to four business days after such
event.\260\ We believe it may take funds up to four business days to
write and review a narrative description of the relevant facts and
circumstances, particularly where the liquidity threshold event was
caused by multiple or complex circumstances. If a fund has daily liquid
assets or weekly liquid assets continuously below the relevant
threshold for consecutive business days after reporting an initial
liquidity threshold event, the proposal would not require additional
Form N-CR reports to disclose that the same type of liquidity threshold
event continues.\261\
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    \260\ Proposed Instruction to Part E of Form N-CR.
    \261\ If a fund initially falls below only one threshold and
then subsequently falls below the other threshold, the proposal
would require a second Form N-CR report. For example, if a fund
dropped below 25% weekly liquid assets on Tuesday and dropped below
12.5% daily liquid assets on Thursday, it would be required to file
two separate reports to disclose each liquidity threshold event.
Additionally, if a fund fell below either threshold and subsequently
resolved the liquidity threshold event before an initial or amended
report is filed, the fund would still be required to report the
liquidity threshold event and the facts and circumstances leading to
the liquidity threshold event.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to Form N-CR to
report information related to liquidity threshold events:
    102. Should we require money market funds to file reports on Form
N-CR when they fall more than 50% below a minimum liquidity
requirement, as proposed? How might liquidity reporting on Form N-CR
affect money market funds' incentives to maintain weekly liquid assets
and daily liquid assets above 25% and 12.5%, respectively, of total
assets? How might this reporting affect investor behavior?
    103. Should a report on Form N-CR when a fund falls more than 50%
below a liquidity threshold be filed confidentially with the Commission
(e.g., because investors can already see liquidity levels on funds'
public websites and Form N-CR reporting may increase investor
sensitivity to liquidity levels)? Or, in addition to the proposed
public reporting when a fund falls more than 50% below a liquidity
threshold, should we require funds to file confidential reports at a
different level below a minimum liquidity requirement (e.g., 25% below
a minimum)? If we require funds to report certain information
confidentially on Form N-CR, should that information be publicly
available on a delayed basis and, if so, what is an appropriate delay
(e.g., 15, 30, or 60 days)?
    104. Should we use a different daily liquid asset or weekly liquid
asset level for determining when a fund must file a report on Form N-
CR? If so, what level(s) should we use? For example, would 10%, 25%, or
75% (rather than 50%) below the minimum liquidity requirements be
appropriate?
    105. As proposed, should funds be required to report both their
current weekly liquid asset and daily liquid asset levels even if only
one of those thresholds is crossed?
    106. Should funds be required to report each day they remain below
either the 12.5% daily liquid asset threshold or the 25% weekly liquid
asset threshold, or is just the initial date of liquidity threshold
event sufficient? Should funds be required to subsequently report when
a fund's liquidity returns above an identified threshold (e.g., to a
level at or above the minimum liquidity requirements) or is the daily
website disclosure of fund liquidity levels sufficient for this
purpose?
    107. As proposed, should we require funds to report liquidity
threshold events within one business day of the relevant event? Is four
business days sufficient for funds to file an amended report that
includes a brief description of the facts and circumstances leading to
the fund falling below either threshold? Should these reporting periods
be longer or shorter?
    108. Should any more, less, or other information be required in
connection with liquidity threshold events?
b. Structured Data Requirement
    We are proposing to require money market funds to file reports on
Form N-CR in a structured data language.\262\ In particular, we are
proposing to require filing of Form N-CR reports in a custom eXtensible
Markup Language (``XML'') -based structured data language created
specifically for reports on Form N-CR (``N-CR-specific XML''). We
believe use of an N-CR-specific XML language would make it easier for
money market funds to prepare and submit the information required by
Form N-CR accurately, and would make the submitted information more
useful to investors and the Commission. A structured data language
would allow tools to be developed so that users can sort and filter the
available data according to specified parameters.
---------------------------------------------------------------------------

    \262\ See proposed General Instruction D of Form N-CR
(specifying that reporting persons must file reports on Form N-CR
electronically on EDGAR and consult the EDGAR Filer Manual for EDGAR
filing instructions). See also 17 CFR 232.301 (requiring filers to
prepare electronic filings in the manner prescribed by the EDGAR
Filer Manual).
---------------------------------------------------------------------------

    Reports on Form N-CR are currently required to be filed in HTML or
ASCII.\263\ We understand that, in order to prepare reports in HTML and
ASCII, money market funds generally need to reformat required
information from the way the information is stored for normal business
uses. In this process, money market funds typically strip out
incompatible metadata (i.e., syntax that is not part of the HTML or
ASCII specification) that their business systems use to ascribe meaning
to the stored data items and to represent the relationships among
different data items. The resulting code, when rendered in an end-
user's web browser, is comprehensible to a human reader, but it is not
suitable for automated validation or aggregation.
---------------------------------------------------------------------------

    \263\ See Regulation S-T, 17 CFR 232.101(a)(1)(iv); 17 CFR
232.301; EDGAR Filer Manual (Volume II) version 59 (September 2021),
at 5-1 (requiring EDGAR filers generally to use ASCII or HTML for
their document submissions, subject to certain exceptions).
---------------------------------------------------------------------------

    In recent years we have gained experience with different reporting
data languages, including with reports in an XML-based structured data
language. For example, we have used customized XML data languages for
reports filed on Form N-CEN and Form N-MFP.\264\ We

have found the XML-based structured data languages used for those
reports allow investors to aggregate and analyze reported data in a
much less labor-intensive manner than data filed in ASCII or HTML.
Based on our understanding of how funds currently disclose required
information in a structured data language, we believe that requiring a
Form N-CR-specific XML language would minimize reporting costs while
yielding more useful data for investors and the Commission, as
applicable. Money market funds would be able, at their option, either
to submit XML reports directly or use a web-based reporting application
developed by the Commission to generate the reports, as funds are able
to do today when submitting holdings reports on Form N-CEN.
---------------------------------------------------------------------------

    \264\ See e.g., Investment Company Reporting Modernization,
Investment Company Act Release No. 32314 (Oct. 13, 2016) [81 FR
81870 (Nov. 18, 2016)] (adopting Form N-CEN); 2010 Adopting Release
(adopting Form N-MFP).
---------------------------------------------------------------------------

    We recognize that Form N-CR filers could bear some additional
reporting costs related to adjusting their systems to a different data
language. However, many money market funds have acquired substantial
experience with reporting on web-based applications (or directly
submitting information in a structured data language). For example,
money market funds currently file Form N-MFP on a monthly basis to
report their portfolio holdings and other information to the Commission
in a custom XML language. We believe that aligning Form N-CR's
reporting data language with the type of data language of other
required reports, including Form N-MFP, may reduce costs and introduce
additional efficiencies for money market funds already accustomed to
reporting using structured data and may reduce overall reporting costs
in the longer term. Furthermore, even if there are increased costs, we
believe that the benefits to investors and the Commission of making the
information more usable would justify these costs.
    We request comment on the reporting data language we are proposing
to require for reports filed on Form N-CR, and, in particular, on the
following:
    109. Should we require, as we are proposing, Form N-CR reports to
be filed in an N-CR-specific XML language? Is an N-CR-specific XML
language the appropriate type of data language for Form N-CR reports?
Why or why not? If another structured data language (e.g., Inline
eXtensible Business Reporting Language), would be more appropriate,
which one, and why?
    110. Would this proposed requirement yield reported data that is
more useful to investors, compared with not requiring Form N-CR to be
filed in an N-CR-specific XML language, or requiring Form N-CR to be
filed in a structured data language other than an N-CR-specific XML
language?
    111. Should any subset of funds be exempt from the proposed
structured data reporting requirement? If so, what subset and why?
    112. What implementation and long term costs, if any, would be
associated with the proposed structured data reporting requirement?
c. Other Proposed Amendments
    In addition to the proposed items related to liquidity threshold
events and the proposed structured data language requirement, we are
proposing a few other amendments to Form N-CR. To improve the
identifying information for the registrant and series reporting an
event on Form N-CR, we are proposing to require the registrant name,
series name, and legal entity identifiers (``LEIs'') for the registrant
and series.\265\ We also propose to add definitions of LEI, registrant,
and series to the form for clarity, and the definitions of these terms
would be the same as on Form N-MFP.\266\ Further, we are proposing to
remove the reporting events that relate to liquidity fees and
redemption gates, consistent with our proposal to remove the underlying
provisions from rule 2a-7.\267\ We also propose an amendment to Part C
of Form N-CR, which relates to the provision of financial support to
the fund. Specifically, when the support involves the purchase of a
security from the fund, we propose to require the date the fund
acquired the security, which would allow better identification of, and
context for, support that occurs within a short period of time. For
example, if the fund purchased the security a few days before the
affiliate acquired it, this could suggest that the risk profile of the
security deteriorated rapidly.
---------------------------------------------------------------------------

    \265\ See Items A.2, A.4, A.5, and A.7 of proposed Form N-CR. An
LEI is a unique identifier generally associated with a single
corporate entity and is intended to provide a uniform international
standard for identifying counterparties to a transaction. Money
market funds are already required to report LEIs for a registrant
and series on Form N-CEN. See Items B.1 and C.1 of Form N-CEN.
    \266\ See proposed General Instruction F of Form N-CR.
    \267\ See Parts F through G of current Form N-CR.
---------------------------------------------------------------------------

    We request comment on the other proposed amendments to Form N-CR:
    113. Should we require reporting of registrant name, series name,
and LEIs for the registrant and series on Form N-CR, as proposed? Is
there other identifying information we should require?
    114. Should we make any changes to the definitions we propose to
include in Form N-CR? Are there other terms we should define in the
form?
    115. For the Form N-CR item requiring reporting of financial
support, should we require reporting of the date the fund acquired a
security, as proposed, if the support involves the purchase of a
security from the fund?
2. Amendments to Form N-MFP
    Form N-MFP is the form that money market funds use to report their
portfolio holdings and other key information each month.\268\ We use
the information on Form N-MFP to monitor money market funds and support
our examination and regulatory programs. We are proposing amendments to
improve our ability to monitor money market funds. The proposed
amendments would provide certain new information about a fund's
shareholders and disposition of non-maturing portfolio investments. We
are also proposing changes to enhance the accuracy and consistency of
information funds currently report, to increase the frequency of
certain data points, and to improve identifying information for the
reporting fund.
---------------------------------------------------------------------------

    \268\ See rule 30b1-7 under the Investment Company Act.
---------------------------------------------------------------------------

a. New Information Requirements
    We are proposing to require additional information about the
composition and concentration of money market fund shareholders. With
respect to shareholder concentration, we are proposing that all money
market funds disclose the name and percent of ownership of each person
who owns of record or is known by the fund to own beneficially 5% or
more of the shares outstanding in the relevant class.\269\ Money market
funds currently provide substantially the same information on an annual
basis in their registration statements.\270\ We believe more frequent
information about shareholder concentration would be helpful for
monitoring a fund's potential risk of redemptions by an individual or a
small group of investors that could significantly affect the fund's
liquidity. We recognize that as a result of omnibus accounts, there are
circumstances in which multiple investors would be

represented as a single shareholder of record for purposes of this
disclosure.\271\ The proposal would require information about
beneficial owners known by the fund in recognition that funds may not
have information about the amount each beneficial owner holds in an
omnibus account. The proposed item would distinguish between record
owners and beneficial owners to facilitate a more nuanced understanding
of potential concentration levels. We are proposing to require funds to
use a 5% ownership threshold for this reporting requirement to align
with analysis funds already must conduct each year for purposes of
updating their registration statements.\272\
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    \269\ See proposed Item B.10 of Form N-MFP. If the fund knows
that two or more beneficial owners of the class are affiliated with
each other, the fund would treat them as a single beneficial owner
for purposes of the 5% ownership calculation and would report
information about each affiliated beneficial owner. For these
purposes, an affiliated beneficial owner would be one that directly
or indirectly controls or is controlled by another beneficial owner
or is under common control with another beneficial owner.
    \270\ See Item 18 of Form N-1A.
    \271\ Omnibus accounts are accounts established by
intermediaries that typically aggregate all customer activity and
holdings in a money market fund, which can result in the fund not
having information about individual beneficial owners who hold their
shares through the omnibus account.
    \272\ See Item 18 of Form N-1A.
---------------------------------------------------------------------------

    We also propose to require a money market fund that is not a
government money market fund or a retail money market fund to provide
information about the composition of its shareholders by type.\273\ The
proposed item would require these funds to identify the percentage of
investors within the following categories: Non-financial corporation;
pension plan; non-profit; state or municipal government entity
(excluding governmental pension plans); registered investment company;
private fund; depository institution and other banking institution;
sovereign wealth fund; broker-dealer; insurance company; and other.
This information would assist with monitoring the liquidity and
redemption risks of institutional money market funds, as different
types of investors may pose different redemption risks. We are not
proposing to require this information of government money market funds
because these funds have lower redemption and liquidity risks than
other money market funds. We are not proposing to apply this
requirement to retail funds because these funds, by definition, are
limited to retail investors.
---------------------------------------------------------------------------

    \273\ See proposed Item B.11 of Form N-MFP.
---------------------------------------------------------------------------

    In addition, we propose to add new Part D to Form N-MFP, which
would require information about the amount of portfolio securities a
prime money market fund sold or disposed of during the reporting
period. This information would facilitate monitoring of prime money
market funds' liquidity management, as well as their secondary market
activities in normal and stress periods. It also would improve the
availability of data about how selling activity by money market funds
relates to broader trends in short-term funding markets. The proposal
would require a prime fund to disclose the aggregate amount it sold or
disposed of for each category of investment.\274\ The categories of
investments would mirror the categories funds already use on Form N-MFP
for identifying their month-end holdings (e.g., certificate of deposit,
non-negotiable time deposit, financial or non-financial company
commercial paper, or U.S. Treasury debt).\275\ To focus the disclosure
on secondary market activity, the proposal would exclude portfolio
securities the fund held until maturity. We are proposing to require
only prime funds to provide information about securities sold or
disposed of because we believe that asset liquidation by this type of
money market fund contributed to the market stress in March 2020 and
during the 2008 financial crisis. In contrast, government funds
generally receive inflows during periods of market stress and tend to
provide liquidity to the market by investing incoming cash flow in the
repurchase agreement market and purchasing securities. Tax-exempt funds
are only a small segment of the money market fund industry and are less
likely to generate significant liquidity concerns for the broader
municipal market.
---------------------------------------------------------------------------

    \274\ See Item D.1 of proposed Form N-MFP.
    \275\ See Item C.6 of current Form N-MFP.
---------------------------------------------------------------------------

    As described above in the proposed swing pricing requirement
section, we also propose to amend Form N-MFP to require money market
funds that are not government money market funds or retail money market
funds to report the number of times the fund applied a swing factor
over the course of the reporting period, and each swing factor applied.
In that section, we requested comment on these swing pricing-related
amendments to Form N-MFP.
    We request comment on the new items we propose to add to Form N-
MFP, including:
    116. Should we require all money market funds to disclose
information about shareholder concentration on Form N-MFP, as proposed?
Should certain types of funds be excluded and, if so, why? Should the
reporting threshold be ownership of at least 5% of a class's shares
outstanding, as proposed? Should the threshold be lower or higher, such
as 1%, 10%, or 15%? Instead of requiring information about shareholders
who hold a certain amount of a class's outstanding shares, should we
use a different method of obtaining information about shareholder
concentration? For example, should we require funds to report the
amount of net assets held by a specific number of the fund's largest
investors, such as the one, five, or ten largest investors?
    117. As proposed, should the shareholder concentration item require
the name and percentage of ownership for each shareholder who owns of
record or beneficially 5% or more? Should we require different
information for some or all types of investors? For example, should we
not require name information for retail investors or other types of
investors? As another alternative, should we require funds to report
only the number of investors who own of record or beneficially 5% or
more, distinguishing between record owners and beneficial owners?
Additionally, should this information, as proposed, be reported on a
non-confidential basis? Is there any sensitivity to identifying
shareholder information such that it should only be reported to the
Commission on a confidential basis?
    118. Do funds currently gather information about shareholder
concentration and composition on at least a monthly basis, or would the
proposal require more frequent gathering of information than current
practices? If more frequent information gathering would be required,
what are the associated advantages and disadvantages of assessing
shareholder concentration and composition more frequently? Should we
require funds to report this information on Form N-MFP less frequently
than proposed, such as annually, semiannually, or quarterly?
    119. Should we require institutional prime and tax-exempt money
market funds to provide information about the composition of their
shareholders by type, as proposed? Are there any changes we should make
to the types of shareholders the form would identify? Should certain
shareholder categories be added or removed? Should we provide
additional guidance or definition for any of the categories of
shareholders? Should we also require government money market funds to
respond to this item? If so, why?
    120. To what extent do money market funds know when an investor
beneficially owns 5% or more of a class's outstanding shares when those
shares are held through an omnibus account? To what extent do
institutional money market funds know the composition of their
shareholders by type? Are there any changes we should make to
facilitate money market funds' abilities to collect this information,
including for investors who invest through an omnibus account? For
example, should we preclude a money market fund from selling its
securities to

a financial intermediary in nominee name on behalf of others unless the
intermediary provides certain information about investors in the fund
(such as size of holding, type of investor, or other investor
characteristics)?
    121. Should we require prime funds to disclose aggregate
information about the amount of portfolio securities they sold or
disposed of during the reporting period for each category of
investment, as proposed? Should we instead require details about each
instrument sold (e.g., date of sale, price, and identifying information
for each holding)? Should we instead consider requiring that prime
funds report information about the amount of portfolio securities sold
or disposed of on Form N-CR if the amount is above a specific
threshold? If so, what amount of selling activity should trigger such
reporting?
    122. Should we require only some money market funds to disclose
their selling activity, as proposed? Should we alternatively require
all, or a broader subset of, money market funds to disclose this
information?
    123. Are there other types of information we should require money
market funds to report on Form N-MFP to facilitate monitoring of these
funds?
b. Changes To Improve the Accuracy and Consistency of Currently
Reported Information
    We are proposing several amendments to improve information about
money market funds' portfolio securities. We are proposing to specify
that, for purposes of reporting the fund's schedule of portfolio
securities in Part C of Form N-MFP, filers must provide required
information separately for the initial acquisition of a security and
any subsequent acquisitions of the security (i.e., for each lot).\276\
Currently, some funds report information separately for each lot, while
others do not. Requiring funds to report information separately for
each lot would facilitate the Commission's ability to analyze other
information we propose to require. Specifically, we are proposing an
additional item that would require funds to provide the trade date on
which the security was acquired and the yield of the security as of
that trade date.\277\ These proposed amendments, collectively, would
assist the Commission in understanding how long a fund has held a given
position and the maturity of the position when it was first acquired.
This information is important to understand a money market fund's
portfolio turnover during normal market conditions and to monitor a
potentially higher level of asset disposition during periods of market
stress.
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    \276\ See introductory language to Part C of proposed Form N-
MFP.
    \277\ See Item C.6 on proposed Form N-MFP. Because the proposed
amendments separately request the yield at the time of acquisition,
we are proposing to remove language in Item C.2 requiring filers to
include the coupon, if applicable, in response to that item.
---------------------------------------------------------------------------

    Form N-MFP requires filers to report particular information about
funds' repurchase agreements. We are proposing to amend the form to
require additional information about repurchase agreement transactions
and to standardize how filers report certain information. Specifically,
the amendments would require that filers identify (1) the name of the
counterparty in a repurchase agreement; (2) whether a repurchase
agreement is centrally cleared and the name of the central clearing
counterparty, if applicable; (3) if a repurchase agreement was settled
on a triparty platform; and (4) the CUSIP of the securities involved in
the repurchase agreement. Currently, Form N-MFP simply asks for the
name of the issuer. For repurchase agreements, filers sometimes report
the name of the counterparty to the repurchase agreement, the name of
the clearing house (in the case of centrally cleared repurchase
agreements), or both in response to this item. In addition, the
amendments would recognize changes that have occurred in the market for
repurchase agreements since the form was last amended, such as the
introduction of centrally cleared (or ``sponsored'') repurchase
agreements. These proposed amendments would improve the Commission's
monitoring of money market fund activity in various segments of the
market for repurchase agreements, including potentially increased or
decreased activity during periods of market stress, which may affect
availability of funding for borrowers.
    We are also proposing to include ``cash'' as a category of
investment that most closely represents the collateral in repurchase
agreements.\278\ This amendment is designed to recognize that cash is
sometimes used as collateral for repurchase agreements, and we expect
that the addition would reduce inaccurate disclosure suggesting that a
repurchase agreement is under-collateralized. Moreover, we are
proposing to remove the ability for funds to aggregate certain required
information if multiple securities of an issuer are subject to the
repurchase agreement.\279\ Removing this provision would provide more
complete information about securities subject to a repurchase
agreement.
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    \278\ See Item C.9.k of Form N-MFP (currently listing as
categories of investments that most closely represents the
collateral: Asset-backed securities; agency collateralized mortgage
obligations; agency debentures and agency strips; agency mortgage-
backed securities; private label collateralized mortgage
obligations; corporate debt securities; equities; money market; U.S.
Treasuries (including strips); and other instruments).
    \279\ See Item C.8 of Form N-MFP.
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    Form N-MFP currently requires filers to indicate the category of
money market fund.\280\ These categories include ``Treasury,''
``Government/Agency,'' and ``Exempt Government,'' among others. We
understand that these categories for government money market funds have
contributed to confusion and inconsistent approaches to categorization.
We are proposing to remove these three category designations and to
replace them with one ``Government'' category.\281\ To differentiate
between Treasury funds and other government funds, the proposal
includes a new subsection that requires government money market funds
to indicate whether they typically invest at least 80% of the value of
their assets in U.S. Treasury obligations or repurchase agreements
collateralized by U.S. Treasury obligations.\282\ We believe that these
amendments would provide more clarity for filers and supply the
Commission with more accurate identification of different types of
government money market funds.
---------------------------------------------------------------------------

    \280\ Item A.10 of Form N-MFP.
    \281\ See proposed Item A.10 of Form N-MFP. We also propose to
add definitions for ``government money market fund'' and ``retail
money market fund'' in the form, which would be consistent with the
definitions of these terms in rule 2a-7. Including these definitions
in the form would clarify the meaning of references to these terms
in this item and elsewhere in the form. See General Instruction E of
proposed Form N-MFP. Because under this approach the definition of
``retail money market fund'' would be clear for purposes of the
form, we also propose to amend Item A.10.a to use this defined term,
rather than refer to exempt retail money market funds. See proposed
Item A.10.a of Form N-MFP.
    \282\ See proposed Item A.10.b of Form N-MFP. The 80% investment
standard is based on 17 CFR 270.35d-1 (rule 35d-1 under the
Investment Company Act), which requires a money market fund that
includes ``Treasury'' in its name to adopt a policy to invest, under
normal circumstances, at least 80% of its assets in the particular
type of investment the fund's name suggests.
---------------------------------------------------------------------------

    We are proposing a new item in Form N-MFP that would require filers
to indicate whether the fund is established as a cash management
vehicle for affiliated funds and accounts.\283\ This item would make it
easier and more efficient to identify privately offered institutional
money market funds. Our proposal also includes an amendment to

enhance consistency of reporting of whether a fund seeks to maintain a
stable price per share.\284\ Currently, the form provides that if a
fund seeks to maintain a stable price per share, it must state the
price it seeks to maintain. However, if a fund does not respond to this
item, it is unclear whether the fund did so in error or simply does not
seek to maintain a stable price per share. The proposed amendment would
require a fund to respond ``yes'' or ``no'' to whether it seeks to
maintain a stable price per share so as to avoid any ambiguity.
---------------------------------------------------------------------------

    \283\ See proposed Item A.21 of Form N-MFP.
    \284\ See proposed Item A.18 of Form N-MFP (proposing to require
a fund to respond ``yes'' or ``no'' to whether it seeks to maintain
a stable price per share).
---------------------------------------------------------------------------

    Currently, funds are required to provide the name of any person who
paid for or waived all or part of the fund's operating expenses or
management fees during the reporting period and describe the amount and
nature of the fee and expense waiver or reimbursement. These
disclosures are difficult to use, as they are provided in a format that
is not structured.\285\ Moreover, the identification of the person who
paid for or waived the fund's expenses or fees is not significantly
beneficial to the Commission's monitoring and assessment of fund risks.
While we continue to believe that shareholders should have access to
this information, we believe that it is unnecessary to include in Form
N-MFP since disclosure related to fees and expenses is available in
funds' financial statements. Accordingly, we are proposing to require
funds to report only the amount of any fee waiver or expense
reimbursement during the reporting period.\286\ This proposed change
would make it easier for the Commission and investors to analyze
efficiently the reported data.
---------------------------------------------------------------------------

    \285\ Item B.8 of Form N-MFP.
    \286\ See proposed Item B.9 of Form N-MFP.
---------------------------------------------------------------------------

    For each portfolio security, a fund is required to indicate on Form
N-MFP the category of instrument, using a list of categories designated
in the form.\287\ We are proposing to include a new category that
distinguishes between U.S. Government agency notes that are coupon-
paying and those that are no-coupon discount notes.\288\ We believe
that including this distinction would allow us to better understand
whether an agency security should be categorized as a weekly liquid
asset, as only agency discount notes with less than 60 days to maturity
can be considered weekly liquid assets under the rule. We are also
proposing a conforming change to the list of investment categories that
a fund must use for purposes of disclosing information about its
holdings on its website.\289\
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    \287\ Item C.6 of Form N-MFP.
    \288\ See proposed amendments to Item C.7 of Form N-MFP.
    \289\ See proposed rule 2a-7(h)(10)(i)(B)(2).
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    We request comment on the proposed amendments to improve the
accuracy and consistency of currently reported information on Form N-
MFP, including the following:
    124. Is the proposed requirement that funds provide required
information separately for the initial acquisition of a security and
any subsequent acquisitions of the security appropriate? Why or why
not? Should we require funds to report the acquisition date and yield
as of the acquisition date for each lot, as proposed? Are there better
ways for us to assess how long a fund has held a position and its
portfolio turnover? If so, how?
    125. Should we, as proposed, require additional information about
the counterparty to the repurchase agreement and information about
whether a repurchase agreement is centrally cleared or a triparty
agreement? Are there other ways we could acquire this information?
    126. As proposed, should we require the CUSIP of the collateral
subject to the repurchase agreement and add a category for cash
collateral? As proposed, should we remove the provision that allows
funds to aggregate information about multiple securities of an issuer
that are subject to a repurchase agreement? To what extent do funds
currently rely on this provision? What are the potential effects of our
proposal to remove this provision? Is there any additional information
related to repurchase agreement transactions that we should require?
    127. Should Form N-MFP require registrants to provide Financial
Instrument Global Identifier for securities, if available? Should Form
N-MFP permit registrants to report the Financial Instrument Global
Identifier in lieu of a CUSIP number on Form N-MFP? Why or why not?
    128. Are our proposed amendments to consolidate how funds would
identify different types of government money market funds effective? Is
our proposed approach to identifying funds that should be classified as
Treasury funds appropriate?
    129. Is our proposed item to identify money market funds
established as cash management vehicles for affiliates or other related
entities sufficiently clear? Are there any changes we should make to
that item? Is there a more effective way of identifying these funds?
Would this question be more appropriate on a different form instead of
Form N-MFP, for example, Form N-CEN?
    130. Should we simplify disclosure of any fee waiver or expense
reimbursement during the reporting period, as proposed? What scope of
arrangements do funds currently report as fee waivers or expense
reimbursements on Form N-MFP? For example, do they include offsets or
credits (e.g., custodian credits)? Do funds need additional clarity or
guidance on the types of arrangements to report? Instead of our
proposed approach, should we retain information about the person
waiving the fee or reimbursing the expense and a description of the fee
waiver or expense reimbursement? For example, to better structure the
item, should we require filers to identify the type of waiver or
reimbursement on Form N-MFP (e.g., management fees, 12b-1 fees)? Why or
why not? Should we require filers to provide a reason for the waiver or
reimbursement? For instance, should the item require that filers
designate whether such actions were taken to maintain a particular
expense ratio or a minimum level of yield? Why or why not?
    131. As proposed, should we require funds to distinguish between
U.S. Government agency notes that are coupon-paying and those that are
no-coupon discount notes when categorizing their portfolio securities
on Form N-MFP? Would this information be helpful for identifying
securities that qualify as weekly liquid assets? Should we also require
funds to distinguish between these two categories for purposes of
disclosing portfolio securities on their websites, as proposed?
    132. Are there other changes or additions that would improve the
accuracy and consistency of the required reported information on Form
N-MFP?
c. More Frequent Data Points
    Under current rule 2a-7, a money market fund must prominently
disclose on its website, as of the end of each business day during the
preceding six months, the fund's percentage of total assets invested in
daily liquid assets and in weekly liquid assets, as well as the fund's
net asset value per share (including for each class of shares) and net
shareholder flow.\290\ Currently, in monthly reports on Form N-MFP, a
money market fund must provide the

same general information for each Friday during the month
reported.\291\ Based on the Commission's experience with using current
Form N-MFP data to analyze the events of March 2020 and other periods,
we are proposing to amend Form N-MFP to require a money market fund to
provide in its monthly report this liquidity, net asset value, and flow
data for each business day of the month, rather than on a weekly basis.
---------------------------------------------------------------------------

    \290\ 17 CFR 270.2a-7(h)(10)(ii).
    \291\ Items A.13, A.20, B.5, and B.6 of Form N-MFP.
---------------------------------------------------------------------------

    We are proposing to require daily liquidity, net asset value, and
flow data in monthly reports to allow Commission staff to better and
more precisely monitor risks and trends in these areas in an efficient
and more precise manner without requiring frequent visits to the
websites of many different funds, and to provide industry-wide daily
data in a central repository as a resource for investors and
others.\292\ The weekly data currently reported on Form N-MFP provides
only a snapshot of the liquidity, net asset value, and flow data for
any given month, and is therefore incomplete and less useful for
purposes of analysis and monitoring than data for each business day in
that month. In addition, most of the data on Form N-MFP is reported as
of the end of the month, making it difficult to analyze the weekly data
in a comprehensive manner. This is because the weekly data points
generally relate to different days than the monthly data points.
Although data vendors provide some daily data based on information
gathered from funds' websites, the staff has found this data could be
incomplete at times, and therefore may not be appropriate for purposes
of staff monitoring and analyses. As money market funds generally are
already required to report on their websites the same data that we
propose requiring be reported on Form N-MFP, we believe this change
would impose minimal burden on money market funds. Consistent with the
website information funds already provide, the reported daily data
points would be calculated as of the end of each business day.
---------------------------------------------------------------------------

    \292\ To enhance consistency in reporting practices, we propose
to specify that filers report gross subscriptions and gross
redemptions as of the trade date (rather than as of the settlement
date). This proposed change is intended to ensure that funds are
reporting the information in the same manner. We also propose to
clarify that filers that are master-feeder funds should report the
required shareholder flow data at the feeder fund level only. See
Item B.7 of proposed Form N-MFP. In addition, as discussed above, we
are also proposing to amend the net asset value per share
disclosures to require that an institutional prime or institutional
tax-exempt fund should provide the net asset value per share as
adjusted by a swing factor, if applicable. See supra Section II.B.4.
---------------------------------------------------------------------------

    We are also proposing to increase the frequency with which funds
report certain yield information. Currently, funds must report 7-day
gross yields (at the series level) and 7-day net yields (at the share
class level) as of the end of the reporting period. We propose to
require funds to report this information each business day. We believe
the higher-frequency reporting would assist in the timely monitoring
and assessment of fund risks, particularly during periods of market
stress.
    We request comment on our proposal to require daily liquidity, net
asset value, flow, and yield data in monthly Form N-MFP reports,
including on the following:
    133. Should we, as proposed, require liquidity, net asset value,
and flow data to be reported as of the close of business on each
business day of each month? Would funds incur significantly higher
costs than under the current weekly data reporting requirement? Please
describe the associated costs.
    134. Would our new proposed requirements help us better identify
certain risk characteristics that the form currently does not capture?
    135. Are there other ways to monitor risks and trends in fund
liquidity, valuation, and shareholder flow in a more efficient and
precise manner without requiring frequent visits to the websites of
many different funds?
    136. When reporting required flow information on Form N-MFP, money
market funds must include dividend reinvestments in the gross
subscriptions figure.\293\ After last amending Form N-MFP, the
Commission adopted Form N-PORT, which requires other types of
registered management investment companies to report shares sold in
connection with reinvestments of dividends and distributions
separately.\294\ Should we similarly require money market funds to
report dividend reinvestments and distributions separately? Would using
an approach that is similar to Form N-PORT benefit fund complexes by
allowing them to use consistent systems across different types of
mutual funds for purposes of reporting flow information and allow the
Commission and investors to better identify whether the fund is
receiving new subscriptions? Or would such a change burden fund
complexes and require systems changes, without significantly enhancing
the current data because dividend reinvestments by money market fund
investors are less substantial than for other fund types?
---------------------------------------------------------------------------

    \293\ See Item B.6 of current Form N-MFP.
    \294\ See Item B.6 of Form N-PORT.
---------------------------------------------------------------------------

    137. Should we, as proposed, require money market funds to report
7-day yield information each business day? What are the advantages and
disadvantages of requiring higher-frequency reporting of yield
information? Should we instead require funds to report this information
for each Friday of the month and for month-end, or on a different time
cycle?
d. Other Amendments
    Form N-MFP currently provides that a filer must disclose the
registrant's LEI, if available, and does not require the LEI of the
series.\295\ Filers also provide the name of the registrant and series
in metadata associated with the form, but filers do not report these
names on the form itself. We are proposing to require funds to identify
the name and LEI for both the fund registrant and the series.\296\
Requiring reporting of registrant and series names on the form is meant
to make the form easier for investors to use. The change to require
LEIs for the registrant and series aligns Form N-MFP with Forms N-CEN
and N-PORT, which require LEI reporting for the registrant and series.
---------------------------------------------------------------------------

    \295\ See Item 3 of current Form N-MFP.
    \296\ See Items 2, 4, 5, and 6 of proposed Form N-MFP. We also
propose that funds disclose the full name of the class of series, as
the current form only includes the EDGAR class identifier.
---------------------------------------------------------------------------

    Currently, funds must report the LEI that corresponds to a
portfolio security, if the LEI is available. We propose to clarify that
funds should respond to an item request with ``N/A'' if the information
is not applicable (e.g., a company does not have an LEI).\297\ We also
propose to amend the definition of LEI in the form to remove language
providing that, in the case of a financial institution that does not
have an assigned LEI, a fund should instead disclose the RSSD ID
assigned by the National Information Center of the Board of Governors
of the Federal Reserve System, if any.\298\ Rather than classify an
RSSD ID as an LEI under these circumstances, we propose to add RSSD ID
as an additional category of ``other identifiers'' that a fund can use
for relevant portfolio securities.\299\

These changes are designed to improve consistency and comparability of
information funds report about the securities they hold.
---------------------------------------------------------------------------

    \297\ See General Instruction A of proposed Form N-MFP.
    \298\ See General Instruction F of proposed Form N-MFP for a
revised definition of LEI.
    \299\ See Item C.5 of proposed Form N-MFP; General Instruction F
of proposed Form N-MFP (adding a definition of RSSD ID). The revised
definition of LEI would differ from the definitions of this term in
Forms N-CEN, N-PORT, and PF, which allow an RSSD ID for a financial
institution to be treated as an LEI if the institution has not been
assigned an LEI. However, we do not believe that the different
definitions of LEI among these forms would result in confusion or
burdens. Form N-MFP would continue to allow a fund to report an RSSD
ID for a financial institution when an LEI is not available, similar
to the other forms, but it would make it easier to distinguish
between the two types of identifiers.
---------------------------------------------------------------------------

    We request comment on our other proposed amendments to Form N-MFP,
including the following:
    138. Should we require funds to provide both the name and LEI for
the registrant and the series and the full name of the class of the
series, as proposed? Is there other identifying information about the
registrant, series, or class that would be helpful?
    139. As proposed, should we amend the definition of LEI in the form
and provide a separate item for providing an RSSD ID as a securities
identifier, as applicable?
    140. Are there other definitions we should amend, include, or
exclude from the form? Please explain.

G. Compliance Date

    We propose to provide a transition period after the effective date
of the amendments to give affected funds sufficient time to comply with
the proposed changes and associated disclosure and reporting
requirements, as described below. Based on our experience, we believe
the proposed compliance dates would provide an appropriate amount of
time for funds to comply with the proposed rule if adopted.
     Twelve-Month Compliance Date. We propose that 12 months
after the effective date of the amendments, any money market fund that
is not a government money market fund or a retail money market fund
must comply with the proposed swing pricing requirement in rule 2a-7,
if adopted, as well as the swing pricing disclosures applicable to
these money market funds in the proposed amendments, if adopted, to
Forms N-MFP and N-1A.\300\ We also propose to provide 12 months after
the effective date for government and retail funds to determine, should
the rule be adopted, that financial intermediaries have the capacity to
redeem and sell at a price based on the current net asset value per
share pursuant to rule 22c-1 or prohibit the financial intermediary
from purchasing in nominee name on behalf of other persons, securities
issued by the fund.\301\
---------------------------------------------------------------------------

    \300\ See proposed rule 2a-7(c); proposed amendments to Items 4
and 6 of Form N-1A; proposed amendments to Item A.22 of Form N-MFP.
    \301\ See proposed rule 2a-7(h)(ii).
---------------------------------------------------------------------------

     Six-Month Compliance Date. The proposed compliance period
for all other aspects of the proposal is six months after the effective
date of the amendments, if adopted, and includes the following:
    [cir] The proposed increased daily minimum asset and weekly minimum
asset requirements; and
    [cir] The amendments to Forms N-CR and N-MFP, except the swing
pricing-related disclosure on Form N-MFP.
     Effective Date for Amendments Related to Liquidity Fees
and Redemption Gates. Removal of the liquidity fee and redemption gate
provisions in rule 2a-7, as well as removal of associated disclosure
requirements in Form N-1A and N-CR, would be effective, if adopted,
when the final rule is effective.
    We request comment on the proposed compliance dates, and
specifically on the following items:
    141. Are the proposed compliance dates appropriate? If not, why
not? Is a longer or shorter period necessary to allow affected funds to
comply with one or more of these particular amendments? If so, what
would be a recommended compliance date?
    142. Should removal of the fee and gate provisions be effective
when the final rules become effective, as proposed? Alternatively,
should these provisions not be effective until the compliance period
ends for the increased liquidity requirements or the swing pricing
requirement?

III. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the
costs and benefits, of the proposed amendments. Section 2(c) of the Act
provides that when the Commission is engaging in rulemaking under the
Act and is required to consider or determine whether an action is
consistent with the public interest, the Commission shall also consider
whether the action will promote efficiency, competition, and capital
formation, in addition to the protection of investors. The analysis
below addresses the likely economic effects of the proposed amendments,
including the anticipated and estimated benefits and costs of the
amendments and their likely effects on efficiency, competition, and
capital formation. The Commission also discusses the potential economic
effects of certain alternatives to the approaches taken in this
proposal.
    Money market funds serve as intermediaries between investors
seeking to allocate capital and issuers seeking to raise capital.
Specifically, money market funds pool a diversified portfolio of short-
term debt instruments (such as government and municipal debt,
repurchase agreements, commercial paper, certificates of deposit, and
other short-term debt instruments), and sell shares to end investors,
who use money market funds to manage liquidity needs. Money market
funds play an important role in investors' asset allocation and
liquidity management; serve as a source of wholesale funding liquidity
in the financial system; and rely on capital subject to daily and
intraday redemptions to invest in short-term debt instruments.\302\
---------------------------------------------------------------------------

    \302\ See Section III.B.3 for an analysis of portfolio holdings
of different types of money market funds.
---------------------------------------------------------------------------

    As discussed in detail in the sections that follow, the proposal
seeks to address liquidity externalities in money market funds.
Specifically, redeeming investors impose negative liquidity
externalities on investors remaining in the fund (``fund dilution''),
which may amplify a first mover advantage in redemptions. For example,
when early redemptions force a money market fund to draw down on liquid
assets, they reduce overall fund liquidity available for future
redemptions. The proposed removal of the tie between weekly liquid
assets and redemption gates and the proposed elimination of redemption
gates under rule 2a-7 are intended to reduce incentives of investors to
redeem early to avoid losing liquidity during a potential gating
period. The proposed increases in minimum liquidity requirements are
designed to support funds' ability to meet redemptions from cash or
securities convertible to cash even in market conditions in which money
market funds cannot rely on a secondary or dealer market to provide
liquidity, which may reduce transaction costs associated with
redemptions and corresponding dilution borne by remaining investors. In
addition, the proposed swing pricing requirement for institutional
prime and institutional tax exempt money market funds is intended to
require redeeming investors to absorb the liquidity costs they impose
on the fund and thereby reduce unfairness to and the dilution of
shareholders remaining in the fund.
    By reducing liquidity externalities in money market funds, the
proposal may dampen the risk of runs on money market funds. The
possibility that funds may impose gates or fees after crossing a
threshold may give rise to additional

run risk. As discussed in Section I.B, in March 2020, when some money
market funds approached the 30% weekly liquid asset threshold that
would permit a fund to impose a gate or a fee, investors became more
likely to redeem from those funds. Loss of access to liquidity by
investors during the gating period can magnify the incentive to run
before the gate is imposed.
    The proposal may mitigate liquidity externalities and run risk in
money market funds in three ways. First, the proposal would remove the
tie between weekly liquid asset thresholds and the possibility that
gates or fees will be imposed, which incentivized runs on money market
funds and altered portfolio management behavior of money market funds
in 2020, based on available evidence. Second, increases in minimum
liquidity requirements may improve the ability of funds to meet
redemptions, reducing the risk of runs on funds with low liquidity.
Third, the proposed swing pricing requirement may partly reduce run
risk by reducing the first-mover advantage related to dilution
costs.\303\
---------------------------------------------------------------------------

    \303\ Factors other than dilution costs--such as falling asset
prices and potential differences between a fund's net asset value
and execution prices--may also contribute to runs. These and other
considerations are discussed in greater detail in Section III.B.2
below.
---------------------------------------------------------------------------

    Money market fund managers' risk-taking incentives may lead them to
hold liquidity levels that may be insufficient to meet redemptions in
times of stress \304\ for at least three reasons. First, some investors
may seek to maximize returns,\305\ assets with higher liquidity risks
deliver higher returns,\306\ and fund managers' compensation may be
related to fund size and performance.\307\ Second, large scale
redemptions akin to those experienced by some funds in March 2020 are
rare, and estimating the risk of such rare and large scale redemptions
is inherently difficult. Third, money market funds do not internalize
liquidity externalities that money market fund liquidity management
practices may impose on market participants transacting in the same
asset classes. While the proposal would not fundamentally change these
incentives of money market funds or fund managers, it would require
funds to hold a greater share of highly liquid assets. This may reduce
the ability of money market funds to invest in less liquid assets in
order to reach for yield, reducing the probability that money market
funds are unable to meet redemptions with liquid assets and have to
sell less liquid holdings at a large haircut. Moreover, future times of
stress may involve larger redemptions that would force money market
funds to sell less liquid assets to meet redemptions. Thus, the
proposal may lower the risk that money market funds do not have enough
liquidity to meet redemptions and consequently relying on government
backstops or sponsor support.
---------------------------------------------------------------------------

    \304\ A large finance literature examines the interplay between
maturity transformation, systemic risk, and leverage. See, e.g.,
Fahri, Emmanuel and Jean Tirole. 2012. ``Collective Moral Hazard,
Maturity Mismatch, and Systemic Bailouts''. American Economic Review
102(1): 60-93. See also Acharya, Viral, and S Viswanathan. 2011.
``Leverage, Moral Hazard, and Liquidity.'' Journal of Finance 66(1):
99-138. Other papers have examined the effects of government
backstops on money market funds. See, e.g., Strahan, Philip, and
Basak Tanyeri. 2015. ``Once Burned, Twice Shy: Money Market Fund
Responses to a Systemic Liquidity Shock.'' Journal of Financial and
Quantitative Analysis 50(1-2): 119-144. See also Kim, Hugh Hoikwang.
2020. ``Information Spillover of Bailouts.'' Journal of Financial
Intermediation 43.
    \305\ In a somewhat parallel open end fund context, fund inflows
are highly sensitive to fund yields, which can incentivize a reach
for yield. See, e.g., Choi, Jaewon, and Mathias Kronlund. 2018.
``Reaching for Yield in Corporate Bond Mutual Funds.'' The Review of
Financial Studies. 31(5): 1930-1965. See also Kacperczyk, Marcin,
and Philipp Schnabl. 2013. ``How Safe are Money Market Funds?'' The
Quarterly Journal of Economics, 138(3): 1073-1122. See also
Fulkerson, Jon, Bradford Jordan, and Timothy Riley. 2013. ``Return
Chasing in Bond Funds.'' Journal of Fixed Income, 22(4): 90-103.
    \306\ See, e.g., Lee, Kuan-Hui. 2011. ``The World Price of
Liquidity Risk.'' Journal of Financial Economics 99(1): 136-161. See
also Acharya, Viral, and Lasse Pedersen. 2005. ``Asset Pricing with
Liquidity Risk.'' Journal of Financial Economics, 77(2): 375-410.
See also Pastor, Lubos, and Robert Stambaugh. 2003. ``Liquidity Risk
and Expected Stock Returns.'' Journal of Political Economy 111(3):
642-685.
    \307\ See, e.g., Ma, Linlin, Yuehua Tang, and Juan-Pedro Gomez.
2019. ``Portfolio Manager Compensation in the U.S. Mutual Fund
Industry.'' Journal of Finance 74(2): 587-638.
---------------------------------------------------------------------------

    Many of the benefits and costs discussed below are difficult to
quantify. For example, we lack data to quantify the number of funds
that had to sell less liquid holdings during March 2020; how funds may
adjust the liquidity of their portfolios in response to the proposed
liquidity thresholds; the extent to which investors may reduce their
holdings in money market funds as a result of the proposed swing
pricing requirement; the extent to which investors may move capital
from institutional prime to government money market funds; and the
reductions in dilution costs to investors as a result of the proposed
amendments (which will depend on investor redemption activity and the
liquidity risk of underlying fund assets). Form N-MFP data is not
sufficiently granular to allow such quantification and many of these
effects will depend on how affected funds and investors may react to
the proposed amendments. While we have attempted to quantify economic
effects where possible, much of the discussion of economic effects is
qualitative in nature. We seek comment on all aspects of the economic
analysis, especially any data or information that would enable a
quantification of the proposal's economic effects.

B. Economic Baseline

1. Affected Entities
a. Money Market Funds
    The proposed amendments would directly affect money market funds
registered with the Commission. From Form N-MFP data, there are a total
of 318 funds with approximately $5 trillion in total net assets that
may be affected by various aspects of the proposal. Table 3 and Table 4
below estimate the number and total net assets of funds by fund type as
of the end of July 2021. Prime money market funds account for
approximately 17% of the total net assets in the industry, whereas
municipal money market funds account for approximately 2%.

[GRAPHIC] [TIFF OMITTED] TP08FE22.006

[GRAPHIC] [TIFF OMITTED] TP08FE22.007

    As discussed above, the swing pricing proposal may
disproportionately affect funds that strike their NAV at the midpoint
price, rather than at the bid price of the securities. One commenter
indicated that it and many other U.S. fund complexes value the
securities held in money market and bond funds for purposes of
computing fund NAVs at the bid price.\308\ We lack data to quantify how
many institutional prime and institutional tax-exempt funds currently
strike their NAV at the midpoint and, to the best of our knowledge, no
such data is publicly available. We solicit comment and any data that
would enable such quantification.
---------------------------------------------------------------------------

    \308\ See Fidelity Comment Letter to the Financial Stability
Board, available at https://www.fsb.org/wp-content/uploads/Fidelity.pdf.
---------------------------------------------------------------------------

b. Other Affected Entities
    As discussed above, the proposed swing pricing requirement would
indirectly affect a large group of intermediaries. Specifically, swing
pricing would require certain money market funds to receive more timely
flow information before they can strike the NAV and settle trades. As
discussed in greater detail below, this may affect all market
participants sending orders to relevant money market funds, including
broker-dealers, registered investment advisers, retirement plan
recordkeepers and administrators, banks, other registered investment
companies, and transfer agents that receive flows directly.
    In addition, the proposed requirement that stable NAV money market
funds determine that intermediaries submitting orders to purchase or
redeem the fund's shares have the ability to process transactions at
non-stable prices would also affect intermediaries sending flows to
these money market funds. As discussed in section II.D, rule 2a-7
already imposes the obligation on money market funds and their transfer
agents to have the capacity to redeem and sell securities at prices
that do not correspond to a stable price per share.
2. Certain Economic Features of Money Market Funds
    Several features of money market funds can create an incentive for
their shareholders to redeem shares heavily in periods of market
stress. We discuss these factors below, as well as the adverse impacts
that can result from such heavy redemptions in money market funds.
a. Money Market Fund Investors
    As discussed elsewhere,\309\ investors in money market funds have
varying investment goals and tolerances for risk. Many investors use
money market funds for principal preservation and as a cash management
tool. Such investors may be loss averse for many reasons, including
general risk tolerance, legal or investment policy restrictions, or
short-term cash needs. These overarching considerations may create
incentives for money market fund investors to redeem--incentives that
may persist regardless of market conditions and even if the other
dilution related incentives discussed below are addressed by the
proposal.
---------------------------------------------------------------------------

    \309\ See, e.g., 2014 Adopting Release, supra footnote 12, at
47740.
---------------------------------------------------------------------------

    The desire to avoid loss may cause investors to redeem from certain
money market funds in times of stress. For example, as discussed
elsewhere, heavy redemptions from prime money market funds and
subscriptions in government money market funds during the 2008
financial crisis pointed to a flight to quality, given that most of the
assets

held by government money market funds have a lower default risk than
the assets of prime money market funds.\310\ As discussed above, during
peak market stress in March 2020, investor redemptions may have been
driven by liquidity considerations, among other things.
---------------------------------------------------------------------------

    \310\ See id.
---------------------------------------------------------------------------

    In addition, as long as investors consider their money market
investments as relatively liquid and low risk, the possibility that a
fund may impose gates or fees when a fund's weekly liquid assets fall
below 30% under rule 2a-7 may contribute to the risk of triggering
runs, particularly from institutional investors that commonly monitor
their funds' weekly liquid asset levels.\311\ As discussed above, some
research suggests that, during peak market volatility in March 2020,
institutional prime money market fund outflows accelerated as funds'
weekly liquid assets went closer to the 30% threshold.\312\ In order to
avoid approaching or breaching the 30% weekly liquid asset threshold
for the possible imposition of redemption gates, money market fund
managers may also choose to sell less liquid portfolio securities
during times of stress.\313\
---------------------------------------------------------------------------

    \311\ See, e.g., Comment Letter of the Systemic Risk Council
(Apr. 12, 2021) (``Systemic Risk Council Comment Letter''); SIFMA
AMG Comment Letter; Fidelity Comment Letter.
    \312\ See, e.g., Li et al., supra footnote 31. See also ICI MMF
Report, supra footnote 45.
    \313\ Some commenters indicated that, on aggregate, prime money
market funds pulled back little from commercial paper markets as
they were largely unable to resell commercial paper and CDs to
issuing banks and such securities lack a liquid secondary market.
See, e.g., ICI MMF Report, supra footnote 45.
---------------------------------------------------------------------------

b. Liquidity Externalities and Dilution Costs
    Money market fund investors can incur dilution costs. Specifically,
the value of shares held by investors staying in the fund may be
diluted if other fund investors transact at a NAV that does not fully
reflect the ex post realized costs of the fund's trading induced by
fund flows. Shareholders in floating NAV and stable NAV funds may bear
dilution costs in different forms. In floating NAV funds, dilution is
reflected in the fund's NAV, which directly affects the yields of
shareholders remaining in the fund. In stable NAV funds, dilution costs
can accrue until the fund's shadow price declines below $0.995, which
may result in the fund breaking the buck and re-pricing its shares
below $1.00. Fund sponsors can also choose to absorb some or all of the
dilution costs for reputational reasons, but are not obligated to do
so.
    Several factors can contribute to the dilution of investors'
interests in money market funds. First, trading costs can lead to
dilution. To effect net redemptions or subscriptions, a fund incurs
trading costs. If these costs are realized prior to NAV strike, they
are distributed across both transacting and non-transacting investors.
However, if these costs are realized after NAV strike, they are borne
solely by non-transacting shareholders that remain in the fund. For low
levels of net redemptions or subscriptions, the difference between the
two scenarios for non-transacting shareholders is low; however, for
large net redemptions, the difference in dilution costs borne by non-
transacting shareholders can be stark.
    Using a stylized example, Figure 2 compares the dilution attributed
to trading costs that occurs when a fund trades to meet redemptions
after NAV is struck (as is currently the case in the U.S.) with the
dilution attributed to trading costs that occurs if a fund is able to
trade to accommodate investor redemptions/subscriptions prior to the
NAV strike (dotted straight line). This stylized example assumes that a
fund holds a single asset whose value is constant, but liquidating the
asset incurs a spread/haircut of 10%. Importantly, the haircut
assumption in this stylized example is used purely for illustrative
purposes; haircuts on assets in money market funds tend to be much
smaller. However, this example demonstrates that larger redemptions can
contribute nonlinearly to higher dilution for remaining shareholders
when a fund trades after the NAV is struck compared to a scenario in
which the fund trades before the NAV is struck.\314\
---------------------------------------------------------------------------

    \314\ To the degree that some funds may determine their NAV
using holdings as of the prior trading day, such practices may also
exacerbate dilution. In Figure 2, if funds strike their NAV using
current trading day holdings, the dotted line would not be
decreasing.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP08FE22.008

    Second, stale prices could contribute to dilution, especially
during times of market stress. Some assets that money market funds hold
may become illiquid and stop trading during times of market stress. In
such events, the only available prices for these assets are prices
realized during pre-stress market conditions, i.e., stale prices. If a
floating NAV fund's NAV on a given date is based on stale prices, net
redemptions at that NAV can dilute non-transacting fund shareholders
when assets are eventually sold at prices that reflect their true
value. Since funds with a stable NAV have a fixed share price at $1,
stale prices only affect the shadow price per share and the probability
that a fund breaks the buck and potentially leads to sponsor support.
The stale pricing phenomenon has been documented in fixed income funds
\315\ and not specifically in money market funds. However, money market
funds hold significant amounts of commercial paper, certificates of
deposit, and other assets that do not have an active and robust
secondary market, making them similarly opaque and difficult to
accurately price, especially during times of market stress.
---------------------------------------------------------------------------

    \315\ See, e.g., Choi, Jaewon, Mathias Kronlund, and Ji Yeol Oh.
2021. ``Sitting Bucks: Stale Pricing in Fixed Income Funds.''
Journal of Financial Economics, forthcoming.
---------------------------------------------------------------------------

    Knowing that these and other factors \316\ may contribute to
dilution, money market fund investors may have an incentive to redeem
quickly in times of stress to avoid realizing potential dilution, an
effect exacerbated if they believe other investors will redeem.\317\
Some research in a parallel open end fund setting suggests that
liquidity externalities may create a ``first-mover advantage'' that may
lead to cascading anticipatory redemptions akin to traditional bank
runs.\318\ There is a dearth of academic research about the degree to
which dilution costs alone may trigger money market fund runs. In
addition, theoretical models of such first-mover advantage typically
rely on some exogenous mechanism to generate initial redemptions from
funds.\319\ While stale NAV and trading costs can create incentives for
early redemptions, redemptions may also occur for reasons that are not
strategic, such as a desire to rebalance portfolios under stressed
market conditions.
---------------------------------------------------------------------------

    \316\ For example, market risk may contribute to dilution costs.
If a fund redeems investors at a given NAV, but must raise funds to
meet those redemptions on a subsequent trading day during which the
value of the fund's holdings declines significantly, non-transacting
shareholders will be diluted. Conversely, non-transacting money
market fund investors can benefit if assets are sold at a price
higher than NAV. While the value of the fund's holdings can go both
up and down, such market risk amplifies the risk fund shareholders
would otherwise experience. However, since true market prices may be
very difficult to forecast, the degree to which such dilution
contributes to the first mover advantage is unclear.
    \317\ Similar effects have been shown to create run dynamics in
banking contexts. See, e.g., Diamond, Douglas and Philip Dybvig.
1983. ``Bank Runs, Deposit Insurance, and Liquidity.'' Journal of
Political Economy 91(3): 401-419.
    \318\ This research generally models an exogenous response to
negative fund returns and not trading costs. However, these results
may extend to trading costs to the degree that cost based dilution
may reduce subsequent fund returns, which would trigger runs in
these models. See e.g., Chen, Qi, Itay Goldstein, and Wei Jiang.
2010. ``Payoff Complementarities and Financial Fragility: Evidence
from Mutual Fund Outflows.'' Journal of Financial Economics 97(2):
239-262. See also Goldstein, Itay, Hao Jiang, and David Ng. 2017.
``Investor Flows and Fragility in Corporate Bond Funds.'' Journal of
Financial Economics 126(3): 592-613. See also Morris, Stephen,
Ilhyock Shim, and Hyun Song Shin. 2017. ``Redemption Risk and Cash
Hoarding by Asset Managers.'' Journal of Monetary Economics 89: 71-
87. See also Zeng, Yao. 2017. ``A Dynamic Theory of Mutual Fund Runs
and Liquidity Management.'' Working Paper. See also Ma, Yiming,
Kairong Xiao, and Yao Zeng. 2021. ``Mutual Fund Liquidity
Transformation and Reverse Flight to Liquidity.'' Working Paper. See
also Ma, Yiming, Kairong Xiao, and Yao Zeng. 2021. ``Bank Debt
versus Mutual Fund Equity in Liquidity Provision.'' Working Paper.
    \319\ For example, one model assumes that investors redeem from
funds following poor performance. See Chen, Qi, Itay Goldstein, and
Wei Jiang. 2010. ``Payoff Complementarities and Financial Fragility:
Evidence from Mutual Fund Outflows.'' Journal of Financial Economics
97(2): 239-262.
---------------------------------------------------------------------------

    Regardless of the reason for a fund experiencing net redemptions on
any given day, such redemptions impose a cost on investors remaining in
the fund in the absence of measures to take trading costs into account.
In addition, since money market funds can trade portfolio holdings to
meet redemptions or subscriptions, money market fund liquidity
management can both dampen and magnify disruptions in underlying
securities markets.

3. Money Market Fund Activities and Price Volatility
a. Portfolio Composition and Interplay With Short-Term Funding Markets
    As described in the introduction, portfolio composition of money
market funds is determined by fund type. Figure 3 and Figure 4 show
portfolio holdings of prime and tax-exempt money market funds since
2016.\320\ Prime money market funds mostly hold certificates of deposit
and time deposits, which average 33% of their portfolio holdings. The
second largest category is financial commercial paper, which averages
18% of fund portfolio holdings. These categories of holdings decreased
as portfolio shares after March 2020 as prime money market funds
increased their Treasury holdings. Tax-exempt money market funds mostly
hold variable rate demand notes, which average 50% with a slight
downward trend over time. The second largest category is tender options
bonds, which average 23%, with a slight upward trend over time. Figure
5 shows differences in portfolio holdings of commercial paper of retail
and institutional prime money market funds: Generally retail money
market funds have somewhat higher holdings of commercial paper compared
to institutional funds. For instance, retail prime money market funds
held on average 21% of financial commercial paper compared to 17% for
institutional prime money market funds.
---------------------------------------------------------------------------

    \320\ The 2014 money market fund reforms were implemented in
2016. For the purposes of this economic analysis, the Commission's
baseline reflects rules currently in effect as well as how money
market fund practices and portfolios evolved in the aftermath of the
2014 final rule.
    \321\ The numbers on the x axis are months and years. CDs/Time
Deposits are certificates of deposit or time deposits. Financial CP
is commercial paper of issuers in the financial industry. Treasury
Debt/Repos are U.S. Treasury obligations or repurchase agreements
collateralized by U.S. Treasury securities. Government Agency Debt/
Repos are debt securities of Federal agencies and instrumentalities,
as well as repurchase agreements collateralized by government agency
securities. ABCP is asset-backed commercial paper. Non/Financial CP
is commercial paper of issuers not in the financial industry. In a
repurchase agreement, one party sells an asset, usually a Treasury
security or other fixed income security, to another party with an
agreement to repurchase the asset at a later date at a slightly
higher price. Repo contracts are a common form of short-term
financing. In a repo, the party selling the security is similar to
the lender in a securities lending agreement; the party purchasing
the security is similar to a borrower in cash collateralized
securities lending. In both cases, the transaction is facilitated by
cash transfers from the purchaser (borrower) to the seller (lender).
In a securities loan, the cash is in the form of collateral while in
a repo transaction the cash is payment for the security. In both
cases, the purchaser or borrower becomes the legal owner of the
security. To unwind the repurchase agreement or securities loan,
cash transfers back to the purchaser in terms of the repurchase cost
for a repo or in the form of returned collateral in a securities
loan. Repos and securities loans differ in that repos typically are
primarily used for short-term financing while securities loans
typically are used to gain access to the security itself. Also loans
generally allow the lender to recall the security on demand while
repos do not. Additionally, the cash received by the seller of a
repo is often not re-invested but is used to finance the operations
of a company whereas the cash received in a securities loan is
generally re-invested in low risk fixed income securities for the
life of the loan. See, e.g., Gorton, Gary and Andrew Metrick. 2012.
``Securitized Banking and the Run on Repo,'' Journal of Financial
Economics 104.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
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[GRAPHIC] [TIFF OMITTED] TP08FE22.010

[GRAPHIC] [TIFF OMITTED] TP08FE22.011

    While money market funds are only one type of participant among
many in short-term funding markets, money market fund activity may
influence short-term funding markets. A wave of redemptions can force
money market funds to liquidate portfolio holdings at reduced prices,
if they have insufficient cash on hand from maturing daily and weekly
liquid assets or cash from subscriptions, which can contribute to
stress in underlying short-term funding markets. As a result, money
market fund liquidity has the potential to impact underlying securities
issuers' ability to raise capital in short-term markets during stress
periods. Figure 6 shows trends in holdings of commercial paper by money
market funds.

[GRAPHIC] [TIFF OMITTED] TP08FE22.012

b. NAV and Price Volatility
    After the 2014 rule 2a-7 amendments, only one money market fund had
its market NAV drop below $.9975 in 2020; \322\ however, in a few
instances, fund sponsors provided financial support by purchasing
securities from affiliated institutional prime money market funds to
prevent these funds from dropping below the 30% weekly liquid asset
threshold.\323\
---------------------------------------------------------------------------

    \322\ All money market funds have a market NAV, which is a four
digit price that is calculated using available market prices and/or
fair value market pricing models of the portfolio securities. In
contrast, retail and government money market funds also have a
stable NAV, which is a two digit price usually set at $1.00 that
does not fluctuate and is calculated using amortized cost
accounting.
    \323\ See, e.g., ICI Comment Letter I; Wells Fargo Comment
Letter.
---------------------------------------------------------------------------

    To reduce volatility in their market NAVs, money market funds
invest in short-term, high-credit-quality, well diversified debt
securities pursuant to rule 2a-7. Although the limits on maturity and
credit risk of money market fund holdings under rule 2a-7 reduce risks
a money market fund may face, they do not eliminate those risks. Risks
that remain may cause the fund's market NAV to deviate from $1. Changes
in interest rates or a security's credit rating, for example, could put
temporary downward pressure on an asset's price before it matures at
par. In addition, if any securities were sold or matured for less than
the amortized cost, then any deviation between the fund's market price
and $1 would become permanent. Finally, an issuer may default on
payments of principal or interest, generating losses for funds holding
the issuer's securities. If the loss is large enough, a stable NAV fund
could break the buck while a floating NAV fund could see a decline in
its share price.
    We have examined the distribution of market NAVs before and after
the compliance date of the 2014 amendments (October 2016).\324\ Figure
7 quantifies the trends in the distribution of money market fund market
NAVs before and after the 2014 rule amendments went into effect and in
the run up to the 2020 market stress. The distribution of money market
fund market NAVs, as a whole, changed little over time. However, as can
be seen from Figure 8 and Figure 9, the distribution of prime money
market fund's market NAVs tightened around the compliance date with the
2014 amendments.
---------------------------------------------------------------------------

    \324\ This analysis relies on Form N-MFP submissions between
November 2010 and November 2020 for all money market funds. From
these filings, portfolio holdings and fund characteristics,
including fund NAV prices from Item B.5, are extracted for each
fund. Item B.5 requires filers to report the net asset value per
share as of the close of business on each Friday of the month. To
avoid duplication, master funds are removed from the sample:
Although feeder funds generally have the same characteristics as
their master fund, feeder funds have different investor redemption
patterns, which can affect the fund's market price. As a result,
Form N-MFP filers generally provide market prices for the feeder
funds and leave the market prices for master funds blank or zero.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TP08FE22.013

[GRAPHIC] [TIFF OMITTED] TP08FE22.014

[GRAPHIC] [TIFF OMITTED] TP08FE22.015

    The dispersion of market NAVs across all retail prime money market
funds each month in Figure 9 is larger than the dispersion of market
NAVs of their institutional counterparts.\325\ This result is
consistent with the possibility that, following the 2014 amendments,
advisers to institutional prime and institutional municipal funds were
under increased pressure to keep their weekly liquid assets high and
their floating NAV near $1.0000, possibly because sophisticated
institutional investors are more likely to track the standard
deviations and redeem shares in a crisis.\326\ In other words, the
baseline daily disclosure of the market prices may allow institutional
investors to monitor NAV fluctuations, and may influence the liquidity
risk management of money market funds.
---------------------------------------------------------------------------

    \325\ For example, between October 2016 and February 2020 the
mean market NAV was $1.0001 with a standard deviation of $0.0003 for
retail prime funds and for institutional prime funds the mean market
NAV was $1.0001 with a standard deviation of $0.0002.
    \326\ See, e.g., Response to Questions Posed by Commissioners
Aguilar, Paredes, and Gallagher, Page 10, available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
---------------------------------------------------------------------------

    Figure 10 and Figure 11 show the distribution of weekly retail and
institutional prime money market fund market NAVs during the COVID-19
pandemic, respectively. On average, retail prime money market fund
market NAVs dropped from $1.0002 to $0.9994 or 8 bps as a result of the
market dislocation. Similarly, the average institutional prime money
market fund market NAV dropped from $1.0003 to $0.9994 or 9 bps as a
result of the market dislocation. The lowest market NAV for retail
prime dropped from $0.9994 to $0.9980 or 14 bps. In contrast,
institutional prime money market fund lowest market NAV dropped from
$0.9999 to $0.9976 or 23 bps. No prime money market fund market NAV
dropped below $0.9975. To the degree that the only available prices for
some affected money market fund holdings during March 2020 stress may
have been realized during pre-stress market conditions, these NAV
fluctuations may underestimate the degree of asset volatility in these
funds.

[GRAPHIC] [TIFF OMITTED] TP08FE22.016

[GRAPHIC] [TIFF OMITTED] TP08FE22.017

    Holdings of retail and institutional money market funds may
contribute to NAV volatility of these funds. Figure 12 shows
differences in the holdings of Treasuries, commercial paper, and
certificates of deposit of retail prime and institutional prime money
market funds.

[GRAPHIC] [TIFF OMITTED] TP08FE22.018

c. Liquidity Management
    The above portfolio differences between retail and institutional
money market funds are also observed in the amount of the daily liquid
assets and weekly liquid assets in prime fund portfolios, with retail
fund daily and weekly liquid assets being lower than those of
institutional funds. Figure 13 reports daily and weekly liquid asset
percentages for prime funds.
[GRAPHIC] [TIFF OMITTED] TP08FE22.019

BILLING CODE 8011-01-C
    During peak volatility in March 2020, some funds experienced a
reduction in their daily and weekly liquid asset values as they drew
down on their liquid assets to meet large redemptions. Specifically, a
high of 6 institutional prime funds on March 18 had weekly liquid
assets below 35%, and one of the institutional prime money market funds
had weekly liquid assets below 30%.\327\ The largest fund outflow was a
weekly decrease of 55% in assets under management, and the fund's
weekly liquid assets declined from 38.8% to 32.2% over three
consecutive days.
---------------------------------------------------------------------------

    \327\ See ICI MMF Report, supra footnote 45. ICI also reports
that one of the institutional prime money market funds had weekly
liquid assets of less than 30% on March 18, 2020. Currently, rule
2a-7 requires that a money market fund comply with the daily and
weekly liquid asset standards at the time each security is acquired
(rule 2a-7(d)(4)(ii) and (iii)).
---------------------------------------------------------------------------

C. Costs and Benefits of the Proposed Amendments

1. Removal of the Tie Between the Weekly Liquid Asset Threshold and
Liquidity Fees and Redemption Gates
a. Benefits
    The proposal would remove the tie between money market funds'
weekly liquid assets and the possible imposition of fees and redemption
gates, as well as eliminate gate provisions from rule 2a-7. These
amendments may benefit money market funds and their investors by
reducing the risk of runs on money market funds, especially during
times of liquidity stress.
    As discussed in the introduction, money market funds use a pool of
assets subject to daily redemptions to invest in short-term debt
instruments that are not perfectly liquid, which renders them
susceptible to a first mover advantage in investor redemptions akin to
bank runs.\328\ Moreover, money market fund

redemptions can impose liquidity externalities on shareholders
remaining in the fund, as discussed in Section III.B.2. The possibility
of a redemption fee or gate can magnify those incentives and
externalities. Specifically, under the current baseline, money market
funds may impose redemption fees or gates if their weekly liquid assets
are below 30% of their total assets. Thus, as funds approach the 30%
threshold, investors seeking to avoid a redemption gate or fee are
incentivized to redeem before other redemptions further deplete a
fund's liquid assets. The proposal is expected to reduce such
incentives to redeem.
---------------------------------------------------------------------------

    \328\ See, e.g., Schmidt, Lawrence, Allan Timmermann, and Russ
Wermers. 2016. ``Runs on money market mutual funds.'' American
Economic Review, 106(9): 2625-57. Run dynamics in funds have been
explored in a large body of finance research, including, for
example: Zeng, Yao. 2017. ``A dynamic theory of mutual fund runs and
liquidity management.'' Available at SSRN 2907718; Chen, Qi, Itay
Goldstein, and Wei Jiang. 2010. ``Payoff complementarities and
financial fragility: Evidence from mutual fund outflows.'' Journal
of Financial Economics, 97(2): 239-262.
---------------------------------------------------------------------------

    As a result, the proposed removal of the tie between weekly liquid
assets and the potential imposition of liquidity fees or redemption
gates may better enable funds to use their daily and weekly liquid
assets to meet redemptions in times of stress without giving rise to
risk of runs.\329\ This benefit may be strongest for money market funds
that have weekly liquid assets close to the minimum threshold during
times of liquidity stress, as they are currently most susceptible to
runs. Moreover, money market fund investors would no longer face the
possibility of the imposition of gates outside of liquidations,
enhancing the attractiveness of money market funds as a highly liquid
investment product.
---------------------------------------------------------------------------

    \329\ See, e.g., SIFMA AMG Comment Letter; State Street Comment
Letter.
---------------------------------------------------------------------------

    This amendment may also benefit money market fund investors. As
discussed above, the weekly liquid asset triggers for the possible
imposition of redemption fees or gates create incentives for investors
to redeem first, at the expense of investors remaining in the fund who
experience further dilution during the gating period. The proposed
removal of the weekly liquid asset trigger as well as the elimination
of redemption gates outside of liquidation may reduce the liquidity
costs borne by investors remaining in the fund. This aspect of the
proposal may increase the attractiveness of money market funds as a low
risk cash management tool and sweep investor account to risk averse
investors.
b. Costs
    As discussed in Section II.A, the proposal would not only remove
the tie between fund weekly liquid assets and the possibility of gating
and fees, but would also eliminate gate and fee provisions from rule
2a-7. As a result, money market funds would only be able to impose
gates in the event of liquidation. To the degree that the ability to
impose redemption gates or fees under rule 2a-7 may be a useful
redemption management tool during times of stress, the proposed
amendment may reduce the scope of tools available to money market funds
to manage their liquidity risk in times of stress.
    Four factors may mitigate this economic cost of the proposed
amendment. First, no money market fund imposed a fee or a gate under
the rule during the market stress of 2020, and investors exhibited
anticipatory redemptions when funds approached the 30% weekly liquid
threshold for the potential imposition of fees and gates. In light of
these factors, money market funds may be unlikely to impose redemption
gates outside of fund liquidation, even if we retained a redemption
gate provision in rule 2a-7. As discussed in Section II.A, the
possibility that a money market fund would impose redemption gates may
influence investment and redemption decisions, which could trigger
runs.
    Second, under the proposal, institutional prime and institutional
tax-exempt money market funds would be required to impose swing
pricing, as discussed in greater detail below. NAV adjustments would
not be tied to weekly liquid assets of the fund, but to the size of net
redemptions and the liquidity costs redeeming investors are imposing on
the shareholders remaining in the fund. The proposed swing pricing
approach may be a more valuable tool for money market funds in managing
investor redemptions than redemption gates and liquidity fees under
rule 2a-7. Moreover, the proposed increases to daily and weekly
liquidity thresholds may increase fund liquidity buffers that can be
used to manage liquidity costs of redemptions.
    Third, money market funds would continue to be able to suspend
redemptions under rule 22e-3 in anticipation of fund liquidation.
Specifically, money market funds would be able to suspend redemptions
if a fund's weekly liquid assets decline below 10% or, in the case of a
stable NAV money market fund, if the board determines that the
deviation between its amortized cost price per share and its market-
based NAV per share may result in material dilution or other unfair
results to investors or existing shareholders, in each case if the
board also approves liquidation of the fund.\330\ Thus, money market
funds would still have access to a form of gating during large
liquidity shocks in connection with a fund liquidation.
---------------------------------------------------------------------------

    \330\ See 17 CFR 270.22e-3.
---------------------------------------------------------------------------

    Fourth, as a result of the run dynamics described above, the tie
between weekly liquid assets and the potential imposition of fees and
gates may have contributed to incentives for money market fund managers
to preserve their weekly liquid assets during liquidity stress, rather
than using them to meet redemptions. Therefore, the tie between weekly
liquid assets and the possibility of fees and gates may magnify
liquidity stress because it incentivizes money market funds to sell
less liquid assets with higher liquidity costs rather than absorb
redemptions out of liquid assets. Thus, the proposed removal of fees
and gates under rule 2a-7 may reduce run risk and liquidity
externalities in money market funds.
2. Raised Liquidity Requirements
a. Benefits
    The proposed amendments increasing daily and weekly liquid asset
requirements to 25% and 50% respectively may reduce run risk in money
market funds. Early redemptions can deplete a fund's daily or weekly
liquid assets, which reduces liquidity of the remainder of the fund's
portfolio and increases the risk that a fund may need to sell less
liquid assets into the market during fire sales. Thus, higher levels of
daily and weekly liquid assets in a fund may reduce trading costs and
the first mover advantage during a wave of redemptions, potentially
disincentivizing runs. When money market funds experience runs, funds
with higher daily and weekly liquid assets may experience lower
liquidity costs as they may be more likely to be able to use their
liquid assets to meet redemptions rather than be forced to sell assets
during liquidity stress.\331\ Although liquidity dynamics in open end
funds may differ from those in money market funds,\332\ some research
in that context shows that fund illiquidity can contribute to run
dynamics, as discussed in section III.B.2b. Some other work finds that
less liquid open-end bond funds suffered more severe outflows during
the COVID-19 crisis than liquid funds, and

that less liquid funds experienced redemptions well before more liquid
funds.\333\ Other research shows that runs were more likely in less
liquid funds for both U.S. and European institutional prime money
market funds.\334\
---------------------------------------------------------------------------

    \331\ See Prime MMFs at the Onset of the Pandemic Report, supra
footnote 41, at 4. According to Form N-MFP filings, no prime money
market fund reported daily liquid assets declining below the 10%
threshold in March 2020.
    \332\ For example, unlike open end funds, money market funds are
subject to daily and weekly liquid asset requirements.
    \333\ See Falato, Antonio, Itay Goldstein and Ali
Horta[ccedil]su. 2021. ``Financial Fragility in the COVID-19 Crisis:
The Case of Investment Funds in Corporate Bond Markets.'' Journal of
Monetary Economics, forthcoming.
    \334\ See Cipriani, Marco and Gabriele La Spada. 2020.
``Sophisticated and Unsophisticated Runs.'' FRB of New York Staff
Report No. 956. See also Anadu, Kenechukwu, Marco Cipriani, Ryan
Craver, and Gabriele La Spada. 2021. ``The Money Market Mutual Fund
Liquidity Facility.'' FRM of New York Staff Report No. 980.
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    The proposed increases to liquidity requirements may reduce the
likelihood that funds need to sell portfolio securities during periods
of market stress. This may reduce the potential effect of redemptions
from money market funds on short-term funding markets during times of
stress. Some commenters stated that redemptions from money market funds
may not have contributed to stress in short-term debt markets during
March 2020 and noted a relation between sales and the introduction of
the Money Market Liquidity Facility (MMLF).\335\ For example, one
industry group conducted a survey of members that indicated the two-
thirds of the reduction in prime money market funds' commercial paper
holdings ($23 billion) represented sales to the MMLF after that
facility was announced on March 18. The commenter suggested that
because these sales moved assets from money market funds to the Federal
Reserve's balance sheet, these sales would not have placed downward
pressure on prices.\336\ There may be varying interpretations of the
effects of fund outflows in March 2020 on the prices of assets held by
money market funds and, thus, the degree to which the proposed
liquidity requirements may reduce the transaction costs and losses
money market funds would face when selling portfolio securities into
stressed markets. Importantly, the proposed liquidity requirements
would enhance the ability of funds to meet large redemptions and reduce
the dilution of remaining fund shareholders which would protect
investors. Some commenters indicated that increases in the weekly
liquid asset threshold would not necessarily result in enhanced money
market fund liquidity because fund managers would continue to be
reluctant to use a fund's liquid assets to fulfill redemptions.\337\
Funds may choose between drawing down on daily or weekly liquid assets
and selling other assets in distressed markets to meet redemptions.
However, the proposed removal of the tie between weekly liquid assets
and the potential imposition of redemption fees and gates may reduce
the disincentives funds currently face to draw down their weekly liquid
assets during a wave of redemptions. Before the 2014 amendments, the
only consequence of a money market fund having weekly liquid assets
below the 30% threshold was that the fund could not acquire any
security other than a weekly liquid asset until its investments were
above the 30% threshold. As a result, funds were more comfortable using
their weekly liquid assets and dropping below the 30% threshold. For
example, at the peak of the Eurozone sovereign crises in the summer of
2011 the lowest reported weekly liquid asset value was approximately
5%.\338\ In combination with the proposed elimination of the tie
between weekly liquid assets and potential imposition of gates and
fees, the proposed liquidity requirements may similarly increase the
reliance of money market funds on daily and weekly liquid assets in
meeting redemptions. However, the proposal would also require prompt
notice of falling below liquidity thresholds, which may decrease these
benefits, as discussed in greater detail in Section III.C.6.
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    \335\ See, e.g., ICI Comment Letter I; ICI Comment Letter II;
Federated Hermes Comment Letter I; SIFMA AMG Comment Letter.
    \336\ See, e.g., ICI Comment Letter I; ICI Comment Letter II.
    \337\ See, e.g., Wells Fargo Comment Letter; JP Morgan Comment
Letter.
    \338\ See, supra footnote 274, Figure 8.
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    These benefits may also be mitigated to the extent that many money
market funds may already voluntarily hold daily and weekly liquid
assets in excess of the regulatory minimum thresholds.\339\ For
example, the asset weighted average daily and weekly liquid assets for
publicly offered institutional prime money market funds between October
2016 and February 2020 was 33% and 48% respectively.\340\ After the
peak volatility in March 2020, money market funds generally increased
their daily and weekly liquidity, with the asset weighted average daily
and weekly liquid assets for publicly offered institutional prime money
market funds rising to 44% and 56% respectively between March 2020 and
November 2020. Importantly, the distribution of liquid assets is
skewed, with approximately 50% of publicly offered institutional prime
funds holding below average (44%) in daily liquid assets and 75% of
funds holding below average (less than 56%) in weekly liquid assets. As
a result, fewer prime funds may benefit from the proposed higher daily
liquid asset threshold than the proposed higher weekly liquid asset
threshold.
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    \339\ Wells Fargo Comment Letter; JP Morgan Comment Letter;
Western Asset Comment Letter (noting that reporting and transparency
requirements encourage managers to maintain liquid assets in excess
of the existing WLA threshold).
    \340\ Averages were calculated by dividing the aggregate amount
of daily (weekly) liquid assets from all funds by the aggregated
amount of assets from all fund.
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    Reduced run risk in money market funds may enhance the resilience
of affected funds and reduce the risk that money market funds may rely
on government backstops. Moreover, this amendment may benefit investors
to the degree that increasing the liquidity of money market fund
portfolios would allow funds to meet large redemptions from liquidity
buffers more easily. For example, after the March 2020 market
dislocation, some prime money market funds voluntarily shifted their
portfolios by swapping out longer maturity commercial paper and
certificates of deposit for more liquid Treasuries, allowing them to
meet any future redemptions better. Raising liquidity thresholds may
have a similar benefit.
    The magnitude of these economic benefits is likely to depend on the
way in which money market funds may respond to the proposed amendments.
Specifically, some affected money market funds (i.e., money market
funds with less than the proposed 25% in daily and 50% in weekly liquid
assets) may react to the proposal by increasing the maturity of the
remainder of their portfolios, potentially reducing their liquidity to
the extent that it is tied to maturity. However, under the current
rules money market funds are constrained in the maturity and weighted
average life of the assets they hold, which is intended to limit the
degree to which funds are able to risk shift their portfolios while
remaining registered as money market funds. Moreover, the liquidity
stress in 2020 was so severe that commercial paper across a variety of
maturities became illiquid.
b. Costs
    The proposed amendments would impose indirect costs on money market
funds, investors, and issuers. Because less liquid assets are more
likely to yield higher returns in the form of a liquidity premium,\341\
to the degree that the

proposal improves the liquidity of money market fund portfolios, it
would lower expected returns of those funds to investors that are
already earning low and or zero net yields in a low interest rate
environment. Several commenters have indicated that an increase in
weekly liquid assets would likely decrease money market fund yields and
make them less desirable to investors.\342\ This may reduce the
attractiveness of money market funds to some investors. Reduced
investor demand may lead to a decrease in the size of assets under
management of affected money market funds and the wholesale funding
liquidity they provide to other market participants. Investors that
prefer to use money market funds as a cash management tool, giving them
the ability to preserve the value of their investments and receiving a
small yield, may move out of prime money market funds and into
government money market funds that deliver lower yields, but have lower
risk to the value of the investment. Moreover, to the degree that some
money market funds are only viable because investors treat them as cash
equivalents, this amendment may result in better matching of investors
to funds that meet their risk tolerance and yield expectations,
mitigating the above costs.
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    \341\ See, e.g., Lee, Kuan-Hui. 2011. ``The World Price of
Liquidity Risk.'' Journal of Financial Economics 99(1): 136-161. See
also Acharya, Viral, and Lasse Pedersen. 2005. ``Asset Pricing with
Liquidity Risk.'' Journal of Financial Economics, 77(2): 375-410.
See also Pastor, Lubos, and Robert Stambaugh. 2003. ``Liquidity Risk
and Expected Stock Returns.'' Journal of Political Economy 111(3):
642-685.
    \342\ SIFMA AMG Comment Letter; Western Asset Comment Letter;
Wells Fargo Comment Letter; JP Morgan Comment Letter.
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    The proposed increase of daily and weekly liquid assets may require
as many as 15% of affected funds to increase their daily liquid assets
and 50% of affected funds to increase their weekly liquid assets, as
discussed in further detail below.\343\ The proposal would thus
increase the demand of money market funds for daily liquid assets, such
as repos, and the liquidity in overnight funding markets may then flow
through banking entities to leveraged market participants, such as
hedge funds. Thus, the proposal may reduce the liquidity risk borne by
money market funds, but may result in a concentration of risk taking
among leveraged and less regulated market participants. At the same
time, this shift could allocate risk that currently resides in money
market funds to hedge funds and other more speculative vehicles.
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    \343\ The analysis is based on March 2020 redemptions from
publicly offered institutional prime funds. The possible new
thresholds determined by stress in publicly offered institutional
prime fund portfolios are then applied to all money market funds
(except for the daily liquid asset threshold for tax-free money
market funds). As such, these figures also reflect the percentage of
retail and institutional prime funds that would be impacted by the
various liquidity thresholds. Important caveats and limitations of
this analysis are discussed in Section III.D.2.a below.
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    The proposed amendments may also impose indirect costs on issuers.
Specifically, money market funds are significant holders of commercial
paper and certificates of deposit, as described in the economic
baseline,\344\ and most of the commercial paper they hold is issued by
banks, including foreign bank organizations.\345\ Therefore, issuers of
commercial paper and certificates of deposit are likely to experience
incrementally reduced demand for their securities from money market
funds, particularly demand for debt that would fall outside of the
weekly liquid assets category. This may reduce such issuers' access to
capital and increase the cost of capital, negatively affecting capital
formation in commercial paper and certificates of deposit. Issuers may
respond to such changes by reducing their issuance of commercial paper
and certificates of deposit and increasing issuance of longer-term
debt. In a somewhat analogous setting, some research explores the
effects of the 2014 money market fund reforms, which resulted in asset
outflows from prime money market funds into government money market
funds and affected funding for large foreign banking organizations in
the U.S., on bank business models.\346\ One paper finds that banks were
able to replace some of the lost funding, but reduced arbitrage
positions that relied on unsecured funding, rather than reducing
lending.\347\ Another paper finds that money market fund reforms led to
an increase in the relative share of lending in bank assets and
concludes that reduction in unstable funding can discourage bank
investments in illiquid assets.\348\ Other research examined the
effects of decreased holdings of European bank debt by money market
funds during the Eurozone sovereign crisis in 2011. One paper found
that reduced wholesale dollar funding from money market funds during
this period led to a sharp reduction in dollar lending by Eurozone
banks relative to euro lending, which reduced the borrowing ability of
firms reliant on Eurozone banks prior to the sovereign debt
crisis.\349\
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    \344\ To the degree that some money market funds hold
significant quantities of commercial paper issued by foreign banks
seeking dollar funding, such issuer costs may have a greater effect
foreign issuers.
    \345\ See ICI MMF Report, supra footnote 45.
    \346\ These outflows around the October 2016 compliance date for
the 2014 reforms, for example, led to reduced money market funds
purchases of commercial paper with other entities like mutual funds
eventually picking up the shortfall and an approximately 30 basis
point spike in 90-day financial commercial paper rates for about
three months.
    \347\ See, e.g., Anderson, Alyssa, Wenxin Du, Bernd Schlusche.
2019. ``Money Market Fund Reform and Arbitrage Capital.'' Working
Paper.
    \348\ See Thomas Flanagan. 2020. ``Funding Stability and Bank
Liquidity.'' Working Paper.
    \349\ See Ivashina, Victoria, David Scharfstein, and Jeremy
Stein, 2015. ``Dollar Funding and the Lending Behavior of Global
Banks.'' Quarterly Journal of Economics 130(3): 1241-1281.
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    These potential costs of the proposed amendment to issuers may be
mitigated by four potential factors. First, as discussed above, money
market funds may respond to a higher weekly liquid asset threshold by
increasing the maturity and liquidity risk in their non-weekly liquid
asset portfolio allocations. This effect may dampen the adverse demand
shock for commercial paper, but increase portfolio risk of affected
money market funds. However, as discussed in Section II.C. above, for
the past several years prime money market funds have maintained levels
of liquidity that are close to or that exceed the proposed thresholds,
without generally barbelling.\350\ Second, as discussed in Section
III.B.3.a), money market funds hold less than a quarter of outstanding
commercial paper, which could limit the impact of the proposal on
commercial paper issuers and markets. Third, the proposed increases to
liquidity requirements may increase some money market fund's liquidity
buffers, which may enable such funds to meet large redemptions from
liquid assets and reduce the need to sell commercial paper to meet
large redemptions during fire sales. This may enhance the stability of
commercial paper markets during times of market stress--an effect that
is also limited by the relative size of money market fund holdings of
commercial paper. Fourth, money market funds are just one group of
investors investing in commercial paper markets and hold less than a
quarter of commercial paper outstanding, as discussed above. If money
market funds pull back from commercial paper markets and commercial
paper prices decrease as a result, other investors, such as mutual
funds or insurance companies, may be attracted to commercial paper,
absorbing some of the newly available supply, as observed after the
2016 reforms.
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    \350\ See BlackRock Comment Letter (stating that they have not
seen evidence that barbelling was a problem in March 2020, or that
money market fund portfolios were generally structured with a
barbell). We similarly have not observed significant use of
barbelling strategies among money market funds.

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3. Stress Testing Requirements
a. Benefits
    The proposal would also alter stress testing requirements for money
market funds. Under the baseline, money market funds are required to
stress test their ability to maintain 10% weekly liquid assets under
the specified hypothetical events described in rule 2a-7 since breach
of the 10% weekly liquid asset threshold would impose a default
liquidity fee. The proposal would eliminate the default liquidity fee
triggered by the 10% threshold and the corresponding stress testing
requirement around the 10% weekly liquid asset threshold. Instead, the
proposal would require funds to determine the minimum level of
liquidity they seek to maintain during stress periods and to test
whether they are able to maintain sufficient minimum liquidity under
such specified hypothetical events, among other requirements.
    Money market funds may have different optimum levels of liquidity
under times of stress. Many factors influence optimum levels of minimum
liquidity, including the type of money market fund, investor
concentration, investor composition, and historical distribution of
redemption activity under stress. This aspect of the proposal may
increase the value of stress testing as part of fund liquidity
management by allowing funds to tailor their stress testing to the
fund's relevant factors, which may enhance the ability of funds to meet
redemptions and the Commission's oversight of money market funds.
b. Costs
    Proposed amendments to fund stress testing requirements may impose
direct and indirect costs. Specifically, a fund would be required to
determine the minimum level of liquidity it seeks to maintain during
stress periods, identify that liquidity level in its written stress
testing procedures, periodically test its ability to maintain such
liquidity level, and provide the fund's board with a report on the
results of the testing. As a baseline matter, funds are expected