which the liquidity fee was applied and the amount of the liquidity fee
applied by the fund.
    Broadly, the final amendments to Form N-MFP may make the form more
usable by filers, regulators, and investors, and may increase
transparency around money market fund activities in three ways. First,
the requirement that the funds report daily information about their
daily and weekly liquid assets, flows, and NAV will reduce costs of
accessing this information relative to the baseline of routinely
accessing and downloading information across many fund websites and
will provide a long-term repository of this information for all funds.
Second, additional information about fund repo activities will enable
investors and the Commission to better assess fund liquidity risks and
oversee the industry. Third, information about shareholder
concentration and composition can help the Commission and investors
understand and evaluate potential redemption and liquidity risks.
    In addition, the final amendments add disclosure requirements to
Form N-MFP to capture information about the relevant funds' use of
liquidity fees. These amendments are expected to benefit investors in
money market funds by reducing information asymmetries between funds
and investors about these funds' liquidity fee practices. Since
liquidity fees have not been broadly used by U.S. money market funds,
the purpose of the disclosure requirement is, thus, to inform investors
about the manner in which affected money market funds implement the
liquidity fee framework. Such transparency may result in greater
allocative efficiency as investors with low tolerance of liquidity risk
and costs may choose to reallocate capital to money market funds that
have lower liquidity risk and costs. In addition, to the degree that
uncertainty about the final liquidity fee framework may reduce the
attractiveness of affected money market funds to investors, the final
amendments requiring disclosures about liquidity fees may reduce
information asymmetries between money market funds and their investors,
which may dampen those adverse effects.
    The final amendments to Form N-MFP will impose initial and ongoing
PRA costs, as discussed in section V below.\684\ The Commission
continues to believe that money market funds generally already maintain
the information they will be required to report on Form N-MFP pursuant
to other regulatory requirements or in the ordinary course of business.
However, the Commission continues to recognize that affected funds
would incur some costs in reporting the information, particularly costs
of reporting certain information with more frequency.\685\ Due to
economies of scale, such costs may be more easily borne by larger fund
families, and costs borne by money market funds may be passed along to
investors in the form of higher fees and expenses. The Commission also
received comments that the proposed requirements related to reporting
of shareholder concentration and composition, as well as lot-level
reporting may give rise to privacy and related costs,\686\ as well as
predatory trading costs.\687\ As discussed in greater detail in section
II, to reduce such costs and concerns, the final rule does not require
money market money market funds to disclose the names of beneficial or
record owners who hold 5% or more of the shares outstanding in the
relevant class, but only the type of owner, as suggested by some
commenters.\688\ In addition, as discussed in section II, the final
rule does not impose lot-level reporting requirements.
---------------------------------------------------------------------------

    \684\ As discussed in section V.C, the Commission estimates a
total annual internal time cost of the information collection
requirements of the amendments to Form N-MFP of $601,002 and total
annual external cost burden of $268,128 for all affected funds. The
cost estimates include both initial and ongoing costs with the
former being amortized over three years.
    \685\ See, e.g., Federated Hermes Comment Letter I.
    \686\ See, e.g., CFA Comment Letter; Federated Hermes Comment
Letter I; Invesco Comment Letter; Dechert Comment Letter; Schwab
Comment Letter; ICI Comment Letter; Bancorp Comment Letter; SIFMA
AMG Comment Letter; Northern Trust Comment Letter; CCMR Comment
Letter.
    \687\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
BlackRock Comment Letter; CCMR Comment Letter.
    \688\ See, e.g., Federated Hermes Comment Letter I; BlackRock
Comment Letter.
---------------------------------------------------------------------------

    One commenter opposed the proposal to require liquidity, net asset
value, and flow data to be reported as of the close of business on each
business day of each month on the basis that it would be unduly
burdensome and without any added benefit.\689\ As discussed in the
proposal, daily data based on information collected from funds'
websites provided by private data vendors can be incomplete, and may
have limited utility for Commission oversight and analysis. Moreover,
money market funds are, in general, already required to provide on
their websites the same data that we are requiring be reported on Form
N-MFP. Thus, we believe that the burdens of the proposed changes on
money market funds may be small or de minimis. In addition, the final
disclosures concerning liquidity fees may create incentives for money
market funds to compete on this dimension. Specifically, institutional
investors that use institutional money market funds for cash management
and prefer lower or zero liquidity fees may move capital from money
market funds that charged higher historical fees to funds with lower
fees or those that have never charged fees. This may incentivize fund
managers to manage their liquidity so as to avoid charging mandatory or
discretionary fees. However, while

liquidity fees charge redeemers, they benefit investors remaining in
the fund, which may make funds actively using liquidity fees more
attractive to some investors.
---------------------------------------------------------------------------

    \689\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

c. Benefits and Costs of Requirements Related to Identifying
Information on Form N-CR and Form N-MFP
    The final amendments will also require the registrant name, series
name, related definitions, and LEIs for the registrant and series on
Form N-CR. In addition, the final amendments will require money market
funds to report LEIs for the series on Form N-MFP. The LEI is used by
numerous domestic and international regulatory regimes for
identification purposes.\690\ As such, requiring these additional
disclosures could enable data users such as investors and regulators to
cross-reference the data reported on Form N-CR with data reported on
Form N-MFP and with data received from other sources more easily,
thereby expanding the scope of information available to such data users
in their assessments.\691\ All money market funds are already required
to have registrant and series LEIs due to baseline Form N-CEN reporting
requirements, as discussed in section II.F. The final amendments to
Form N-MFP will also require other information to better identify
different types of money market funds, such as amendments to better
identify Treasury funds and funds that are used solely by affiliates
and other related parties. These amendments will help the Commission
and market participants to identify certain categories of money market
funds more efficiently. However, the final requirements to improve
identifying information may give rise to direct compliance costs
associated with amending reporting on Forms N-CR and N-MFP, as
discussed in section V.
---------------------------------------------------------------------------

    \690\ Other regulators with LEI requirements include the U.S.
Federal Reserve, European Union's (E.U.'s) MiFid II regime, and
Canada's IIROC; the LEI is also used by private market participants
for risk management and operational efficiency purposes. See https://www.leiroc.org/lei/uses.htm.
    \691\ Fees and restrictions are not imposed for the usage of or
access to LEIs.
---------------------------------------------------------------------------

    In addition to the entity identification information (e.g.,
registrant name, series name, related definitions, and LEIs) discussed
above, the final amendments will also expand security identification
information by adding a CUSIP requirement for collateral securities
that money market funds report on Form N-MFP. CUSIP numbers are
proprietary security identifiers and their use (including storage,
assignment, and distribution) entails licensing restrictions and fees
that vary based on factors such as the number of CUSIP numbers
used.\692\ Money market funds are currently required to disclose CUSIP
numbers for each holding they report on Form N-MFP.\693\ As such, the
incremental compliance cost on money market funds associated with the
CUSIP requirement, compared to the baseline, will be limited to those
costs, if any, incurred by money market funds as a result of storing
additional CUSIP numbers (to the extent money market funds do not
already store CUSIP numbers for their collateral securities).\694\
---------------------------------------------------------------------------

    \692\ The CUSIP system (formally known as CUSIP Global Services)
is owned by the American Bankers Association and managed by FactSet
Research Systems Inc. See CGS History, available at https://www.cusip.com/about/history.html, and License Fees, available at
https://www.cusip.com/services/license-fees.html.
    \693\ See Item C.3 of Form N-MFP.
    \694\ CUSIP license costs vary based upon, among other factors,
the quantity of CUSIP numbers to be used, on a tiered model, with
the lowest tier being up to 500 CUSIP numbers. See CGS License
Structure, available at https://www.cusip.com/services/license-fees.html#/licenseStructure. Based on our understanding of current
CUSIP licenses and usage among money market funds, we do not believe
the CUSIP reporting requirement for collateral securities is likely
to impose incremental compliance costs on money market funds by
moving them into a new CUSIP license pricing tier.
---------------------------------------------------------------------------

    As discussed in section II, one commenter supported the CUSIP
requirement and agreed that money market fund managers will not incur
additional costs or burden due to the CUSIP requirement.\695\ By
contrast, one commenter opposed the CUSIP requirement due to its
limited utility and the costs involved.\696\ However, we believe the
CUSIP requirement will be useful, because it will provide more precise
and consistent identification of the securities that money market funds
use as collateral, thus facilitating staff and public analysis of money
market fund activity. Also, as noted, we do not believe the CUSIP
requirement will cause money market funds to incur incremental
additional costs, because they are subject to existing CUSIP reporting
obligations.
---------------------------------------------------------------------------

    \695\ See ABA Comment Letter II. This commenter additionally
asserted that a discussion of licensing restrictions is not relevant
to the added CUSIP requirement under final amendments, and that the
concept of CUSIP being proprietary has never applied to
transactional use or regulatory reporting. However, the commenter
did not specify which particular provisions in the license agreement
set forth exceptions for regulatory reporting and transactional use.
    \696\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

d. Benefits and Costs of Structured Data Requirement for Form N-CR
    The final amendments will require money market funds to submit
reports on Form N-CR using a structured, machine-readable data
language--specifically, in an XML-based language created specifically
for Form N-CR (``N-CR-specific XML'').\697\ Currently, money market
funds submit reports on Form N-CR in HTML or ASCII, neither of which is
a structured data language.\698\ As discussed in section II, the
Commission received one comment that viewed the final structured data
requirement as a reporting enhancement that will increase transparency
for institutional and retail investors, and allow regulators and
policymakers to better assess the state of the financial system.\699\
By contrast, one commenter opposed this requirement, indicating that a
structured data language requirement is costly and not used by
investors.\700\ This aspect of the final amendments may facilitate the
use and analysis, both by the public and by the Commission, of the
event-related disclosures reported by money market funds on Form N-CR,
as compared to the current baseline. The improved usability of Form N-
CR could enhance market and Commission monitoring and analysis of
reported events, thus providing greater transparency into potential
risks associated with money market funds on an individual level and a
population level.
---------------------------------------------------------------------------

    \697\ This would be consistent with the approach used for other
XML-based structured data languages created by the Commission for
certain specific EDGAR Forms, including Form N-CEN and Form N-MFP.
See Current EDGAR Technical Specifications, available at https://www.sec.gov/edgar/filer-information/current-edgar-technical-specifications.
    \698\ See supra note 400.
    \699\ See, e.g., Western Asset Comment Letter.
    \700\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Importantly, the incremental costs associated with requiring money
market funds to submit reports on Form N-CR in N-CR-specific XML,
compared to the baseline of submitting Form N-CR in HTML or ASCII, may
be low given that money market funds already utilize XML-based
languages to meet similar requirements in their other reporting, and
can utilize their existing capabilities for preparing and submitting
Form N-CR.\701\ In addition, money market funds will be given the
option of filing Form N-CR using a fillable web form that will render
into N-CR-specific XML in the Electronic Data Gathering, Analysis, and
Retrieval (``EDGAR'') system, rather than filing directly in N-CR-
specific XML using the technical specifications published on the
Commission's website. However, under the final rule, money market funds
that choose to submit Form N-CR directly in N-CR-specific XML (rather
than use the fillable web form) will

incur the incremental compliance costs of updating their existing
preparation and submission processes to incorporate the new technical
schema for N-CR-specific XML.\702\
---------------------------------------------------------------------------

    \701\ See supra note 400.
    \702\ See infra section V.
---------------------------------------------------------------------------

7. Calculation of Weighted Average Maturity and Weighted Average Life
    The Commission is adopting amendments to rule 2a-7 to specify that
WAM and WAL must be calculated based on percentage of each security's
market value in the portfolio, rather than based on amortized cost of
each portfolio security. These amendments will enhance consistency and
comparability of disclosures by money market funds in data reported to
the Commission and provided on fund websites and, as discussed in
section II, commenters generally supported these amendments.\703\ One
commenter indicated that the fractional difference between the weighted
average maturity and weighted average life calculated with amortized
cost versus market value would not meaningfully impact a fund's
weighted average maturity or weighted average life.\704\ As discussed
above, while the difference between a fund's weighted average maturity
or weighted average life calculated using amortized cost versus market
value is likely to be small in many circumstances, it may be more
significant when a security's issuer experiences a credit event, during
periods of market stress, or when interest rates rise rapidly,
particularly for assets with longer maturities. The Commission
continues to believe that a consistent definition of WAM and WAL across
funds can enhance transparency for investors seeking to assess the risk
of various money market funds and may increase allocative efficiency.
Moreover, greater comparability of WAM and WAL across money market
funds may benefit investors and enhance Commission oversight of risks
in money market funds.
---------------------------------------------------------------------------

    \703\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Capital Group Comment Letter.
    \704\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that these
amendments are not expected to give rise to direct compliance costs.
One commenter indicated that funds may be required to make additional
operational changes to comply with the proposed calculation,\705\ but
did not provide any estimates of related costs. The Commission is
unable to quantify the costs of such potential operational changes
because they may depend on the extent to which funds and fund families
that use amortized cost in their WAM and WAL calculations are already
equipped to use market value in such calculations and, if they are
already equipped to do so, whether the ability to instead use market
value is automated or requires manual involvement in the
calculation.\706\ However, as discussed in section II, the Commission
continues to believe that a majority of money market funds already
calculate WAM and WAL based on the percentage of each security's market
value in the portfolio and all types of money market funds determine
the market values of their portfolio holdings for other purposes, which
may limit the extent of operational changes needed.\707\ Importantly,
these amendments may enhance the consistency of WAM and WAL
calculations across funds, which may better inform investors and
enhance Commission oversight.
---------------------------------------------------------------------------

    \705\ Id.
    \706\ For example, the commenter stated that its retail and
government money market funds currently use amortized cost in their
WAM and WAL calculations but are equipped to immediately shift to
using market value if an issuer of portfolio securities had a credit
problem. See Federated Hermes Comment Letter I.
    \707\ 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.
---------------------------------------------------------------------------

8. Form PF Requirements for Large Liquidity Fund Advisers
    As discussed in section II, the amendments to section 3 of Form PF
include requirements for additional and more granular information that
large advisers to private liquidity funds will have to provide
regarding operational information and assets, as well as portfolio
holdings, financing, and investor information.
    The amendments will require large liquidity funds to report
substantially the same information that money market fund will report
on Form N-MFP. Thus, in combination with the final Form N-MFP
amendments, Form PF amendments will help provide a more complete
picture of the short-term financing markets, in which liquidity funds
and money market funds invest. In turn, they may enhance the
Commission's and FSOC's ability to assess the potential market and
systemic risks presented by liquidity funds' activities.\708\ One
commenter questioned the value added of the data.\709\ The Commission
continues to believe that additional and more granular information in
the final amendments will enable the Commission and FSOC to better
assess liquidity funds' asset turnover, liquidity management and
secondary market activities, subscriptions and redemptions, and
ownership type and concentration. This information may be used to
analyze funds' liquidity and the susceptibility of funds with specific
characteristics to the risk of runs, which may give rise to systemic
risk concerns. In addition, the information can be used for identifying
trends in the liquidity funds industry during normal market conditions
and for assessing deviations from those trends that could potentially
serve as signals for changes in the short-term funding markets. Also,
amendments to section 3 of Form PF will improve comparability of data
across liquidity funds and money market funds, which may further
enhance oversight.
---------------------------------------------------------------------------

    \708\ See, e.g., Better Markets Comment Letter on File No. S7-
01-22; Loubriel Comment Letter on File No. S7-01-22.
    \709\ See NYC Bar Comment Letter on File No. S7-01-22. For more
general criticism of benefits of Form PF, see, e.g., Comment Letter
of Alternative Investment Management Association and Alternative
Credit Council on File No. S7-01-22 (Mar. 21, 2022); Comment Letter
of Teachers Insurance and Annuity Association of America on File No.
S7-01-22 (Mar. 21, 2022) (``TIAA Comment Letter on File No. S7-01-
22''); Comment Letter of Real Estate Board of New York (Mar. 21,
2022). Some commenters argued that sophisticated investors do not
require monitoring of their private fund investments, see, e.g.,
Comment Letter of Center for Capital Markets Competitiveness, U.S.
Chamber of Commerce on File No. S7-01-22 (Mar. 21, 2022); Comment
Letter of SIFMA on File No. S7-01-22 (Feb. 11, 2022).
---------------------------------------------------------------------------

    These additional tools and data may enable the Commission and FSOC
to better anticipate and deal with potential systemic and investor harm
risks associated with activities in the liquidity funds industry and
overall markets for short-term financing. This may increase the
resilience of short-term financing markets and enhance investor
confidence in the U.S. markets for short-term financing, which could
facilitate capital formation.
    The final amendments to Form PF will lead to certain additional
costs for advisers of large liquidity funds. While we are unable to
quantify the full costs of the final Form PF amendments for advisers of
large liquidity funds, we are able to estimate some of the costs,
specifically the costs related to information collection requirements
as defined by the PRA. The information collection costs are quantified
in section V.F.\710\ Advisers may pass along all or a portion of these
costs to large liquidity fund investors, and the degree to which
investors may ultimately bear such costs may depend on, among others,
how advisers choose to comply with the final

amendments, competition among large liquidity fund advisers, and
competition between large liquidity funds relative to money market
funds, among others.
---------------------------------------------------------------------------

    \710\ As discussed in section V.F, the Commission estimates a
total cost increase associated with the information collection
requirements of amended Form PF of $9,931 per initial filing and
$3,331 per quarterly filing.
---------------------------------------------------------------------------

    The costs to advisers of large liquidity funds may include both
direct compliance costs and indirect costs, which may be relatively
larger for smaller advisers.\711\ The final amendments aimed at
improving data quality and comparability, such as requiring advisers to
identify any ``other unique identifier'' they use to identify portfolio
securities, may impose limited direct costs on advisers given that
advisers already accommodate similar requirements in their current Form
PF and Form ADV reporting and can utilize their existing capabilities
for preparing and submitting an updated Form PF. Most of the costs are
likely to arise from the requirements to report additional and more
granular information on Form PF, such as requiring advisers to
distinguish between U.S. Government agency debt categorized as a
coupon-paying note and a zero-coupon note. For existing section 3, the
direct costs associated with the final amendments to section 3 will
mainly include an initial cost to set up a system for collecting and
verifying additional more granular information, and limited ongoing
costs associated with periodic reporting of this additional
information.\712\
---------------------------------------------------------------------------

    \711\ Some commenters emphasized, generally, disproportionate
costs of Form PF to smaller advisers. See, e.g., Comment Letter of
Managed Funds Association on File No. S7-01-22 (Mar. 21, 2022); TIAA
Comment Letter on File No. S7-01-22; Comment Letter of Real Estate
Roundtable on File No. S7-01-22 (Mar. 21, 2022).
    \712\ Section V estimates direct internal compliance costs for
existing section 3 filers associated with the preparation and
reporting of additional and more granular information by large
liquidity fund advisers. It is estimated that there will be no
additional direct external costs and no changes to filing fees
associated with the proposed amendments to section 3.
---------------------------------------------------------------------------

    Indirect costs for advisers will include the costs associated with
other actions that advisers may decide to undertake in light of the
additional reporting requirements. Specifically, to the extent that the
final amendments provide an incentive for advisers to improve internal
controls and devote additional time and resources to managing their
risk exposures and enhancing investor protection, this may result in
additional expenses for advisers, some of which may be passed on to the
funds and their investors.
    Form PF collects confidential information about private funds and
their trading strategies, and the inadvertent public disclosure of such
competitively sensitive and proprietary information could adversely
affect the funds and their investors. However, we anticipate that these
adverse effects will be mitigated by certain aspects of the Form PF
reporting requirements and controls and systems designed by the
Commission for handling the data. For example, with the exception of
select questions, such as those relating to restructurings/
recapitalizations of portfolio companies and investments in different
levels of the same portfolio company by funds advised by the adviser
and its related person, Form PF data generally could not, on its own,
be used to identify individual investment positions. The Commission has
controls and systems for the use and handling of the modified and new
Form PF data in a manner that reflects the sensitivity of the data and
is consistent with the maintenance of its confidentiality. The
Commission has substantial experience with the storage and use of
nonpublic information reported on Form PF.

D. Alternatives 713
---------------------------------------------------------------------------

    \713\ This discussion supplements the discussion of alternatives
in other sections of the release.
---------------------------------------------------------------------------

1. Alternatives to the Removal of Temporary Redemption Gates
    The final amendments could have replaced the 30% weekly liquid
asset threshold for the discretionary imposition of temporary
redemption gates with a different threshold. This alternative would
allow money market funds to impose gates during large redemptions to
reduce some of the dilution costs during large redemptions. However, as
discussed above, we believe that a weekly liquid asset threshold for
gates could trigger runs on money market funds in times of stress.
Under the final amendments, money market funds are still able to reduce
dilution costs during large redemptions. Under current rule 22e-3,
money market funds are permitted to impose permanent suspensions of
redemptions where a fund's weekly liquid assets drop below 10% and the
fund determines to liquidate the fund. In addition, institutional prime
and institutional tax-exempt money market funds are required to charge
mandatory liquidity fees based on a same day net redemption threshold
that may be less susceptible to run risk, and money market funds retain
broad flexibility with respect to the imposition of discretionary
liquidity fees without any regulatory thresholds.
    The final amendments could also have modified the trigger for
redemption gates. The final rule could have eliminated the tie between
the possible imposition of gates and a weekly liquid asset threshold
without eliminating funds' ability to impose gates outside of
liquidation, for example, by allowing boards complete discretion in
imposing gates.\714\ Alternatively, the final rule could have permitted
funds to impose redemption gates after confidentially seeking
regulatory approval. Under these alternatives, investors could, at any
time, find themselves subject to a gate which would mean they would be
unable to access their funds for cash management purposes. As a result,
these alternatives would significantly reduce the usefulness of these
funds for investors, as they function as a means of cash management.
Moreover, there would be few if any offsetting benefits of these
alternatives in terms of discouraging runs relative to the final rule.
---------------------------------------------------------------------------

    \714\ See, e.g., Federated Hermes Comment Letter I; Federated
Hermes Board Comment Letter; Cato Inst. Comment Letter; Dechert
Comment Letter.
---------------------------------------------------------------------------

2. Alternatives to the Removal of the Tie Between Weekly Liquid Assets
and Discretionary Liquidity Fees
    The final amendments could have replaced the 30% weekly liquid
asset threshold for the imposition of discretionary liquidity fees with
a different weekly liquid asset threshold. This alternative would allow
money market funds to impose discretionary liquidity fees during
redemption waves to reduce some of the dilution costs of large
redemptions. However, as discussed above, we believe that, compared to
net redemption thresholds, weekly liquid asset thresholds leave funds
more vulnerable to strategic redemptions. The mandatory and
discretionary fees under the final rule are expected to provide tools
for money market funds to address dilution while reducing incentives
for strategic redemptions and corresponding run risk.
3. Alternatives to the Final Increases in Liquidity Requirements
a. Alternative Thresholds
    The final amendments could have included a variety of alternative
daily and weekly liquid asset thresholds. More specifically, the
Commission could have increased minimum liquidity thresholds to 20%
daily liquid assets and 40% weekly liquid assets thresholds.\715\
---------------------------------------------------------------------------

    \715\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
BlackRock Comment Letter; JP Morgan Comment Letter; State Street
Comment Letter; Western Asset Comment Letter; Invesco Comment
Letter; Healthy Markets Association Comment Letter.

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

    In the Proposing Release, the Commission quantified the potential
effect of various liquidity thresholds on the probability that money
market funds would confront liquidity stress, modeling stress in
publicly offered institutional prime fund portfolios using the
distribution of redemptions observed during the week of March 16 to 20,
2020, (``stressed week'') at various starting levels of daily and
weekly liquid assets.\716\ Using the same methodology (and subject to
the same caveats), Figure 13 below plots the probability that a fund
will run out of daily liquid assets on a given day of the stressed week
for a variety of thresholds, including those suggested by
commenters.\717\ For the final thresholds of weekly liquid assets at
50% and daily liquid assets at 25%, Figure 13 shows that about 8.4% of
funds would deplete daily liquid assets and be unable to absorb
redemptions out of daily liquid assets on at least one of the five
stressed days. By contrast, a threshold of 20% daily liquid assets and
40% weekly liquid assets would approximately double the estimate of
funds that would deplete daily liquidity to meet redemptions on at
least one of the days of a stressed week (to approximately 15.4%). As
referenced above, the largest weekly and daily redemption during the
week of March 16 to 20, 2020, was approximately 55% and 25%
respectively. Thus, an approach aimed at eliminating the risk of funds
having insufficient liquid assets to absorb redemptions (using
redemption data from March 16 to 20, 2020) would require funds to hold
more than 55% of weekly and at least 25% of daily liquid assets. Lower
thresholds increase the probability that some funds may deplete their
liquid assets to meet redemptions, but also reduce the adverse impacts
described above.
---------------------------------------------------------------------------

    \716\ 87 FR 7310.
    \717\ See supra note 715. See also IIF Comment Letter
(suggesting 20% daily liquid asset and 30% weekly liquid asset
thresholds); Bancorp Comment Letter (suggesting 25% daily liquid
asset and 40% weekly liquid asset thresholds); Morgan Stanley
Comment Letter (suggesting 25% daily liquid asset and 45% weekly
liquid asset thresholds).
---------------------------------------------------------------------------

Figure 13--The Probability That a Fund Will Run Out of Daily Liquid
Assets Under Different Minimum Liquidity Thresholds
[GRAPHIC] [TIFF OMITTED] TR03AU23.012

    Similarly, Table 12 quantifies the daily probability that a
publicly offered institutional prime fund depletes daily liquid assets
to meet redemptions under four scenarios: the current baseline daily
and weekly liquid asset thresholds, thresholds based on the largest
daily and weekly redemption during the stressed week; proposed daily
and weekly liquid assets thresholds; and several alternatives suggested
by commenters.\718\ The baseline scenario would require no change for
money market funds; the ``biggest redemptions'' alternative would
require approximately 8% of all prime funds (including both
institutional and retail prime funds) to increase their daily liquid
assets and approximately 34% of all prime funds to increase their
weekly liquid assets.
---------------------------------------------------------------------------

    \718\ See, e.g., IIF Comment Letter (suggesting 20% daily liquid
asset and 30% weekly liquid asset thresholds); Bancorp Comment
Letter (suggesting 25% daily liquid asset and 40% weekly liquid
asset thresholds); Morgan Stanley Comment Letter (suggesting 25%
daily liquid asset and 45% weekly liquid asset thresholds). Several
commenters suggested thresholds of 20% daily liquid assets and 40%
weekly liquid assets. See, e.g., ICI Comment Letter; SIFMA AMG
Comment Letter; BlackRock Comment Letter; JP Morgan Comment Letter;
State Street Comment Letter; Western Asset Comment Letter; Invesco
Comment Letter; Healthy Markets Association Comment Letter.

 Table 12--Probability a Publicly Offered Institutional Prime Fund Runs Out of Liquidity Under the Baseline, Proposed Threshold, Biggest Redemptions and
                                                                4 Alternative Thresholds
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Starting liquidity          Probability that a fund depletes available liquidity on a given day
                                                 -------------------------------------------------------------------------------------------------------
                      Model                                                                                At least
                                                    DLA (%)      WLA (%)     Day 1 (%)    Day 2 (%)    Day 3 (%)    Day 4 (%)    Day 5 (%)   one day (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current Threshold...............................           10           30          9.5         21.5         22.3         18.6          3.3         32.3
Proposed Threshold..............................           25           50          2.4          1.8          4.8          4.8          1.2          8.5
Biggest Redemptions.............................           25           55          2.4          1.4          3.6          3.6          0.0          6.5
Alternative 1...................................           20           30          2.4          5.7         19.9         19.6          6.2         22.3
Alternative 2...................................           20           40          2.4          3.1         12.0         10.6          2.5         15.4
Alternative 3...................................           25           40          2.4          2.3          7.5          9.3          3.0         12.3
Alternative 4...................................           25           45          2.4          1.8          5.7          6.5          2.5         10.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Form N-MFP and CraneData.

    The above estimates rely on a number of modeling assumptions.
First, institutional prime fund redemptions were historically higher
than redemptions out of retail funds, which may bias the analysis to
overestimate the probability a retail or private institutional prime
fund runs out of liquidity on a given day. Second, the analysis assumes
that assets maturing on a given business day will be available at the
end of that day. Third, the analysis assumes no assets are sold into a
distressed market and redemptions are absorbed fully out of a fund's
liquid assets. Fourth, the models do not include government agency
securities with a maturity in excess of seven days, and assume Treasury
securities have daily liquidity regardless of maturity and can be sold
without any loss. Fifth, the analysis assumes that funds would go below
the current rule's 30% weekly liquid asset minimum, continuing to meet
redemptions out of liquid assets, rather than hold on to the weekly
liquid assets as occurred in March 2020. As discussed above, the
removal of the potential imposition of redemption gates from rule 2a-7,
and the removal of the current use of weekly liquid asset thresholds
for redemption gates and liquidity fees in the rule, may increase the
willingness of money market funds to meet redemptions with daily and
weekly liquid assets. Sixth, these estimates are based on redemption
patterns in March 2020 and the distribution of future redemptions may
differ, in part, as a result of the proposed amendments.
    In addition, this analysis does not capture the extent to which
fund managers may be able to anticipate redemptions and pre-position
fund liquidity ahead of time.\719\ However, their ability to do so may
be hampered in times of severe stress when redemption patterns are more
volatile and less predictable, and costs of portfolio rebalancing are
higher. Specifically, we have analyzed aggregate portfolios of
institutional prime and retail prime funds during market stress in
March 2020. As can be seen from Figure 14 and Figure 15 below,
institutional prime funds increases their daily liquid assets the week
after peak market stress (week of March 27), rather than during the
week of peak market stress (week of March 20) when they experienced
large net redemptions. By contrast, retail prime funds experienced less
net redemptions and were able pre-position their portfolios during peak
stress week by increasing their daily liquid assets.\720\
---------------------------------------------------------------------------

    \719\ See, e.g., Federated Hermes Comment Letter I. The
commenter also indicated that the analysis relies on a false
assumption that there are no inflows into the fund which could be
utilized to offset redemptions. Since this analysis uses net rather
than gross redemption patterns during March 2020, historical
subscription activity is captured in the stressed fund paths
analyzed here.
    \720\ In general, prime funds increased their liquidity after
the Mar. 2020 market dislocation by purchasing Treasury securities
from inflows, maturing assets or selling longer-dated assets. For
instance, between Feb. 28, 2020 and Aug. 31, 2020, retail prime
money market funds decreased their portfolio percentage of
commercial paper and certificates of deposit from 64% to 38%, while
the percentage of Treasury debt and repos increased from 14% to 34%.
Similarly, institutional prime money market funds decreased their
portfolio percentage of commercial paper and certificates of deposit
from 50% to 38%, while the percentage of Treasury debt and repos
increased from 18% to 33%.
---------------------------------------------------------------------------

Figure 14--Aggregate Asset Changes of Institutional Prime Funds During
2020, by Liquidity Bins

[GRAPHIC] [TIFF OMITTED] TR03AU23.013

Figure 15--Aggregate Asset Changes of Retail Prime Funds During 2020,
by Liquidity Bins
[GRAPHIC] [TIFF OMITTED] TR03AU23.014

    The Commission has received comments \721\ that, under certain
assumptions, a 20% daily and 40% weekly liquid asset threshold may be
sufficient for funds to meet redemptions even if the stress lasts 10
weeks. One commenter's analysis in support of these thresholds assumed
that funds face a redemption rate of 16% and that fund portfolios have
somewhat frontloaded maturity laddering. In addition, the analysis did
not take into account how heterogeneity in portfolio construction
across funds may influence the levels of liquidity available to meet
redemptions. Notably, during the stress of March 2020, funds exhibited
a distribution of outflows with some funds experiencing outflows double
or triple the average redemption rate; portfolios reported on Form N-
MFP exhibited less frontloaded maturity structures than the commenter
assumed; and heterogeneity in portfolio constructions mean that funds
with longer dated securities would have less liquidity to meet
redemptions. Additional analysis, described in greater detail below,
aims to extend the commenter's modeling framework to take into account
variations in redemption patterns and portfolio construction across
funds.
---------------------------------------------------------------------------

    \721\ See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    Out of the sample of 42 prime money market funds, we removed four
funds with weekly liquid assets below 35%, following the commenter's
methodology to account for the possibility that redemptions out of
those funds were exacerbated by the threat of gates and fees as weekly
liquid asset levels approached 30%.\722\ The average redemption rate
for these four funds was approximately 28%, with the remaining 38 funds
having an average redemption rate of 16%. Importantly, as can be seen
from Figure 16, there were a number funds with weekly liquid assets in
excess of 35% that had redemptions double and triple the 16% average.
---------------------------------------------------------------------------

    \722\ Additional models without removing the four funds with
weekly liquid assets below 35% were constructed to compare with the
commenter's results and to test the robustness of the models.
---------------------------------------------------------------------------

Figure 16--Weekly Redemptions in Prime Money Market Funds During the
Week of March 20, 2020

[GRAPHIC] [TIFF OMITTED] TR03AU23.015

    Next, we examined 1,744 public institutional prime fund portfolios
that filed on Form N-MFP between October 2016 and February 2020 and
placed every security in the 1,744 portfolios into maturity bins by
week (from 1 week to >10 week maturity). Setting initial weekly liquid
assets for each portfolio based on a given fund's weekly liquid assets
provided on Form N-MFP and assuming no gates or fees, we then stressed
each portfolio for 10 weeks using weekly redemption rates of 38 prime
money market funds observed during the stress week. Similar to the
commenter's analysis, we assumed that each portfolio started with $10
billion in total assets. Each week we calculated a new weekly liquid
asset level for each portfolio based on the weekly liquid asset level
the week before, the amount of assets that rolled over into the weekly
liquid asset bin, and the weekly redemption rates. If the portfolio did
not have enough weekly liquid assets to meet the weekly redemptions,
then we assumed the longest dated assets were sold first with no
haircuts. Under these assumptions, Figure 17 reports simulated changes
in money market fund total assets after 10-weeks of redemptions. Figure
17 shows that, considering the entire distribution of redemption rates
in March 2020 rather than the average redemption rate of 16%, a number
of funds run out of assets well before the 10 week mark.

Figure 17--Simulated Changes in Prime Money Market Fund Total Assets
Under 10 Weeks of Stress, Using Historical Distribution of Redemption
Rates for the Week of March 20, 2020
[GRAPHIC] [TIFF OMITTED] TR03AU23.016

    To further quantify these effects, Table 13 shows the distribution
of weekly liquid assets in fund portfolios with starting weekly liquid
assets of 40% when stressed with up to 10 weeks of redemptions using 38
historical prime money market fund redemption rates in the stress week.
As can be seen from Table 13, after one week of redemptions, 10% of
fund portfolios with starting weekly liquid assets of 40% had less than
or equal to 9% of weekly liquid assets remaining. By contrast, 10% of
fund portfolios with starting weekly liquid assets of 50% had less than
or equal to 28% of weekly liquid assets remaining. As another example,
if fund portfolios enter the stress week with 40% in weekly liquid
assets, a fifth have run out of weekly liquid assets to meet
redemptions by week 2. At the same time, if fund portfolios enter the
stress week with 50% in weekly liquid assets, a fifth of funds has 23%
of weekly liquid assets remaining to meet redemptions.

      Table 13--Distribution of Weekly Liquid Assets (WLA) in Stressed Prime Money Market Fund Portfolios After 5 Weeks of Stress, Using Historical
                            Distribution of Redemption Rates in March 20, 2020 and Portfolio Composition Data From Form N-MFP
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Distribution of WLA
               Week                WLA start -----------------------------------------------------------------------------------------------------------
                                                Min       5%      10%      20%      30%      40%      50%      60%      70%      80%      90%      Max
--------------------------------------------------------------------------------------------------------------------------------------------------------
1................................        40%       0%        3        9       20       27       30       33       35       38       40       42      60%
2................................         40        0        0        0        0       13       19       25       31       37       42       45       66
3................................         40        0        0        0        0        0        6       16       25       36       42       47       79
4................................         40        0        0        0        0        0        0        8       23       37       45       51      100
5................................         40        0        0        0        0        0        0        1       19       37       46       54      100
1................................         50        6       22       28       38       42       44       47       50       52       54       59       69
2................................         50        0        0        0       23       32       38       44       49       53       58       67       84
3................................         50        0        0        0        6       20       31       41       50       55       61       73       90
4................................         50        0        0        0        0       11       26       41       52       58       66       80      100
5................................         50        0        0        0        0        3       21       39       53       60       68       84      100
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 13 demonstrates two key results. First, when the historical
distributions in prime money market fund redemption rates during the
stress week in March 2020 and fund portfolio compositions are taken
into account, a large share of stressed funds would run out of
liquidity well before the 10 week mark suggested by some commenters.
Second, funds that enter stress with 50% in weekly liquid assets have
more weekly liquid assets to meet redemptions and are more likely
survive a period of prolonged stress than funds that enter stress with
40% in weekly liquid assets.
    Some commenters indicated that the proposed changes to the current
fee and gate framework would allow funds to more freely use existing
liquid assets to meet redemptions and, thus supported a more modest
increase to the liquidity requirements.\723\ The analysis presented
above excludes from the distribution of historical redemption rates
funds that entered the stress week with less than 35% of weekly liquid
assets. Since those funds were more likely to approach the 30% weekly
liquid asset threshold for the imposition of gates and fees,
redemptions out of those funds were more likely to have been triggered
by the risk of gating or fees. Thus, weekly liquid assets may remain
crucial for the ability of money market funds to meet redemptions
during times of stress even in the absence of gating.
---------------------------------------------------------------------------

    \723\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; T. Rowe Price Comment Letter;
Invesco Comment Letter.
---------------------------------------------------------------------------

    More broadly, as can be seen from the above, lower liquidity
thresholds relative to the final amendments would allow funds to hold
less liquid assets, increasing fund liquidity risks. However, lower
thresholds would decrease the number of money market funds having to
restructure their portfolios; would reduce the incentives of funds to
take larger risks in the less liquid portion of their portfolios; and
would reduce the concentration of liquidity in repos that are used by
leveraged market participants for funding liquidity.
    Similarly, alternatives imposing higher minimum daily and weekly
liquidity thresholds relative to the final amendments would require
funds to hold more liquid assets, reducing the risk of fund
liquidations or selloffs that may necessitate future government
backstops. However, higher minimum liquidity thresholds would require a
larger number of money market funds to reallocate their portfolios
towards lower yielding investments. In addition, higher liquidity
thresholds may lead funds to increase the risk in the remainder of
their portfolios to attract investor flows or to keep fund yields from
sliding below zero and ensure the viability of the asset class (the
latter risk may be more pronounced in very low interest rate
environments). Moreover, higher liquidity requirements may increase the
availability of funding liquidity through repos to leveraged market
participants, resulting in a higher levels of risk taking in less
transparent and less regulated sectors of the financial system. The
Commission continues to believe that the final liquidity thresholds
balance these effects and are likely to allow more funds to have
sufficient liquidity to meet redemptions during periods of liquidity
stress.
b. Caps on Fund Holdings of Certain Assets
    As an alternative to increasing the minimum daily and weekly liquid
asset requirements, the Commission considered adopting caps on money
market fund holdings of certain assets, such as commercial paper and
certificates of deposit. Commercial paper and certificates of deposit
lack an actively traded secondary market and are difficult to value or
sell during times of liquidity stress. As discussed in the Proposing
Release, limiting money market fund holdings of such instruments may
reduce run risk to the degree that the illiquidity of all or a portion
of a fund's portfolio may create externalities from redeeming investors
borne by investors remaining in the fund, which may incentivize early
redemptions.
    However, this alternative relies on the assumption that commercial
paper and certificates of deposit homogeneously reduce the liquidity of
a fund's portfolio by more than other money market fund holdings across
maturities. The Commission continues to recognize that these
assumptions may not always hold for different money market funds and
over different time horizons. Moreover, to the degree that investors
prefer funds that deliver higher returns and money market funds benefit
from investor expectations of implicit government backstops during
times of liquidity stress, money market funds may react to this
alternative by changing the maturity structure of their portfolios and
reallocating into other securities with potentially higher liquidity
risk. For example, money market funds may substitute short-term
commercial paper and certificates of deposit that are classified as
daily or weekly liquid assets with longer term commercial paper and
certificates of deposit that would not be classified as daily or weekly
liquid assets. Finally, because this alternative would involve defining
the types of instruments subject to the cap, issuers may be able to
create new financial instruments that are similar, and perhaps
synthetically identical, to commercial paper and certificates of
deposit along risk and return dimensions, but that would not be subject
to the caps. The final approach, which would increase minimum daily and
weekly liquid asset requirements, may reduce liquidity and run risk in
money market funds without such

potential drawbacks, while ensuring funds have minimum liquidity to
meet large redemptions.
    As another alternative, the final amendments could have replaced
the minimum daily and weekly liquid asset thresholds with asset
restrictions, such as imposing a minimum threshold for holdings of
government securities \724\ and repos backed by government securities.
Under the baseline, such assets are generally categorized as daily
liquid assets. Thus, such an approach would have the effect of
replacing minimum daily and weekly liquid asset thresholds with a
single daily liquid asset threshold, and restricting the types of
assets that would qualify as daily liquid assets. This alternative
would reduce the liquidity risk of liquid assets held by money market
funds, which may help them meet redemptions without transaction costs.
However, waves of redemptions as experienced in 2008 and 2020 occur
over multiple days, suggesting that money market funds need to have
both daily and weekly liquidity to meet redemptions. Moreover, asset
restrictions imposing large minimum thresholds for holdings of
government securities would decrease not only the risk, but also the
yield of money market funds and their attractiveness to investors,
reducing the viability of the asset class in low interest rate
environments. This approach would also further concentrate money market
fund holdings in specific types of assets, which may increase the
likelihood of funds selling the same assets to meet redemptions in
times of stress.
---------------------------------------------------------------------------

    \724\ See, e.g., CCMR Comment Letter.
---------------------------------------------------------------------------

    Finally, under the baseline, funds falling below minimum liquid
asset thresholds may not acquire any assets other than daily or weekly
liquid assets, respectively, until funds meet those minimum thresholds.
The final amendments will retain this baseline approach, while
increasing the absolute daily and weekly liquid asset thresholds. As an
alternative, the final amendments could have imposed penalties on funds
or fund sponsors upon dropping below the required minimum liquidity
threshold. Similarly, the final amendments could have imposed a minimum
liquidity maintenance requirement, which would require that a money
market fund maintain the minimum daily liquid asset and weekly liquid
asset thresholds at all times instead of the current requirement to
maintain the minimums immediately after the acquisition of an asset.
During the market stress in 2020, funds experiencing large redemptions
were reluctant to draw down on weekly liquid assets due to the
existence of the threshold for the potential imposition of redemption
fees and gates. Such alternatives may have a similar effect of
penalizing money market funds for using liquidity when liquidity is
most scarce, which may make money market funds reluctant to use daily
and weekly liquid assets to meet large redemptions during market
stress. As a result, money market funds would be incentivized to sell
less liquid assets, such as longer maturity commercial paper, into
distressed markets, rather than risk penalties and dropping below
minimum liquidity maintenance requirements. This may increase
transaction costs borne by redeeming investors and may result in money
market fund redemptions magnifying liquidity stress in underlying
securities markets.
4. Alternative Stress Testing Requirements
    As an alternative to the final amendments to stress testing
requirements, the final amendments could have modified weekly liquid
asset thresholds that funds must use for stress testing. For example,
the final amendments could have required money market funds to perform
stress testing using 15%, 20%, or 30% minimum weekly liquid asset
thresholds. As another example, the final amendments could have
required money market funds to use specific minimum daily and weekly
liquid asset thresholds. Similarly, the Commission could have imposed
explicit requirements regarding who would be responsible for
determining the sufficient minimum level of liquidity for stress
tests.\725\ These alternatives may reduce the discretion of boards and
fund managers in stress testing. The Commission continues to recognize
that stress testing design and optimum levels of liquidity will vary
depending on the type of money market fund, investor concentration,
investor composition, and historical distribution of redemption
activity under stress, among other factors. Thus, alternatives
establishing bright line thresholds for stress testing or limiting the
ability of fund boards to delegate stress testing responsibilities
could reduce the efficiency of the stress testing process and the
usability of stress testing results for board and Commission oversight.
---------------------------------------------------------------------------

    \725\ See, e.g., T. Rowe Comment Letter.
---------------------------------------------------------------------------

    The Commission also could have required stress testing results to
be disclosed to investors.\726\ This alternative could enable investors
to better assess money market fund liquidity management and the
vulnerability of various money market funds to liquidity stress.
However, this alternative may also trigger self-fulfilling runs on more
vulnerable money market funds, particularly in times of stress.
Moreover, to the degree that funds anticipate the results of stress
testing to become publicly disclosed, they may alter stress testing
design, reducing its usability for board and Commission oversight.
---------------------------------------------------------------------------

    \726\ See, e.g., Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------

5. Alternative Implementations of Liquidity Fees
a. Alternative Net Redemption Thresholds for Mandatory Liquidity Fees
    As described in section II.B above, the final amendments will
require institutional funds to apply liquidity fees when they
experience large net redemptions. Specifically, if daily net
redemptions exceed 5% of the fund's net assets, funds are required to
assess liquidity fees that reflect the fund's good faith estimate of
the costs the fund would incur if it sold a pro rata amount of each
security in its portfolio to satisfy the amount of net redemptions,
including spread costs, other transaction costs (i.e., any other
charges, fees, and taxes associated with portfolio security sales), and
market impact costs the fund would incur if it were to sell a pro rata
amount of each security in its portfolio to satisfy the amount of net
redemptions (i.e., vertical slice). If the fund is not able to make a
good faith estimate supported by data of its liquidity costs based on
the sale of a vertical slice (e.g., if reliable transaction or
quotation data for portfolio holdings are not available due to a freeze
in short-term funding market activity), the fund would use a default
liquidity fee of 1% of the value of share redeemed.
    The final amendments could have used a different net redemption
threshold for the application of mandatory liquidity fees. As shown in
the Proposing Release, Table 14 demonstrates that 5% of institutional
prime and institutional tax-exempt money market funds had outflows that
exceeded 3.7%.

                                                Table 14--Daily Flows of Institutional Money Market Funds
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Percentiles
               Institutional funds                  Average   ------------------------------------------------------------------------------------------
                                                   fund count       5%          10%          25%          50%          75%          90%          95%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Prime Only......................................           37         -3.5         -1.9         -0.5          0.0          0.6          2.2          3.9
Prime + Tax-exempt..............................           47         -3.7         -2.1         -0.5          0.0          0.6          2.3          4.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: This table reports the results of an analysis of daily flows reported in CraneData on 1,228 days between Dec. 2016 and Oct. 2021. As of Sept.
  2021, CraneData covered 87% of the funds and 96% of total assets. Flows at the class level were aggregated to the fund level. Flows of feeder funds
  were aggregated for an approximation of flows for the corresponding master fund.

    In the Proposing Release, the Commission proposed a swing pricing
requirement, with a 4% net redemption threshold for market impact
calculations, assessed on a pricing period rather than a daily basis.
The Commission has received comment that the 4% threshold for applying
a market impact factor was too low, particularly where the NAV is
struck multiple times a day.\727\ The final amendments could have
required a lower net redemption threshold, such as 4%, or a higher
threshold, such as 8% or 10% for the liquidity fee threshold.
Alternatively, the final amendments could have used different
redemption thresholds for the liquidity fee requirement for
institutional prime and institutional tax-exempt funds. Section
IV.C.4.b.i quantifies how alternative redemption thresholds would
influence the scope of the liquidity fee framework and associated
benefits and costs. For example, Table 7 shows the average percentage
of funds per month that would exceed a certain net redemption
threshold. For instance, on average, we would expect approximately 1.4%
of institutional prime or institutional tax-exempt funds to exceed the
8% redemption threshold on any given day, while approximately 4.4% of
institutional prime or institutional tax-exempt funds would exceed the
4% redemption threshold on any given day.
---------------------------------------------------------------------------

    \727\ See, e.g., IIF Comment Letter; Bancorp Comment Letter.
---------------------------------------------------------------------------

    Higher (lower) net redemption thresholds for mandatory liquidity
fees would reduce (increase) the number of days on which affected money
market funds must estimate liquidity fees for portfolio securities,
reducing (increasing) related costs and operational challenges.
However, higher (lower) net redemption thresholds would also reduce
(increase) the amount of dilution from redemptions that is recaptured
by money market funds and accrue to non-transacting shareholders,
especially in times of severe and/or prolonged stress. In addition, as
discussed in section II.B.2.a, a higher redemption threshold for the
imposition of liquidity fees may lead investors to expect that they
will not incur a fee as long as they redeem early enough in a crisis,
which may provide an incentive to redeem earlier in a redemption wave
and contribute to the first-mover advantage. As discussed above, we
believe that the final liquidity thresholds balance these effects and
are likely to allow more funds to have sufficient liquidity to meet
redemptions during periods of liquidity stress.
    As another alternative, the final amendments could have required
funds to set their own net redemption triggers on a fund-by-fund basis,
with reference to each fund's historical flows.\728\ For example, each
fund could have been required to determine the trading days for which
it had its highest flows over a set time period, and set its net
redemption threshold based on the 5% of trading days with the highest
redemptions.\729\ Such alternatives could allow funds to customize
their liquidity fee thresholds to their historical redemption flows.
However, they may also result in under-application of fees by funds
with higher run risk and over-application of fees by funds with lower
run risk. For example, funds with volatile redemption histories and
high investor concentration could avoid the application of liquidity
fees in times of stress if they have had large historical redemptions,
whereas funds with smooth redemption histories and low investor
concentration would have to apply fees even in the face of low
redemptions in absolute terms. In addition, these alternatives may
reduce the comparability of money market fund returns for investors
because liquidity fees, including the associated market impact
calculations, influence reported fund returns. Finally, such
alternatives may create strategic incentives for fund complexes to open
and close funds depending on historical redemption activity. For
example, to the degree that the estimation of liquidity fees may be
burdensome or to the extent that there may be incentives from fund
flows not to apply liquidity fees, fund families may choose to close
funds that experienced high redemptions to avoid the application of
liquidity fees.
---------------------------------------------------------------------------

    \728\ As another possibility, the final amendments could have
allowed funds discretion over which historical period could be
chosen. However, because money market funds may not internalize the
externalities that their liquidity management imposes on investors
in the same asset class, they may not be incentivized to use such
discretion in a way that mitigates those externalities. For example,
some affected funds may choose a historical time period that results
in liquidity fee thresholds that are too high, so that liquidity
fees are rarely applied. Moreover, because liquidity fees would
influence reported returns, the alternative may reduce the
comparability of money market fund returns for investors.
    \729\ As another alternative, the rule could have required
policies and procedures regarding the choice of a threshold percent
level based on historical data.
---------------------------------------------------------------------------

b. Alternative Allowing the Exclusion of Pre-Announced Redemptions From
the Net Redemption Threshold for Mandatory Liquidity Fees
    Under the final amendments, all institutional prime and
institutional tax-exempt money market funds will be required to apply
liquidity fees during days with net redemptions in excess of 5% of fund
net assets, unless the estimated liquidity fee is below 1 basis point.
In addition to the final rule's de minimis exception, the final rule
could have allowed funds to exclude from the 5% net redemption
threshold redemption requests that were pre-announced by investors to a
fund a reasonable period in advance. To the degree that fund managers
are able to pre-position their portfolio liquidity to meet anticipated
large redemptions, this alternative could result in fewer instances in
which funds would be required to estimate liquidity fees when liquidity
costs are de minimis. Moreover, this alternative would incentivize
investors to pre-announce their large redemption requests to fund
managers in order to reduce the possibility of a liquidity fee, and
these pre-announced redemption requests may enhance efficiency of
liquidity management by money market funds. At this time, we believe
that the final rule may result in similar benefits because, under
normal market conditions, the liquidity costs of a fund with pre-
positioned liquidity meeting anticipated redemptions generally would be
de minimis. However, unlike the alternative, if a fund is not able to
pre-position its daily or weekly liquidity in anticipation of pre-
announced

redemptions and liquidity costs are above de minimis (for example, in
stressed market conditions), pre-announced redemptions could still
dilute non-transacting investors, and funds would be required to charge
a liquidity fee to redeemers under the final rule.
    The final rule could have allowed funds to exclude from the 5% net
redemption threshold redemption requests that were pre-announced by
investors to funds a reasonable period in advance instead of the final
rule's de minimis exception. At this time, we believe that such an
alternative may be more costly to funds and investors than the de
minimis exception in the final rule, as an exception for pre-announced
redemptions could increase uncertainty about when the exception applies
(e.g., what period of time before the day of redemption is reasonable
and provides sufficient time for the fund to pre-position itself) and
may incentivize investors to pre-announce redemptions that they may not
ultimately carry through, which would create inefficiencies in the
fund's liquidity management. Moreover, the final rule's de minimis
exception may be more efficient than the pre-announced redemption
exception because money market fund investors may face unexpected cash
needs and may be unable to pre-announce their large redemptions.
c. Greater Discretion in the Liquidity Fee Framework
    Under the final amendments, all institutional prime and
institutional tax-exempt money market funds would be required to apply
liquidity fees during days with net redemptions in excess of 5% of fund
net assets. The Commission has considered several alternatives that
would give funds greater discretion over both the triggers for
liquidity fees, liquidity fee amounts, and potential caps. For example,
the rule could require funds to adopt specific procedures regarding the
potential imposition of liquidity fees.\730\ Similarly, the final rule
could have left the application and calculation of liquidity fees to
fund discretion, while requiring fund boards to consider certain
specified factors when determining whether to implement a liquidity
fee.\731\ As a related alternative, the final rule could have provided
institutional fund boards broad discretion to impose liquidity fees
when in the best interest of the fund and its investors.\732\ As
another alternative, the final rule could have made the application of
liquidity fees optional.
---------------------------------------------------------------------------

    \730\ See, e.g., Federated Hermes Comment Letter I; ICI Comment
Letter; Americans for Tax Reform Comment Letter; CFA Comment Letter.
    \731\ See, e.g., ICI Comment Letter.
    \732\ See ICI Comment Letter; Schwab Comment Letter; Federated
Hermes Comment Letter I; Federated Hermes Comment Letter II;
Federated Hermes Board Comment Letter; Invesco Comment Letter; SIFMA
AMG Comment Letter; Americans for Tax Reform Comment Letter.
---------------------------------------------------------------------------

    These alternatives may allow institutional funds not to implement
liquidity fees or to implement a liquidity fee framework with higher
liquidity fee thresholds and lower liquidity fee amounts (for example,
without estimating market impacts of a hypothetical sale of the
vertical slice). Relative to the final amendments, these alternatives
may allow funds to better tailor their liquidity management and
liquidity fee design to investor composition, portfolio and asset
characteristics, and prevailing market conditions. This alternative may
also avoid operational costs and challenges of liquidity fees for some
funds. To the degree that the implementation of mandatory liquidity
fees under the final rule may result in higher fees charged to
redeemers, which can reduce the attractiveness of affected funds to
investors, these alternatives may decrease potential adverse impacts of
liquidity fees on the size of the institutional money market fund
sector, the number of institutional money market funds available to
investors, and the availability of wholesale funding liquidity in the
financial system. However, these alternatives would decrease
comparability of fund returns and benefits of the liquidity fee
framework.
    The operational costs of implementing liquidity fees are immediate
and certain, while the benefits are largest in relatively rare times of
liquidity stress. Moreover, affected funds may not internalize the
externalities that they impose on investors in the same asset classes
or the externalities that redeeming investors impose on investors
remaining in the fund. While money market funds may have governance
structures in place and reputational incentives to manage liquidity to
meet redemptions--and fund sponsors may have chosen to provide sponsor
support in the past--institutional money market funds also face
disincentives from investor behavior and collective action problems.
Specifically, to the degree that institutional investors may use
institutional prime and institutional tax-exempt funds for cash
management and may be sensitive to liquidity fees, funds that start
charging liquidity fees on large redemptions when other funds are not
may experience follow-on redemption waves. As a result, institutional
money market funds may be reluctant to be the first to start charging
liquidity fees, even if all such funds recognize the value of charging
redeeming investors for the liquidity costs of redemptions.
    Thus, these alternatives could reduce the likelihood that funds use
liquidity fees as an anti-dilution tool. This may reduce or eliminate
important benefits of the final liquidity fee requirement, including
protecting non-transacting investors from dilution, reducing first-
mover advantage and run risk, and reducing liquidity externalities
money market funds may impose on market participants transacting in the
same asset classes. In addition, relative to the final amendments,
these alternatives would increase fund manager discretion over the
choice of liquidity fee thresholds, size of liquidity fees, and the
application of liquidity fees in general, which may reduce the
comparability of money market fund returns for investors. Finally, in
the absence of a prescribed trigger for liquidity fees, fund boards may
default to relying on weekly liquid asset thresholds to trigger
liquidity fees.\733\ As discussed in section IV.C.1 above, weekly
liquid asset thresholds may magnify, rather than dampen, liquidity
externalities in money market funds, the first-mover advantage in
investor redemptions, and run risk in money market funds.
---------------------------------------------------------------------------

    \733\ See, e.g., Allspring Funds Comment Letter.
---------------------------------------------------------------------------

    Importantly, as discussed in section IV.C.4.b, the final rule would
allow institutional money market funds to impose discretionary
liquidity fees on days with net redemptions at or below 5% of the
fund's net assets. A combination of mandatory liquidity fees on days
with large net redemptions and discretionary liquidity fees on days
with smaller net redemptions may reduce dilution cost, run risk, and
fund resilience when faced with large redemption waves and during times
of stress, while providing funds with greater flexibility in routine
liquidity management.
    As a related alternative, the final amendments could have required
institutional funds to apply liquidity fees as in the final rule, but
without a requirement to estimate market impact factors. Alternatively,
the final amendments could have made the use of market impact factors
in liquidity fee calculations less prescriptive and more principles-
based or optional in their entirety. These alternatives would reduce
the likelihood and frequency with which affected money market

funds would estimate market impacts in their liquidity fee
calculations, which may reduce costs and operational challenges of
doing so. However, this may reduce the frequency and size of liquidity
fees and the benefits of liquidity fees for non-transacting
shareholders.
    Increased discretion in liquidity fee calculations may allow funds
to tailor the calculation of liquidity costs to individual portfolio
and asset characteristics and prevailing market conditions. This may
make liquidity fees a more precise measure of liquidity costs assessed
to redeeming investors. However, because liquidity fees influence
reported fund returns, greater discretion over the calculation of
liquidity fees may reduce the comparability of money market fund
returns for investors. Moreover, because money market funds may not
internalize the externalities that their liquidity management practices
may impose on investors in the same asset class, they may not be
incentivized to use such discretion in a way that mitigates those
externalities. Specifically, funds may compete on liquidity fees and
may face flow incentives to impose lower fees, and this alternative may
result in assessed liquidity fees being too low to recapture the
dilution costs of redemptions.
d. Other Liquidity Fee Thresholds, Tiered Liquidity Fees, and
Alternative Default Fees
    The Commission has considered a variety of alternatives to the
final liquidity fee framework. For example, given baseline delays in
order flows across various fund intermediary networks, the final rule
could have required affected money market funds to impose liquidity
fees conditional on a previous day's net redemptions exceeding 5% or
some other threshold from the previous day. This alternative could
improve precision of the threshold determination by allowing funds to
use more complete flow information. However, this alternative may
involve three significant groups of costs. First, redeeming investors
would be able to more accurately predict whether a liquidity fee would
be assessed on a particular trading day and the following day.\734\
This may trigger redemptions on days in which fees would not be
applied, magnifying the first-mover advantage in money market fund
redemptions and reducing resilience of affected money market funds
under stress. Second, days with large net redemptions may be followed
by days with smaller net redemptions, especially outside of redemption
waves. The alternative imposing a fee on next day's redemptions based
on previous day's flows may capture less dilution costs compared to the
final rule. Third, under this alternative, redeemers on a given day
would be charged a liquidity fee based on the transaction activity of
redeemers on a previous day, which can pose fairness concerns.
---------------------------------------------------------------------------

    \734\ See 17 CFR 270.2a-7(h)(10)(ii)(C) (requiring a money
market fund to update its website each business day to provide its
net inflows or outflows as of the end of the preceding business
day).
---------------------------------------------------------------------------

    The final rule could have triggered fees based on a fund's sale of
portfolio securities, instead of the level of net redemptions, and
could have tied the size of the fee to ex post transaction costs and
market impacts of security sales. In the swing pricing context, one
commenter indicated that security sales are a better barometer of
dilution than net redemptions.\735\ To the degree that most affected
money market funds may meet redemptions out of daily or maturing weekly
liquid assets, this approach could result in a less frequent imposition
of liquidity fees. However, the final rule will allow funds to assume
that the market impact of weekly liquid assets of zero and includes a
de minimis exception for liquidity fees. Thus, under the final rule,
most funds are also unlikely to assess liquidity fees under normal
market conditions. To the degree that this alternative results in less
frequent imposition of liquidity fees, especially in times of stress,
it could involve lower costs of implementing the liquidity fee approach
for affected money market funds--costs that are likely to be passed
along to money market fund investors. Moreover, the size of the fee
under this alternative would be derived from transaction data of each
fund, which may increase the degree of precision in estimates of spread
and market impact costs of redemptions.
---------------------------------------------------------------------------

    \735\ See, e.g., Capital Group Comment Letter.
---------------------------------------------------------------------------

    However, this alternative may have significant costs relative to
the final rule. Specifically, the alternative may reduce the amount of
dilution costs affected money market funds recapture for the benefit of
non-transacting shareholders relative to the final approach. If a fund
is forced to sell portfolio securities during market stress, they are
likely to sell less illiquid portfolio holdings first. A fee based only
on the transaction costs and market impacts of the securities actually
sold by a fund to meet redemptions would undercharge redeemers for the
liquidity costs they impose on the remaining investors. Thus, relative
to the final rule's requirement to estimate fees on the assumption of
the sale of the pro-rata slice of portfolio securities, the alternative
would reduce the benefits of the liquidity fee framework for the
protection of non-transacting investors and run incentives in affected
money market funds. Moreover, under stressed conditions, short-term
funding markets may freeze and money market funds may be unable to sell
portfolio securities, so the alternative may result in low or zero
liquidity fees being assessed precisely when dilution costs are
greatest. The final amendments may result in larger and more frequent
liquidity fees being assessed, less dilution of non-transacting
investors, and overall lower run risk in affected money market funds.
    The final rule could have relied on alternative bright line
approaches, whereby liquidity fees would trigger automatically upon
certain events. For example, the final rule could have tied the trigger
of mandatory liquidity fees to a specific net redemption level or
weekly liquid assets threshold. As a related alternative, the liquidity
fee framework could have included dual triggers based on net
redemptions and liquidity levels, with both triggers being required for
the imposition of a liquidity fee.\736\ For example, the rule could
have triggered liquidity fees based on net redemptions of more than 10%
and drops in liquidity of more than 50% below required weekly liquid
asset levels, which could be indicative of potential stress. As another
alternative, liquidity fees could be triggered, at least in part, based
on a specified amount of net redemptions over multiple days.\737\ For
example, funds could be required to charge a 2% liquidity fee when they
experience net redemptions of 15% over the course of two consecutive
trading days. As another example, a fee could be triggered in the event
of 5% net redemptions over three consecutive days, in addition to an
occurrence of a Form N-CR reportable event. These alternatives may
improve the ability of investors to forecast whether a liquidity fee
would be imposed across time and may reduce the incidence with which
funds would be required to impose liquidity fees relative to the final
rule. The final rule's same-day net redemption trigger may be less
forecastable and less susceptible to

strategic redemptions and run risk relative to these alternatives.
---------------------------------------------------------------------------

    \736\ See, e.g., ICI Comment Letter; IIF Comment Letter;
BlackRock Comment Letter; JP Morgan Comment Letter; Invesco Comment
Letter; SIFMA AMG Comment Letter.
    \737\ See, e.g., Morgan Stanley Comment Letter; State Street
Comment Letter.
---------------------------------------------------------------------------

    The Commission also received comments recommending tying the
application of liquidity fees to stress as indicated, for example, by
weekly liquid assets instead of net redemptions.\738\ While significant
declines in a fund's weekly liquid assets can reflect fund-specific
liquidity stress and contribute to dilution of non-transacting
shareholders, the weekly liquid asset threshold is more susceptible to
strategic redemptions, as discussed in section IV.C.4 above. We believe
that the final rule would result in larger liquidity fees under
stressed conditions while reducing incentives for strategic redemptions
incentives in three ways. First, the final rule would require that
funds calculate market impacts based on the costs of selling the pro-
rata slice of the fund portfolio, which would be higher under stress,
as discussed in greater detail below. Second, where liquidity costs are
below one basis point of the value of the shares redeemed, such as
under normal conditions and outside of stress, funds would not be
required to assess liquidity fees. Third, if markets are so stressed
that transactions are scarce and funds are unable to estimate the costs
of selling the pro-rata slice of the fund portfolio, funds would apply
a default liquidity fee of 1%.
---------------------------------------------------------------------------

    \738\ See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    As another alternative, the Commission could have tiered liquidity
fees depending on net redemptions and/or liquid asset thresholds. For
example, some commenters suggested that affected funds could be
required to charge liquidity fees of: (1) 0.25% if net redemptions are
10% or more and weekly liquid assets are less than 30% but at least
20%; (2) 1% if weekly liquid assets are less than 20% but at least 10%;
and (3) 2% if weekly liquid asset are less than 10%.\739\ Other
commenters suggested tiered liquidity fees based solely on declines in
liquidity.\740\ For example, the final rule could have imposed a tiered
fee structure for mandatory liquidity fees that would range from 0.5%,
1%, or 2% depending on whether weekly liquid assets were 20%-30%, 10%-
20%, or less than 10%, respectively. These determinations could rely on
the prior day's weekly liquid assets or on weekly liquid assets as of
the end-of-day NAV calculation for these determinations.
---------------------------------------------------------------------------

    \739\ See, e.g., BlackRock Comment Letter; JP Morgan Comment
Letter.
    \740\ See, e.g., ICI Comment Letter; Western Asset Comment
Letter.
---------------------------------------------------------------------------

    Relative to the final rule, these alternatives may reduce costs of
implementing the liquidity fee framework by eliminating costs of
estimating spread and other transaction costs of net redemptions, as
well as market impacts of a hypothetical sale of the vertical slice.
Moreover, alternatives that would impose tiered liquidity fees based on
daily or weekly liquid assets (without consideration of net
redemptions) would eliminate costs of reviewing same-day net
redemptions. Thus, these alternatives would require funds to impose
higher fees in the face of declining liquidity and larger redemptions,
which may proxy for larger liquidity costs of redemptions.
    As discussed above, we believe that weekly liquid asset thresholds
may be subject to greater run risk than a net redemption threshold.
Moreover, by having solely fixed liquidity fee levels, these
alternatives may over- or under-charge redeemers for the liquidity
costs of their redemptions. In contrast, the final rule will generally
require each fund to make a good faith estimate of the liquidity costs
of meeting each day's worth of net redemptions under a given set of
market conditions on that day. This may increase the accuracy with
which liquidity fees price dilution costs, protecting non-transacting
investors from dilution without over-charging redeemers. Importantly,
under the final rule, the liquidity fee will be lower when a fund's
weekly liquid assets are higher because the rule will allow funds to
assume that weekly liquid assets have a market impact of zero,
resulting in similar economic benefits of tiering.
    Finally, the final rule could have included different default
liquidity fees that funds would be able to charge if they are unable to
produce good faith estimates of the liquidity costs of redemptions. For
example, the Commission could have scaled the default liquidity fee of
1% in the final rule to a fund's liquid asset levels (for example, by
multiplying it by one minus the level of weekly liquid assets, or by
one minus the level of daily liquid assets, at the end of the same or
previous day). Such alternatives to the default fee may more closely
resemble the costs of a hypothetical sale of the vertical slice, as
funds with higher liquid assets would charge lower default fees in
times of stress, when they are better able to absorb redemptions out of
liquid assets with a zero haircut. However, this approach could reduce
the fee that funds charge redeemers in times of stress and, given that
fund liquidity levels are publicly disclosed, could contribute to
incentives to redeem before a fund's liquidity is depleted. Moreover,
this alternative may create an incentive for funds to hold onto weekly
liquid assets in times of stress, when the costs of the vertical slice
are difficult to estimate and funds are most likely to use the default
fee. The final rule's 1% default fee is consistent with the current
baseline and is a significant fee for money market funds that are used
as cash vehicles. Moreover, the default fee is intended to apply
precisely when accurate data on liquidity costs for portfolio
securities is not available and does not replace individual fund
estimates of market impacts of a hypothetical sale of the vertical
slice. Importantly, funds may have incentives to use default fees only
in historically rare periods of stress, when transaction and quotation
activity in short-term funding markets freezes and data needed to
estimate liquidity costs of redemptions are not available.
e. Other Alternative Implementations of Liquidity Fees
    The final amendments could have required institutional funds to
assess a liquidity fee on all days with net redemptions, rather than
only on days when net redemptions exceed 5%. Alternatives requiring
funds to apply liquidity fees when net redemptions are below the 5%
threshold may enhance the expected economic benefits of liquidity fees.
However, these alternatives would impose greater costs on institutional
funds related to calculating spread, transaction, and market impacts
when net redemptions are low. As discussed in the baseline, money
market funds generally hold high levels of daily and weekly liquid
assets, and the final amendments would require money market funds to
hold even higher levels of these assets. As a result, unless both net
redemptions and price uncertainty are large, institutional funds may be
able to absorb redemptions of transacting investors without imposing
large liquidity costs on the remaining investors.
    The final amendments could have allowed funds to calculate the
liquidity fees under the assumption that the fund would absorb
redemptions out of liquid assets (the so-called horizontal slice of the
fund portfolio) or otherwise provide funds with flexibility to
determine the costs based on how they would satisfy redemptions on a
given day. Money market funds may manage their liquidity so as to be
able to absorb redemptions out of daily and weekly liquid assets,
rather than having to sell a pro-rata share of their portfolio
holdings. Moreover, the final amendments would require money market
funds to hold higher levels of

daily and weekly liquid assets. Assets that are not daily and weekly
liquid assets can be less liquid and generally may need to be held to
maturity by the fund. Thus, the alternative would allow funds to avoid
charging liquidity fees if they are able to, for example, absorb
redemptions out of more liquid assets. This may reduce uncertainty for
investors about the magnitude of the potential liquidity fee,
especially when liquidity is not scarce. However, this alternative
would result in redeeming investors not being charged for the true
liquidity costs of redemptions, which consist not only of the immediate
costs of liquidating fund assets, but also of the cost of leaving the
fund more depleted of liquidity and thus more vulnerable to future
redemptions.
    As another alternative, the final amendments could have required
that affected money market funds calculate the liquidity fee based on
the fund's best estimate of the liquidity costs of redemptions, rather
than following the approach prescribed in the final rule. Under this
alternative, liquidity fees may more accurately capture the costs of
redemptions as funds would be able to tailor fees to their liquidity
management strategies (whether that is, for example, liquidating pro-
rata shares of portfolio holdings, absorbing redemptions out of daily
or weekly liquidity, or some other approach). However, this alternative
would increase fund discretion in the calculation of liquidity fees,
reduce comparability of fees across money market funds, and fund
manager incentives may not be aligned with incentives to accurately
estimate liquidity costs of redemptions. For example, larger liquidity
fees benefit the fund and can improve reported fund performance. At the
same time, disclosures about historical fees can incentivize fund
managers to apply excessively low fees to attract investors.
6. Swing Pricing
    In lieu of the final liquidity fee framework, the Commission could
have adopted the swing pricing requirement similar to the mandatory
liquidity fee framework, or as proposed. The swing pricing alternative
has several important differences from the final liquidity fee
framework, and these differences give rise to different economic
benefits, costs, and operational challenges. As discussed in the
Proposing Release and in section II, swing pricing and liquidity fees
can both charge redeeming investors for the liquidity costs they impose
on a fund and allow funds to recapture the liquidity costs of
redemptions for non-redeeming investors. However, the swing pricing
alternative may have several effects relative to the final liquidity
fee framework.
    First, the final liquidity fee framework may be more transparent
than a swing factor adjustment to the fund's NAV, as redeeming
investors would more clearly see application of a separate fee. Some
commenters stated that a liquidity fee would be less confusing and more
transparent with respect to the liquidity costs redeeming investors
incur because investors are more familiar with the concept of liquidity
fees (that exist in the current rule) and because the size of the swing
factor is not readily observable in the fund's share price.\741\
---------------------------------------------------------------------------

    \741\ See, e.g., Morgan Stanley Comment Letter; SIFMA AMG
Comment Letter; Federated Hermes Comment Letter II.
---------------------------------------------------------------------------

    Second, under the swing pricing alternative, subscribers enter at a
lower price. This creates an incentive to subscribe that may be
important when liquidity is scarce and a fund is facing a wave of
redemptions. However, some commenters indicated that a liquidity fee
would be a more direct way to pass along liquidity costs and, unlike
swing pricing, would do so without providing a discount to subscribing
investors or adding volatility to the fund's NAV.\742\
---------------------------------------------------------------------------

    \742\ See, e.g., ICI Comment Letter; Federated Hermes Comment
Letter II; JP Morgan Comment Letter.
---------------------------------------------------------------------------

    Third, there may be significant operational challenges and time
pressures of swing pricing \743\ that reduce investor access to same
day liquidity.\744\ Specifically, commenters expressed concern that
swing pricing may inhibit a fund's ability to offer features such as
same-day settlement and multiple NAV strikes per day due to concerns
that swing pricing would delay a fund's ability to determine its
NAV.\745\ Under the swing pricing alternative, a fund has to analyze
flows and costs before publishing its NAV for each pricing period. In
contrast, under the final liquidity fee framework, funds may have more
time after publishing the NAV to finalize the liquidity fee
determination and only need to perform the analysis once per day. One
commenter indicated that a liquidity fee framework could better
preserve same-day liquidity for investors than swing pricing because
liquidity fees are already operationally feasible for many money market
funds and present fewer implementation challenges.\746\ Because
institutional money market funds typically offer same-day settlement,
the final liquidity fee framework would also involve time pressures,
albeit less acute.
---------------------------------------------------------------------------

    \743\ See, e.g., ICI Comment Letter; Northern Trust, Capital
Group Comment Letter; JP Morgan Comment Letter.
    \744\ See, e.g., Northern Trust Comment Letter; BlackRock
Comment Letter.
    \745\ See, e.g., Capital Group Comment Letter; State Street
Comment Letter; ICI Comment Letter; Federated Hermes Comment Letter
II; SIFMA AMG Comment Letter; BNY Mellon Comment Letter.
    \746\ See IIF Comment Letter.
---------------------------------------------------------------------------

    Fourth, some commenters argued that swing pricing is ill-suited for
money market funds given the general lack of experience with swing
pricing in the money market fund industry,\747\ and indicated that
liquidity fees would be easier for money market funds to implement,
allowing funds to leverage their existing experience with liquidity
fees under current rules.\748\
---------------------------------------------------------------------------

    \747\ See Morgan Stanley Comment Letter; SIFMA AMG Comment
Letter; IIF Comment Letter; Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; Senator Toomey Comment Letter;
Mutual Fund Directors Forum Comment Letter; see also Profs. Ceccheti
and Schoenholtz Comment Letter.
    \748\ See, e.g., Federated Hermes Comment Letter II; Invesco
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF
Comment Letter.
---------------------------------------------------------------------------

    Fifth, the Proposing Release recognized that swing pricing may
increase costs of tax reporting. Specifically, the swing pricing
alternative may increase tax reporting burdens for investors if the
requirement prevents an investor from using the NAV method of
accounting for gain or loss on shares in a floating NAV money market
fund or affects the availability of the exemption from the wash sale
rules for redemptions of shares in these funds. Several commenters
stated that swing pricing would increase tax reporting burdens because
wash sale rules may apply to redemptions in floating NAV money market
funds using swing pricing.\749\ In contrast, the tax implications of
liquidity fees are already settled. In addition, liquidity fees have
fewer accounting implications for funds because other types of mutual
funds have used fees and money market funds are already subject to a
liquidity fee framework.\750\
---------------------------------------------------------------------------

    \749\ See, e.g., Northern Trust Comment Letter; Capital Group
Comment Letter; ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter II; Americans for Tax Reform Comment
Letter.
    \750\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter.
---------------------------------------------------------------------------

    As discussed in section II, many commenters expressed broad
concerns about the swing pricing proposal and its potential effect on
institutional money market funds and investors. One commenter indicated
that the swing pricing requirement is based on false assumptions,
including the assumption that liquidity fees did not work during market
stress of 2020, that fund boards will not implement liquidity fees, and

that swing pricing will not eliminate a key tenet of money market funds
(availability of intraday and same day liquidity), among others.\751\
Moreover, the commenter stated that empirical studies about the effects
of swing pricing on redemptions in a crisis cited in the proposal do
not support the swing pricing requirement.\752\ While we disagree with
this assertion, we are not adopting the swing pricing requirement for
money market funds. Section II, section IV.4, and the above discussion
highlight the effects of the liquidity fees tied to weekly liquid
assets in March 2020 on redemption behavior, fund flow disincentives to
implement liquidity fees, and the potential effects of swing pricing on
the availability of same-day and intraday liquidity, among other
things. In light of this analysis and commenter input,\753\ we believe
that, on balance, the final liquidity fee framework may be a more
operationally feasible and efficient way to reduce dilution of fund
investors and facilitate liquidity risk management by money market
funds while reducing costs and unintended effects on the money market
fund industry and investors.
---------------------------------------------------------------------------

    \751\ See Federated Hermes Comment Letter I.
    \752\ See Federated Hermes Comment Letter I discussing, for
example, Dunhong Jin, et al., Swing Pricing and Fragility in Open-
End Mutual Funds, 35 Rev. Fin. Stud. 1, 1-50 (2022).
    \753\ For example, a number of commenters indicated that swing
pricing would reduce the viability of institutional prime funds as
an asset class and that most if not all institutional investors will
abandon funds subject to swing pricing. See, e.g., Federated Hermes
Comment Letter I. Also see, e.g., ICI Comment Letter; Capital Group
Comment Letter; JP Morgan Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

7. Expanding the Scope of the Floating NAV Requirements
    The final amendments could have expanded the floating NAV
requirements to a broader scope of money market funds. For example, the
final amendments could have imposed floating NAV requirements on all
prime money market funds, but not on tax-exempt funds. As another
alternative, the final amendments could have imposed floating NAV
requirements on all prime and tax-exempt money market funds.\754\
Finally, the final amendments could have required that all money market
funds float their NAVs.\755\
---------------------------------------------------------------------------

    \754\ See, e.g., Schwab Comment Letter.
    \755\ See, e.g., Americans for Tax Reform Comment Letter; Better
Markets Comment Letter.
---------------------------------------------------------------------------

    Expanding the scope of the floating NAV requirements beyond
institutional prime and institutional tax-exempt funds would involve
several benefits. First, a floating NAV may increase transparency about
the risk of money market fund investments. Portfolios of money market
funds give rise to liquidity, interest rate, and credit risks--risks
that are relatively low under normal market conditions, but may be
magnified during market stress. To the degree that investors in stable
NAV funds are currently treating them as if they were holding U.S.
dollars due to a lack of transparency about risks of such funds,
expanding the scope of the floating NAV requirements may enhance
investor protections and enable investors to make more informed
investment decisions. Some commenters indicated that such an
alternative could clarify to investors that there is investment risk in
these products and that money market funds differ from insured bank
deposits, as well as reduce the likelihood that official sector
interventions and taxpayer support will be needed to halt future
runs.\756\
---------------------------------------------------------------------------

    \756\ See, e.g., Schwab Comment Letter; Better Markets Comment
Letter.
---------------------------------------------------------------------------

    Second, these alternatives could reduce run risk in affected stable
NAV funds.\757\ Specifically, floating the NAV may reduce the first-
mover advantage in redemptions, partly mitigating investor incentives
to run. A floating NAV requirement could discourage herd redemption
behavior across all prime money market funds and may reduce the
advantages of sophisticated investors that redeem quickly under
stressed conditions. Third, floating the NAV of a broader range of
money market funds could more accurately capture their role in asset
transformation and corresponding risks. Retail prime and retail tax-
exempt funds have risky portfolio holdings, with some of the underlying
holdings of retail money market funds similar to those of institutional
prime funds, which experienced significant stress in 2020. Expanding
the floating NAV requirements to all money market funds would result in
a consistent regulatory treatment of money market funds and put them on
par with other mutual funds. Moreover, it may enhance the allocative
efficiency in the money market fund industry and may enhance
competition between floating NAV and stable NAV funds. To the degree
that the disparate treatment of floating NAV and stable NAV funds led
to a significant migration of institutional investments from prime and
tax-exempt money market funds to government money market funds,
alternatives expanding the scope of the floating NAV requirement to all
money market funds may lead to outflows from government money market
funds back into prime and tax-exempt sectors.
---------------------------------------------------------------------------

    \757\ See, e.g., Schwab Comment Letter.
---------------------------------------------------------------------------

    However, retail investors have exhibited a lower propensity to run
in prior market stress periods than institutional investors.
Additionally, government funds tend to receive inflows rather than
outflows during periods of market stress. These factors would reduce
the benefits of a floating NAV in terms of reducing run risk for retail
and government funds. Further, the final rule's increase in liquidity
requirements may decrease the portfolio and redemption risks of retail
funds, as the final rule will require these funds to maintain liquidity
levels that are high in comparison to historical redemptions these
funds have experienced, further reducing the benefits of a floating NAV
requirement.
    At the same time, the alternatives would impose significant costs.
First, such alternatives may reduce the attractiveness of affected
money market funds to investors and may result in significant
reductions in the size of the money market fund sector. One commenter
noted that adopting a floating NAV for all funds may cause investors to
reallocate capital into cash accounts subject to deposit insurance,
with adverse effects on wholesale funding liquidity and access to
capital for issuers.\758\ To the extent that retail investors use money
market funds as a safe, cash-like product, floating the NAV of stable
NAV funds may lead investors to reallocate capital into cash accounts
subject to deposit insurance. This would reduce retail investors'
ability to receive market rates for their cash management investments.
---------------------------------------------------------------------------

    \758\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    Second, the Commission continues to recognize that if the floating
NAV alternatives resulted in a decrease in the size of the money market
fund industry, they would adversely impact the availability of
wholesale funding liquidity and access to capital for issuers. A
reduction of wholesale funding liquidity available to arbitrageurs may
magnify mispricing across securities markets. Similarly, a reduction in
the size of affected money market funds or the money market fund
industry as a whole may increase the costs of or decrease access to
capital for issuers in short-term funding markets.
    Third, the floating NAV alternative may involve significant
operational, accounting, and tax challenges. In particular,
alternatives involving switching retail funds from stable NAV to
floating NAV may create accounting and tax complexities for some retail
investors. For instance, some retail

investors might not use the NAV method of accounting for gains and
losses on money market fund shares.\759\ In addition, a floating NAV
requirement may be incompatible with popular cash management tools such
as check-writing and wire transfers that are currently offered for many
stable NAV money market fund accounts, as well as the use of stable NAV
money market funds by sweep vehicles.\760\
---------------------------------------------------------------------------

    \759\ See supra note 260 and accompanying text (discussing the
NAV method).
    \760\ See supra paragraph accompanying note 345.
---------------------------------------------------------------------------

8. Countercyclical Weekly Liquid Asset Requirements
    The final rule could have imposed countercyclical weekly liquid
asset requirements. For instance, during periods of market stress, the
minimum weekly liquid asset threshold could decrease, for example, by
50%. The final amendments could have specified the definitions of
market stress that would trigger a change in weekly liquid asset
thresholds. Alternatively, the final amendments could have specified
that decreases in weekly liquid asset thresholds would be triggered by
Commission administrative order or notice.
    As discussed in the Proposing Release, such alternatives could help
clarify that money market funds' liquidity buffers are meant for use in
times of stress and may provide assurance to investors that funds may
utilize their liquidity reserves to absorb redemptions. To the degree
that these alternatives may increase the willingness of affected funds
to absorb redemptions out of daily or weekly liquid assets during times
of stress, these alternatives may reduce liquidity costs borne by fund
investors and may reduce incentives to redeem.
    The Commission has not received comment in support of this
alternative, but has received comment that countercyclical liquidity
requirements are unnecessary.\761\ Specifically, the commenter asserted
that if there is no regulatory link between the level of liquidity and
the potential imposition of fees or gates, money market fund managers
will naturally be able to use liquid assets in a countercyclical way.
The commenter further emphasized that countercyclicality would be
challenging to administer by a regulator.
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    \761\ See Federated Hermes Comment Letter I.
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    Investor redemptions out of institutional prime and institutional
tax-exempt funds during market stress of 2020 demonstrated a high level
of sensitivity of redemptions to threshold effects. The Commission
continues to believe that any decrease in regulatory minimum thresholds
may create investor concerns about liquidity stress in money market
funds and trigger an increase in investor redemptions. Moreover, under
the final amendments, affected money market funds will not be
prohibited from operating below the daily or weekly liquid asset
requirements. Importantly, the elimination of the tie between liquidity
thresholds and fees and gates may more efficiently incentivize funds to
use their liquidity buffers in times of stress, while removing
threshold effects around weekly liquid asset levels.
9. Amendments Related to Potential Negative Interest Rates
    As an alternative, the Commission could have restricted how money
market funds may react to possible future market conditions resulting
in negative fund yields by prohibiting, as proposed, money market funds
from reducing the number of shares outstanding to seek to maintain a
stable net asset value per share or stable price per share. In tandem,
the Commission could have required, as proposed, that government and
retail money market funds to keep records identifying intermediaries
able to process orders at a floating NAV and to no longer transact with
intermediaries that are not able to process orders at a floating NAV,
as proposed.
    To the degree that, relative to the final rule, a floating NAV
provides greater transparency to investors by showing daily
fluctuations in the NAV, this alternative may increase transparency of
stable NAV performance for investors in the event of a negative
interest rate environment.\762\ However, these relative benefits may be
dampened, if not eliminated, by the final rule's disclosure
requirements about the board's determination to use an RDM as well as
account statement disclosures. The alternative requirement related to
fund intermediaries may facilitate a transition of stable NAV funds to
floating NAV in a negative yield environment. One commenter also
indicated that this alternative may result in greater global
consistency among money market funds after the ultimate discontinuation
of share cancellation under the European Money Market Funds
Regulation.\763\
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    \762\ See, e.g., Northern Trust Comment Letter; CFA Comment
Letter.
    \763\ See, e.g., Northern Trust Comment Letter.
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    However, this alternative may impose significant operational
burdens and costs on investors. Many investors in stable NAV funds may
prefer a stable NAV investment even in a negative rate environment, and
this alternative would eliminate this possibility.\764\ In addition,
for some investors, transitioning to a floating NAV could be even more
complex and confusing than an RDM.\765\ Finally, a floating NAV
requirement may be incompatible with popular cash management tools such
as check-writing and wire transfers that are currently offered for many
stable NAV money market fund accounts.
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    \764\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Allspring Funds Comment Letter.
    \765\ BNY Mellon Comment Letter.
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    The alternative requirement that stable NAV funds determine that
their intermediaries have the capacity to process the transactions at
floating NAV and the related recordkeeping requirements would also
impose burdens on such funds. For example, affected money market funds
may have to review their contracts with intermediaries, and some
contracts may need to be renegotiated. Funds would have flexibility in
how they make this determination for each financial intermediary, which
may reduce these costs for some funds. Moreover, intermediaries that
are currently unable to process transactions in stable NAV funds at a
floating NAV may need to upgrade their processing systems to be able to
continue to transact in government and retail funds. Many financial
intermediary platforms that operate cash sweep programs and bank-like
services using an infrastructure that does not accommodate a floating
share price may be unable or unwilling to do so.\766\ To that effect,
the alternative may adversely impact the size of intermediary
distribution networks of some funds, which can limit access or increase
the costs of investor access to some affected funds. Thus, the
alternative may present operational difficulties for intermediaries
offering stable NAV funds and may reduce the ability of investors to
use stable NAV funds for sweep accounting and other cash management
services. Overall, the final rule and its disclosure requirements may
serve to maintain similar transparency to the alternative, without
adverse effects on the ability of investors to have a stable NAV in the
event of negative yields.
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    \766\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Morgan Stanley Comment Letter;
BNY Mellon Comment Letter.
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    As another alternative, the final amendments could have mandated
that in the event of persistent negative interest rates, all stable NAV
funds must use an RDM. Requiring stable NAV funds to use an RDM would
eliminate

NAV fluctuations in a negative yield environment, which may preserve
the use of stable NAV funds for sweep accounting. Such an alternative
may, thus, preserve or increase demand for government and retail money
market funds relative to the final rule. This alternative may also
increase comparability across stable NAV funds relative to the final
rule. However, such an alternative would eliminate valuable flexibility
for stable NAV funds to float the NAV, which may be optimal for some
funds given their investor clientele and capabilities of their
intermediary networks.
10. Amendments Related to WAL/WAM Calculation
    The final rule will amend rule 2a-7 to require that WAM and WAL are
calculated based on the percentage of each security's market value in
the portfolio, as proposed. The Commission could have instead based the
calculation on amortized cost of each portfolio security. Similar to
the final amendments, such an alternative would also enhance
consistency and comparability of disclosures by money market funds in
data reported to the Commission and provided on fund websites. Thus,
the alternative would achieve the same benefits as the final amendments
in terms of enhancing transparency for investors and enhancing the
ability of the Commission to assess the risk of various money market
funds and increasing allocative efficiency. However, relative to the
final amendments, the alternative may give rise to higher compliance
costs. While all money market funds are required to determine the
market values of portfolio holdings, no such requirement exists for
amortized costs of portfolio securities. Thus, funds that do not
currently estimate amortized costs would be required to do so for the
WAL and WAM calculation. Moreover, the Commission continues to believe
that amortized cost may be a poor proxy of a security's value if market
conditions change drastically due to, for example, liquidity or credit
stress, and if the fund is unable to hold the security until maturity.
This may distort WAL and WAM calculations during market dislocations--
when comparable and accurate information about fund risks may be most
important for investment decisions.
    While commenters generally supported the proposed approach,\767\
one commenter disagreed with the proposed changes, but also with the
alternative calculating WAM and WAL based on amortized cost of the
portfolio instead of market value.\768\ Specifically, the commenter
stated that it calculates WAM and WAL using market value for floating
NAV money market funds and amortized cost for retail and government
money market funds. The commenter also stated that the only meaningful
difference in these methodologies would be if one of the issuers of the
portfolio securities had a credit problem, in which case the fund would
immediately shift to using market value.\769\ Further, the commenter
stated that the fractional difference between the WAM and WAL
calculated with amortized cost versus market value would not change
either number calculated in actual days, rather than fractions of a
day, and that any changes relative to the regulatory baseline would
necessitate operational changes.
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    \767\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Capital Group Comment Letter.
    \768\ See Federated Hermes Comment Letter I.
    \769\ Id.
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    Differences between the WAM and WAL calculated with amortized cost
versus market value may vary across funds and over time. As discussed
above, while the difference between a fund's WAM or WAL calculated
using amortized cost versus market value is likely to be small in many
circumstances, there are also circumstances where this difference may
be more significant, such as when a security's issuer experiences a
credit event, during periods of market stress, or when interest rates
rise rapidly, particularly for assets with longer maturities. We
continue to believe that consistency and comparability of disclosures
related to fund WAM and WAL across different money market funds and
different types of money market funds may enhance Commission oversight
and be valuable to investors, and we believe that requiring funds to
use a uniform approach to the WAM and WAL calculations at all times
mitigates any concerns about a fund not moving, or being slow to move,
to a market-based value during times when there could be meaningful
differences. In light of the above considerations, we continue to
believe the final approach may be a more efficient way of accomplishing
such comparability.
11. Form PF Amendments for Large Liquidity Fund Advisers
    The Commission could have adopted Form PF amendments for large
liquidity fund advisers with a greater level of detail requested.
Alternatively, the Commission could have adopted the final Form PF
amendments without including some or all of the new reporting
requirements. For example, the final amendments could have amended Form
PF without requiring new disclosures related to repurchase agreement
transactions or related to investor information. Relative to the final
amendments, alternatives that reduce (increase) the amount of
information required to be reported in Form PF may have reduced
(increased) the benefits of the reporting requirements as well as the
direct and indirect costs borne by large liquidity fund advisers. As
discussed above, one commenter questioned the value added of the
proposed additional reporting,\770\ and other commenters generally