25th............................................            40.1            30.4            52.6            47.4
50th............................................            47.3            43.9            58.7            57.1
75th............................................            57.2            50.9            67.7            60.3
90th............................................            90.3            58.0            92.3            72.9

Max.............................................           100.0            67.5           100.0           76.0
----------------------------------------------------------------------------------------------------------------
Source: Form N-MFP filings.

    Nevertheless, to the extent that some funds have to increase their
liquidity levels to comply with the final amendments, these amendments
may increase the demand of money market funds for liquid assets, such
as repos. To the degree that this results in a decline in yield spreads
between prime and government money market funds, some investments may
flow into government money market funds or, alternatively, banking
entities. To the extent that the liquidity in overnight funding markets
may flow to banking entities, and through them to leveraged market
participants, such as hedge funds, the amendments may reduce the
liquidity risk borne by some money market funds, but may result in a
concentration of risk taking among leveraged and less regulated market
participants. At the same time, investors reaching for yield may flow
out of money market funds and into other more speculative vehicles,
unregulated and less transparent products.
    The final amendments may also impose indirect costs on issuers.
Specifically, money market funds are holders of commercial paper and
certificates of deposit, as described in the baseline,\606\ and most of
the commercial paper they hold is issued by banks, including foreign
bank organizations.\607\ Therefore, issuers of commercial paper and
certificates of deposit are likely to experience incrementally reduced
demand for their securities from money market funds, particularly
demand for debt that would fall outside of the weekly liquid assets
category,\608\ however any such effects may be mitigated by the factors
discussed below. We have received comment that raised liquidity
requirements may reduce issuers' access to capital and increase the
cost of capital, negatively affecting capital formation in commercial
paper and certificates of deposit.\609\ Issuers may respond to such
changes by reducing their issuance of commercial paper and certificates
of deposit and increasing issuance of longer-term debt. In a somewhat
analogous setting, some research explores the effects of the 2014 money
market fund reforms, which may have resulted in asset outflows from
prime money market funds into government money market funds and
affected funding for large foreign banking organizations in the U.S.,
on bank business models.\610\ One paper found that banks were able to
replace some of the lost funding, but reduced arbitrage positions that
relied on unsecured funding, rather than reducing lending.\611\ Another
paper found that money market fund reforms led to an increase in the
relative share of lending in bank assets and concludes that reduction
in unstable funding can discourage bank investments in illiquid
assets.\612\ Other research examined the effects of decreased holdings
of European bank debt by money market funds during the Eurozone
sovereign crisis in 2011. One paper found that reduced wholesale dollar
funding from money market funds during this period led to a sharp
reduction in dollar lending by Eurozone banks relative to euro lending,
which reduced the borrowing ability of firms reliant on Eurozone banks
prior to the sovereign debt crisis.\613\
---------------------------------------------------------------------------

    \606\ To the degree that some money market funds hold
significant quantities of commercial paper issued by foreign banks
seeking dollar funding, such issuer costs may have a greater effect
on foreign issuers.
    \607\ See ICI MMF Report, supra note 542.
    \608\ See, e.g., Allen Kyle, et al., Money Market Reforms: The
Effect on the Commercial Paper Market, 154 J. Banking and Finance
106947 (2023).
    \609\ See, e.g., ICI Comment Letter; Dechert Comment Letter;
CCMR Comment Letter.
    \610\ These outflows around the Oct. 2016 compliance date for
the 2014 reforms, for example, led to reduced money market funds
purchases of commercial paper with other entities like mutual funds
eventually picking up the shortfall and an approximately 30 basis
point spike in 90-day financial commercial paper rates for about
three months.
    \611\ See, e.g., Alyssa Anderson et al., Arbitrage Capital of
Global Banks (Finance and Economics Discussion Series 2021-032.
Washington: Board of Governors of the Federal Reserve System, May
2021), available at https://doi.org/10.17016/FEDS.2021.032.
    \612\ See Thomas Flanagan, Funding Stability and Bank Liquidity
(Working Paper, Mar. 2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3555346 (retrieved from SSRN Elsevier
database).
    \613\ See Victoria Ivashina et al., Dollar Funding and the
Lending Behavior of Global Banks, 130 Q.J. Econ. 1241, 1241-1281
(2015).
---------------------------------------------------------------------------

    These potential costs of the final amendment to issuers may be
mitigated by three potential factors. First, as discussed above and in
the proposal, money market funds may respond to a higher weekly liquid
asset threshold by increasing the maturity and liquidity risk in their
non-weekly liquid asset portfolio allocations. This effect may dampen
the adverse demand shock for commercial paper, but also dampen the
reductions in the portfolio risk of affected money market funds.
However, for the past several years prime money market funds have
maintained levels of liquidity that are close to or that exceed the
final thresholds, without offsetting the low yield of shorter-term
securities with significant holdings of riskier longer-term securities
(``barbelling'').\614\ Second, as discussed in the proposal, money
market funds hold less than a quarter of outstanding commercial paper,
which could limit the impact of the final amendments on commercial
paper issuers and markets. If money market funds pull back from
commercial paper markets and commercial paper prices decrease as a
result, other investors may be attracted to commercial paper, absorbing
some of the newly available supply, as observed after the 2016 reforms.
Third, the amendments to liquidity requirements may increase some money
market funds' liquidity buffers, which may enable such funds to meet
large redemptions from liquid assets and reduce the need to sell
commercial paper to meet large redemptions during stress periods.\615\
This may enhance the stability of commercial paper markets during times
of market stress--an effect that is also limited by the relative size
of money

market fund holdings of commercial paper.
---------------------------------------------------------------------------

    \614\ Fund incentives to barbell may be stronger in higher
interest rate environments or when the yield curve for short-term
securities is steeper.
    \615\ See, e.g., Fidelity Comment Letter (stating that higher
weekly liquid assets allowed the commenter to avoid selling
commercial paper into frozen markets in Mar. 2020).
---------------------------------------------------------------------------

3. Stress Testing Requirements
a. Benefits
    The final amendments will also alter stress testing requirements
for money market funds. Under the baseline, money market funds are
required to stress test their ability to maintain 10% weekly liquid
assets under the specified hypothetical events described in rule 2a-7
since breach of the 10% weekly liquid asset threshold would impose a
default liquidity fee. The amendments will eliminate the default
liquidity fee triggered by the 10% threshold and the corresponding
stress testing requirement around the 10% weekly liquid asset
threshold. Instead, the amendments will require funds to determine the
minimum level of liquidity they seek to maintain during stress periods
and to test whether they are able to maintain sufficient minimum
liquidity under such specified hypothetical events, among other
requirements. We believe that the final stress-testing approach will
allow for better tailoring of stress-testing results to individual fund
characteristics, which may enhance the manager and the board's
understanding of the risks to the fund portfolio under extreme and
plausible market conditions, as well as enhance liquidity management
and the ability of funds to meet redemptions.
    Most commenters generally supported the proposed amendments to the
liquidity stress testing requirements,\616\ but one commenter supported
the existing stress testing framework.\617\ Different money market
funds have different optimum levels of liquidity under times of stress.
Therefore, the final amendments to stress testing requirements reflect
our continuing belief that many factors influence optimum levels of
minimum liquidity during stress periods, including the type of money
market fund, investor concentration, investor composition, and
historical distribution of redemption activity under stress. As such,
we continue to believe that a more principles-based approach may
improve the utility of stress testing as part of fund liquidity
management. Specifically, the final amendments may allow funds to
tailor their stress testing to the fund's relevant factors, which may
enhance the fund managers' and the board's understanding of the risks
to the fund portfolio under extreme and plausible market conditions, as
well as enhancing liquidity management and the funds' ability to meet
redemptions.
---------------------------------------------------------------------------

    \616\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
T. Rowe Comment Letter; Schwab Comment Letter.
    \617\ See Federated Hermes Comment Letter I; Federated Hermes
Comment Letter IV.
---------------------------------------------------------------------------

b. Costs
    Amendments to fund stress testing requirements may impose direct
and indirect costs. Under the final amendments, a fund will be required
to determine the minimum level of liquidity it seeks to maintain during
stress periods, identify that liquidity level in its written stress
testing procedures, periodically test its ability to maintain such
liquidity level, and provide the fund's board with a report on the
results of the testing.
    As a baseline matter, funds are already subject to stress testing
requirements, which may reduce some of the burdens of the final
amendments. Money market funds have also established written stress
testing procedures to comply with existing stress testing requirements
and report the results of the testing to the board. Thus, such funds
may experience costs related to altering existing stress testing
procedures as the final amendments would move from bright-line
requirements to a principles based approach, as well as costs related
to board reporting and recordkeeping.\618\
---------------------------------------------------------------------------

    \618\ The Commission estimates one-time costs of $125,832 for
all affected funds to amend stress testing procedures, and these
costs have been amortized over three years in section V.B for
purposes of the PRA.
---------------------------------------------------------------------------

    In addition, to the degree that funds do not have sufficient
incentives to manage liquidity to meet redemptions, they may choose
insufficiently low minimum levels of liquidity for stress testing,
which may reduce the value of stress testing and corresponding
reporting for board oversight of fund liquidity risk. However, funds
may have significant reputational incentives to manage liquidity costs:
incentives that have, for example, led many funds to voluntarily
provide sponsor support.
    While most commenters generally supported the principles-based
approach, one commenter opposed the change, stating that stress testing
was not effective in March of 2020 as markets were frozen.\619\ The
final stress-testing approach would allow for better tailoring of
stress-testing results to individual fund characteristics, which may
enhance the manager and the board's understanding of the risks to the
fund portfolio under extreme and plausible market conditions, as well
as enhance liquidity management and the ability of funds to meet
redemptions.
---------------------------------------------------------------------------

    \619\ See Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

4. Liquidity Fees
a. Benefits and Costs of the Mandatory Liquidity Fee Amendments
i. Benefits
    As discussed in section II, the final amendments include both
mandatory and discretionary liquidity fee provisions intended to reduce
liquidity externalities in money market funds. Specifically, as
discussed in the baseline, money market fund investors transacting
their shares typically do not incur the costs associated with their
transaction activity. Instead, these liquidity costs may be borne by
shareholders remaining in the fund, which may contribute to a first-
mover advantage and run risk.\620\ Moreover, as discussed in the
baseline, liquidity management by money market funds may impose
negative externalities on all participants investing in the same asset
classes, and this effect may be magnified if there are large-scale net
redemptions during times of market stress. As discussed in further
detail below, we anticipate the final liquidity fee framework will
reduce the negative externalities that redeemers impose on non-
transacting investors, protect non-transacting investors from dilution,
and reduce run risk in money market funds.
---------------------------------------------------------------------------

    \620\ As discussed in the baseline, dilution costs most directly
impact shareholders in floating NAV funds through changes to the
NAV. In stable NAV funds, dilution costs can make the fund more
likely to breach the $1 share price if dilution costs are large.
---------------------------------------------------------------------------

    The final liquidity fee framework will require institutional prime
and institutional tax-exempt money market funds that experience daily
net redemptions in excess of 5% of their net assets to assess liquidity
fees so as to charge redeeming shareholders for the liquidity costs
they impose on the fund. Specifically, the fee amount would reflect the
fund's good faith estimate of the spread, other transaction costs, as
well as market impact costs the fund would incur if it were to sell a
pro rata amount (a vertical slice) of each security in its portfolio to
satisfy the amount of net redemptions. The Commission anticipates that,
under normal market conditions, it is likely that the fee amount would
generally be de minimis, since money market funds already hold
relatively high quality and liquid investments and will hold even
higher levels of liquidity under the final amendments, which may reduce
liquidity costs associated with a vertical slice assumption. In the
event of de minimis costs (costs that are less than 0.01% of the value
of the shares redeemed), a fund will not be required to impose a
liquidity fee. If the fund is

not able to make a good faith estimate of its liquidity costs based on
the sale of a vertical slice, the fund will use a default liquidity
fee, as discussed in section II.B.2. In addition, the final amendments
will allow affected money market funds to assess discretionary
liquidity fees if the board or its delegate determines that fees would
be in the best interest of the fund.
    We anticipate the final liquidity fee framework will reduce
dilution of non-redeeming shareholders in the face of net redemptions.
As discussed in greater detail in section IV.C.4.b.i below, redeeming
investors will bear the fee. As a result, it may dampen any first-mover
advantage, thus reducing the incentive to redeem early, the resulting
fund outflows, and dilution resulting from these outflows. By reducing
dilution, liquidity fees are also expected to protect investors that
remain in a fund, for instance, during periods of high net redemptions.
By protecting non-transacting investors from dilution costs of
redemptions, the liquidity fee framework may also incentivize investors
to stay in funds experiencing large redemptions, reducing run risk.
Moreover, the liquidity fee framework may attract some investors (such
as investors that redeem infrequently) to prime and tax-exempt money
market funds.
    The above economic benefits of liquidity fees may be influenced by
several factors. First, under the final amendments, liquidity fees are
triggered by same-day net redemptions--a threshold that we believe
makes the final liquidity fee framework less susceptible to run risk
than fees conditioned on weekly liquid assets. In general, if investors
expect an indicator that triggers the fee (e.g., weekly liquid assets
or same-day net redemptions) to be below the fee threshold on a given
day, but above the fee threshold on subsequent days, they are
incentivized to redeem early, before the liquidity fee applies.
Therefore, the ability of investors to accurately forecast an indicator
that triggers the fee over subsequent days may give rise to incentives
for strategic redemptions. A day of relatively low weekly liquid assets
combined with significant redemptions may be more likely than otherwise
to be followed by a day with even lower weekly liquid assets, due to
the need to absorb the trading costs of redemptions. This makes
declines in weekly liquid assets more forecastable. By contrast,
changes in net redemptions from one day to the next are more difficult
to predict accurately because net flows aggregate orders from a large
number of investors that may be redeeming and subscribing based on
their cash needs, interest rate expectations, and risk tolerances,
among other things. Investors may still seek to redeem during a
redemption wave based on observation of prior days' net redemptions out
of the fund or similar funds. However, such anticipatory redemptions
run the risk that a liquidity fee would be applied on that day. In such
a scenario, however, to the degree that fees accurately reflect
liquidity costs, investors know that they would not be diluted if they
stay in the fund, reducing their incentives to exit in anticipation of
the application of a liquidity fee and corresponding run risk.
    Second, under normal market conditions, investor dilution may not
be significant and liquidity fees may not be charged or the fees
charged may be small. However, the final rule is intended to address
the dilution that can occur when a money market fund experiences large
net redemptions and is not intended to result in significant fees
unless there is significant net redemption activity leading to large
liquidity costs, such as in times of stress in short-term funding
market. As discussed in section II, funds are expected to charge larger
fees in times of stress, when the benefits of protecting investors from
dilution are higher.
    Third, as discussed in greater detail in section II, the final
liquidity fee framework will require affected funds to calculate fees
based on, among other things, an assessment of the market impacts of
selling a vertical slice of the fund portfolio. To the degree that the
costs of selling a pro rata amount of each portfolio security cannot be
estimated in good faith and supported by data, funds will use the
default liquidity fee prescribed in the rule. This default liquidity
fee is a proxy for true liquidity costs of redemptions in times of
stress,\621\ and may over-estimate or under-estimate the liquidity
costs of different funds. In addition, differences in fund portfolio
composition may allow some funds to estimate liquidity fees under
stress, while other affected funds may be unable to do so and may
simply charge the default fee. This may decrease the ex-ante benefit of
increased comparability of liquidity costs across affected money market
funds.
---------------------------------------------------------------------------

    \621\ As discussed elsewhere, to the degree that discounts
experienced by ultra-short bond exchange traded funds in the peak
market stress of March 2020 may serve as a proxy for liquidity costs
of money market funds, the default liquidity fee is generally
consistent with the range of money market fund liquidity costs
during the same period.
---------------------------------------------------------------------------

    Fourth, the final liquidity fee framework addresses only the
portion of dilution costs related to trading costs and market impacts,
and will not address other sources of dilution discussed in section
IV.B. Thus, the requirement may only partly reduce the dilution costs
that redemptions impose on non-transacting investors and the related
liquidity externalities.
    The final amendments will require affected funds to implement
liquidity fees when faced with redemptions in excess of the 5%
threshold. While money market funds may have reputational incentives to
manage liquidity to meet redemptions,\622\ affected funds also face
collective action problems and disincentives stemming from investor
behavior. Specifically, to the degree that institutional investors may
use institutional prime and institutional tax-exempt funds for cash
management and their flows are sensitive to liquidity fees, funds may
be dis-incentivized to implement liquidity fees until the fund is under
severe and prolonged stress. For example, even if all institutional
money market funds recognized the benefits of charging redeeming
investors for the liquidity costs of redemptions, no fund may be
incentivized to be the first to adopt such an approach as a result of
the collective action problem. By making liquidity fees in the face of
large outflows mandatory, rather than optional, the final amendments
are intended to ensure that funds assess liquidity fees to capture the
dilution costs of net redemptions. Moreover, it may be suboptimal for
an individual money market fund to implement liquidity fees frequently
under normal market conditions, as the operational costs of doing so
are immediate and certain, while the benefits are largest in relatively
rare times of liquidity stress. The final rule's application of
liquidity fees by all institutional prime and institutional tax-exempt
funds faced with large outflows is intended to ensure that liquidity
fees are deployed in times of stress by all affected funds, protecting
remaining fund investors from dilution costs when liquidity costs are
highest.
---------------------------------------------------------------------------

    \622\ One commenter stated that a fund's board of independent
directors would have reputational and legal incentives to apply a
discretionary fee to prevent shareholder dilution regardless of
whether other funds' boards apply fees. See Federated Hermes Comment
Letter V.
---------------------------------------------------------------------------

    The Commission has also received comments that the removal of the
tie between weekly liquid assets and gates and fees would have been
sufficient, and that other amendments are unnecessary.\623\ We note
that for reasons

discussed throughout, the Commission is adopting all of the amendments,
which we believe can work in complementary ways to reduce liquidity
externalities and run risk in money market funds, although each element
of the final rule may have lower incremental benefits. The Commission
has also received comments questioning whether any meaningful dilution
occurs in money market funds.\624\ For example, one commenter stated
that, from their own data and industry experience, no dilution was
actually experienced and that, if dilution occurred, it would have been
observable in a declining NAV during the stressed period in which money
market funds experienced net redemptions.\625\ The Proposing Release
documented declines in the distribution of money market fund NAVs
during peak market stress of March 2020.\626\ However, because
investors can redeem in response to anticipated or realized NAV dips,
it is difficult to disentangle such effects from the dilution that
results from forced sales to meet redemptions. Moreover, dilution costs
exist--and are borne by remaining investors--even if funds do not fully
exhaust their liquidity buffers and experience NAV dips from forced
sales, and anti-dilution mechanisms are intended to address dilution
costs that stem from a fund's liquidity becoming depleted, rather than
necessarily fully exhausted. Finally, we do not observe dilution costs
that would have occurred in absence of the Federal Reserve's facilities
that may have prevented substantial declines in fund NAVs from forced
sales to meet redemptions.
---------------------------------------------------------------------------

    \623\ See, e.g., Federated Hermes Comment Letter I; ICI Comment
Letter.
    \624\ See, e.g., Federated Hermes Comment Letter I; SIFMA AMG
Comment Letter; Capital Group Comment Letter; JP Morgan Comment
Letter; Fidelity Comment Letter.
    \625\ See Federated Hermes Comment Letter II.
    \626\ See 87 FR 7297.
---------------------------------------------------------------------------

    Another commenter estimated the impact of swing pricing on its
money market fund on March 16, 2020, and seemed to suggest that the
impact would have been slightly more than 1 basis point.\627\ Another
commenter analyzed the size of a swing factor adjustment if a fund held
50% of its assets in weekly liquid assets and applied a 100-basis point
upward move in market yield for all other holdings (a historically
large move, according to the commenter) as a proxy of market impact.
The commenter stated that, in this analysis, a fund's NAV would only
move down by $0.0007.\628\ Importantly, this comment addresses the
hypothetical impacts of specific interest rate shocks (rather than, for
example, large firm-specific or sector-wide credit shocks) and do not
revalue the entire fund portfolio based on market impacts of the
liquidation of a pro-rata slice of the fund portfolio using transaction
or quotation data. While dealer accommodation may allow money market
funds to transact at bid or mid prices under normal market conditions,
historical bid and mid estimates from pricing vendors may not reflect
prices at which money market funds are able to transact when markets
are under stress.\629\ In addition, evidence from the commercial paper
market suggests that, during the liquidity stress of 2020, the
commercial paper market exhibited a significant amount of stress
reflected in spikes in the yield spread between commercial paper and
Treasuries and in the commercial paper bid-ask spread, as can be seen
in Figure 4. For example, bid-ask spreads of highly rated dealer-placed
commercial paper reached between approximately 25 and 55 basis points
at the height of the stress in March and April 2020 depending on
maturity.\630\ In addition, we are aware of research showing that
ultra-short bond exchange traded funds exhibited significant NAV
discounts during the peak of market stress in March 2020.\631\ To the
degree that ultra-short bonds may be somewhat comparable to the debt
instruments held by money market funds, and to the extent that the
magnitude of exchange traded fund discounts may proxy for liquidity
costs of money market funds that hold similar assets, this could
suggest nontrivial dilution costs during market stress.
---------------------------------------------------------------------------

    \627\ See, e.g., Capital Group Comment Letter.
    \628\ See Fidelity Comment Letter (stating that if the fund had
30% WLA and the market impact factor was 150 basis points, the NAV
would decline by $0.0014).
    \629\ For example, many dealers may not bid on certain issuer
names altogether to avoid a flood of sell orders from prime money
market funds and other short-term credit investors. See, e.g.,
Blackrock Comment Letter.
    \630\ See Capital Advisors Group, Institutional Cash Investments
in the COVID-19 New Reality, available at http://www.capitaladvisors.com/wp-content/uploads/2020/05/Institutional-Cash-Investments-in-the-COVID-19-New-Reality.pdf. The negative bid/
ask spread seen during Mar. 2020 may reflect a dealer's willingness
to bid on liquid CP and to sell more illiquid CP at a lower price.
    \631\ See Kenechukwu Anadu et al., Swing Pricing Calibration: A
Simple Thought Exercise Using ETF Pricing Dynamics to Infer Swing
Factors for Mutual Funds (SRA Note, Issue Number: 2022-06),
available at https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2022/sra-note-2206.pdf.

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

Figure 4--Differences Between Commercial Paper and Treasury Yields by
Maturity and Type
[GRAPHIC] [TIFF OMITTED] TR03AU23.003

    Commercial paper is just one group of money market fund portfolio
holdings, and data on certificates of deposit and municipal securities
is scarce. Moreover, we do not have granular data about daily money
market fund holdings and quotation data that would enable us to
estimate the amount of dilution that could have been recaptured in
March 2020 or the prevalence of other sources of dilution discussed in
section IV.B. To the best of our knowledge, such data are not publicly
available. In addition, order sizes, fund portfolio holdings, the
liquidity management strategy used to meet redemptions, and execution
quality may impact the precise dilution costs experienced by each fund.
    However, from the above data on short-term commercial paper and
ultra-short bond exchange traded funds, in times of stress in short-
term funding markets, liquidity costs of money market funds can spike.
To the degree that money market funds absorb redemptions out of liquid
assets, and are unable to perfectly anticipate daily redemptions and
ladder portfolio maturities accordingly, redemptions dilute investors
remaining in the fund by reducing the amount of liquidity available to
meet future redemptions. Moreover, the final rule would require funds
to estimate market impact factors using the assumption of the sale of
the pro-rata share of the fund portfolio holdings. Thus, had the final
liquidity fee framework been in effect during market stress in March
2020, we believe that many affected money market funds would have
charged liquidity fees on redemptions, thereby reducing dilution of
non-transacting shareholders and the impact of redemptions on affected
funds.
ii. Costs
    Broadly, the final liquidity fee requirements may impose three
groups of costs. First, as analyzed in section V, affected money market
funds would bear reporting and recordkeeping burdens arising out of the
final liquidity fee requirements.\632\ For money market fund boards
that delegate liquidity fee determinations to the fund's adviser or
officer, funds would also have burdens associated with establishing
board-approved written guidelines for determining the application and
size of liquidity fees, as well as the burdens of periodic board
oversight of the delegate's determinations. Money market funds
generally already have playbooks or other written materials related to
the circumstances in which a fund's board may consider liquidity fees
under the current rule. Funds may update these materials to conform to
the final rule's requirements. The costs of board oversight of the
delegate may include costs of preparing materials in advance of board
meetings to describe any instances in which the delegate determined to
impose a fee, as well as the factors the delegate considered in
determining to impose a fee and the size of the fee.
---------------------------------------------------------------------------

    \632\ As discussed in section V.B, the Commission estimates the
total annual costs attributable to the information collection
requirements of the liquidity fee amendments under rule 2a-7 will be
$1,228,659. This cost estimate includes both initial and ongoing
costs with the former being amortized over three years. The
estimated initial costs of the website disclosure amendments under
rule 2a-7 is $84,966 for all affected funds, amortized over three
years. As discussed in section V.E, the Commission estimates a total
initial cost of updating disclosures to comply with the amendments
to Form N-1A of $59,682 for all affected funds, amortized over three
years. As discussed in section V.G, the Commission estimates a total
annual cost of preserving records of liquidity fee computations of
$97,347, which includes both internal and external costs.
---------------------------------------------------------------------------

    Second, affected money market funds may incur costs related to
implementing an analytical framework required to implement the final
liquidity fee requirements, including costs of estimating dilution
under the vertical slice assumption. Section II discusses how affected
money market funds may choose to comply with the vertical slice
requirement. One commenter questioned the feasibility of estimating
market impact using the vertical slice approach.\633\ Another commenter
estimated their initial costs of implementing all parts of the proposal
at between $10 to $20 million, with $2 to $4 million in annual ongoing
costs (including staffing and personnel costs, legal fees, printing and
mailing costs and fees to custodians).\634\ The commenter indicated
that approximately two-thirds of these

estimated costs would be necessary to implement the swing pricing,
disclosures and negative interest rate aspects of the proposal. The
commenter also indicated that these expenses will be somewhat larger
for larger fund families and their services providers, and somewhat
smaller for smaller fund families and their services providers, but
will not vary exactly in proportion to the size of the money market
fund family. As discussed above, the Commission is modifying its
approach to the negative interest rate aspects as proposed, is scaling
back some of the more costly parts of the disclosure requirements, and
is adopting a liquidity fee framework (which we believe may be less
costly) in lieu of the proposed swing pricing requirement. However, if
costs of the liquidity fee framework are of a comparable order of
magnitude to the costs of the proposed swing pricing requirement at the
fund level, an estimate of the initial compliance costs of the final
liquidity fee framework based on that commenter's assumptions may
therefore be between $6.7 million and $13.4 million, with between $1.3
and $2.7 million in annual ongoing costs.\635\ However, as discussed
throughout the release, a number of commenters indicated that liquidity
fees may be far less costly and operationally complex than the proposed
swing pricing requirement,\636\ and thus, these figures may
overestimate the costs of the final liquidity fee framework.
---------------------------------------------------------------------------

    \633\ See ICI Comment Letter.
    \634\ See Federated Hermes Comment Letter I.
    \635\ These ranges correspond to two-thirds of the corresponding
ranges provided by the commenter.
    \636\ See, e.g., ICI Comment Letter; Invesco Comment Letter;
SIFMA AMG Comment Letter; Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; Invesco Comment Letter; Schwab
Comment Letter; Morgan Stanley Comment Letter; JP Morgan Comment
Letter; BlackRock Comment Letter; State Street Comment Letter;
Western Asset Comment Letter; IIF Comment Letter; Allspring Funds
Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    Third, the liquidity fee amendments would require intermediaries
and service providers (such as broker-dealers, registered investment
advisers, retirement plan record-keepers and administrators, banks,
other registered investment companies, and transfer agents) that
receive flows directly to apply fees to investors' redemptions and
submit the proceeds to the fund, which may increase operational
complexity and cost for intermediaries. While intermediaries and
service providers to non-government money market funds should be
equipped to impose liquidity fees under the current regulatory
baseline, the final amendments will likely result in more frequent
application of fees than what is observed currently given that no money
market funds have imposed liquidity fees under the current rule. As
discussed in section II.B., there are also differences between the
current liquidity fee framework and the new mandatory liquidity fee
framework that may affect how intermediaries apply fees, such as the
requirement to apply fees based on same day net redemptions, and the
likelihood such fees would vary day to day under stressed conditions.
As a result, intermediaries may need to develop or modify policies,
procedures, and systems designed to apply fees to individual investors
and submit liquidity fee proceeds to the fund. In addition, liquidity
fees may require more coordination with a fund's intermediaries and
service providers, since each of them needs to impose fees on an
investor-by-investor basis, which may be more difficult with respect to
omnibus accounts. Moreover, some funds may choose to develop or modify
policies and procedures reasonably designed to ensure intermediaries
are appropriately and fairly applying the fees. Finally, to determine
the liquidity fee amount, funds would need to receive information from
intermediaries about gross redemptions for a given day. To the degree
that some intermediaries may currently provide only net flow
information to funds, intermediaries may need to update their
arrangements with funds to send the gross amount of redemptions in a
timely manner. Due to the costs that the liquidity fee amendments may
impose on intermediaries and distribution networks of affected funds,
money market funds may alter their intermediary distribution contracts,
networks, and flow aggregation practices.
    The magnitude of such costs would depend on, among other things,
intermediaries' current policies and procedures related to the
imposition of liquidity fees under the current rule; future redemption
patterns out of affected money market funds under normal conditions and
under stress, and the liquidity costs thereof (which would affect how
frequently fees would be applied under the final rule); how affected
money market funds choose to structure their relationships with service
providers and intermediaries; and the way in which affected funds may
choose to alter their intermediary contracts, networks, and flow
aggregation practices in response to the final rule. In the Proposing
Release, the Commission was unable to quantify such burdens and costs
and solicited comment and data that would inform this analysis. While
commenters did not provide estimates or data that could inform
estimates of such costs, a large number of commenters suggested that a
liquidity fee framework would be far less costly and operationally
complex than the proposed swing pricing requirement.\637\
---------------------------------------------------------------------------

    \637\ See, e.g., ICI Comment Letter; Invesco Comment Letter;
SIFMA AMG Comment Letter; Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; Invesco Comment Letter; Schwab
Comment Letter; Morgan Stanley Comment Letter; JP Morgan Comment
Letter; BlackRock Comment Letter; State Street Comment Letter;
Western Asset Comment Letter; IIF Comment Letter; Allspring Funds
Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    The costs of the final liquidity fee amendments may be passed along
in part or in full to institutional money market fund investors in the
form of higher expense ratios or fees. In addition, to the degree that
the final amendments result in liquidity fees being charged to
redeemers (relative to the baseline of funds being able to assess the
fees but not being required to assess them and never having assessed
them), the final liquidity fee requirement will increase the
variability of realized returns for redeeming investors in affected
money market funds, particularly in times of market stress. Thus, these
amendments may reduce demand of some investors for institutional prime
and institutional tax-exempt money market funds. However, they may
smooth NAV returns for non-redeeming investors as transactions costs
would no longer detract from the fund NAV. Hence, as discussed above,
the liquidity fee framework may also attract new investors, such as
investors that tend to redeem infrequently, to prime and tax-exempt
money market funds.
    If the final amendments reduce investor demand in some funds, they
would lead to a decrease in assets under management of these money
market funds, thereby potentially reducing the wholesale funding
liquidity they provide to other market participants. A reduction in the
number of money market funds and/or the amount of money market fund
assets under management as a result of the final liquidity fee
requirements would have a greater negative impact on money market fund
sponsors whose fund groups consist primarily of money market funds, as
opposed to sponsors that offer a more diversified range of mutual funds
or engage in other financial activities (e.g., brokerage). However, the
final amendments may also lead to an increase in demand for government
money market funds, which

could dampen or offset the potential adverse effects of the final rule
on the availability of short-term funding liquidity, and on fund
sponsors whose fund groups consist primarily of government money market
funds.
    In addition, the liquidity fee framework may reduce the willingness
of some investors to hold prime and tax-exempt money market funds due
to the possibility of a liquidity fee being applied. Such investors may
reallocate capital into, for example, government money market funds. If
the final amendments result in a shift in assets under management out
of prime and tax-exempt money market funds and into government money
market funds, they may influence costs of capital for issuers, such as
municipalities and corporate issuers due to the need to raise capital
from, for example, bank and bond financing. While we cannot estimate
the magnitude of such potential impacts under the final rule, in the
swing pricing context, one commenter estimated that the shift of
balances out of prime money market funds would result in lost income
and higher borrowing costs of roughly 2% to 3% per annum on the
aggregate amount of prime money market fund balances shifted to
alternative forms of intermediation, such as banks.\638\ Although swing
pricing and liquidity fees can both charge redeeming investors for the
liquidity costs they impose on a fund's non-redeeming investors, the
final liquidity fee framework is tailored to reduce costs on funds and
investors relative to the proposed swing pricing approach, as discussed
in detail in sections II and IV.D, which may mitigate these effects.
---------------------------------------------------------------------------

    \638\ See, e.g., Federated Hermes Comment Letter I.
---------------------------------------------------------------------------

    Moreover, liquidity fees may increase the variability of realized
returns of institutional investors especially during times of stress,
which can reduce the attractiveness of such funds to such investors.
Importantly, under the baseline, institutional funds experience NAV
volatility and money market funds are already able to assess fees.
Risk-averse investors that prefer to be able to redeem at NAV and
without fees may have already shifted to government money market funds
or bank accounts, for example, around the 2016 implementation of money
market fund reforms. The final liquidity framework has been designed to
mitigate these economic costs in several ways. First, the final
liquidity fee requirements are tailored to the level of net
redemptions. When daily net redemptions are low (at or below 5%),
affected money market funds will not be required to assess liquidity
fees.
    Second, as discussed in section II.B.2, affected money market funds
will not be required to assess liquidity fees if a calculated fee is
less than 0.01% of the value of shares redeemed, even if daily net
redemptions exceed the 5% threshold. Thus, under normal market
conditions, affected money market funds will not need to assess
liquidity fees if their estimated liquidity costs are de minimis.
    Third, the 5% net redemption threshold for the application of
mandatory liquidity fees will be applied on a daily basis, rather than
on a pricing period basis as with the proposed swing pricing
requirement. To the degree that affected money market funds may
experience systematic intraday patterns of large redemptions and large
subscriptions, this aspect of the final amendments may reduce the
frequency with which funds must estimate liquidity costs, and the
frequency with which intermediaries and service providers must assess
and pass along the proceeds from liquidity fees.
    Further, we recognize that, while not required, some funds may
choose to reduce the number of NAV strikes they offer or no longer
offer multiple NAV strikes for operational ease. As discussed in
section II, funds and intermediaries may also develop other approaches
to address this issue. Depending on a given fund's approach, a
redeeming investor may experience a reduction in its access to
liquidity relative to current practices. In addition, different
approaches may have differing effects on investors or raise tax or
other considerations. Overall, we believe it is unlikely that the
mandatory liquidity fee would result in a redeeming investor being
unable to access same-day liquidity.
    The liquidity fee requirement may impose costs on investors seeking
to redeem shares in funds they no longer wish to hold, such as in
response to poor fund management, poor performance, or for other
reasons. Under the final amendments, all redemptions out of an affected
fund on a day the fund has net redemptions in excess of 5% of net
assets, regardless of the cause for the redemption, will result in a
liquidity fee being calculated and assessed, unless the fund's
liquidity costs are de minimis. However, we believe that such a fee
would be unlikely to affect an investor's decision to redeem from a
fund the investor no longer wishes to hold for reasons that are
persistent characteristics of a fund, such as the ability of an
individual fund manager, and thus is less likely to be prone to a
sudden wave of redemptions on a particular day. As such, we believe
that the effect of the liquidity fee requirement on efficiency via
market discipline will be limited. Moreover, the liquidity fee
framework is intended to capture any liquidity costs that redemptions
impose on affected funds and protect non-transacting investors from
dilution costs.
    In addition, we believe that the final liquidity fee framework is a
less costly anti-dilution tool relative to the proposal. Specifically,
as discussed in section II, the costs of the liquidity fee framework
are expected to be lower than those of the proposed swing pricing
requirement. For example, many commenters stated that liquidity fees
would be easier for money market funds to implement.\639\ Some
commenters suggested that funds would be able to leverage and build off
of their existing experience with liquidity fees under the current
regulatory baseline,\640\ while commenters indicated 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.\641\
---------------------------------------------------------------------------

    \639\ See, e.g., Federated Hermes Comment Letter II; Invesco
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF
Comment Letter; BlackRock Comment Letter.
    \640\ See, e.g., Federated Hermes Comment Letter II; Invesco
Comment Letter; SIFMA AMG Comment Letter; Schwab Comment Letter; IIF
Comment Letter.
    \641\ See Morgan Stanley Comment Letter; SIFMA AMG Comment
Letter; IIF Comment Letter; Federated Hermes Comment Letter I;
Federated Hermes Comment Letter II; Comment Letter of Senator Pat
Toomey (Apr. 12, 2022) (``Senator Toomey Comment Letter''); Mutual
Fund Directors Forum Comment Letter; see also Profs. Ceccheti and
Schoenholtz Comment Letter.
---------------------------------------------------------------------------

b. Benefits and Costs of Specific Aspects of the Final Implementation
of the Liquidity Fee Amendments
    The final liquidity fee requirement for institutional prime and
institutional tax-exempt funds is characterized by six features. First,
if a fund has net redemptions exceeding 5% on a given day, the fund
must estimate the liquidity costs associated with those redemptions and
assess a fee (unless the fee would be de minimis). Second, funds will
use order flow information available within a reasonable period after
the last NAV strike of the day to determine whether the 5% net
redemption threshold has been reached. Third, the liquidity fee amount
will be an estimate of the costs of selling a vertical slice of the
fund's portfolio to meet the net redemptions. Fourth, if the fund
cannot determine that amount based on current market conditions, a set
default fee of 1% will apply. Fifth,

the mandatory liquidity framework would not cap mandatory liquidity
fees triggered by the 5% net redemption threshold. Sixth, all non-
government money market funds could assess discretionary liquidity fees
if the board (or its delegate) determines that fees are in the best
interest of the fund, which may include situations in which net
redemptions are at or below the 5% threshold. These features of the
final rule aim to address the liquidity externalities that redeemers
impose on investors remaining in the fund in a tailored manner and are
expected to result in reductions in the first-mover advantage and run
risk in institutional money market funds.
i. Fee Threshold: 5% Net Redemption Threshold
    Under the final amendments, when daily net redemptions exceed 5% of
the fund's net assets, funds will be required to assess a liquidity fee
(unless the fee would be de minimis), with the fee amount reflecting
the fund's good faith estimate of the spread, other transaction (i.e.,
any 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 share of each security in its portfolio to satisfy the amount of
net redemptions (i.e., vertical slice). The final amendments may, thus,
allow funds to recapture the liquidity costs of large redemptions,
benefitting non-transacting shareholders and reducing liquidity
externalities redeemers impose on other fund investors.
    The final framework will require funds to charge liquidity fees
that include the spread cost. Relative to a model-generated mid price,
striking a NAV at a model-generated bid price may result in less
dilution of existing shareholders on days with net redemptions. To the
degree that most funds are using model-generated bid prices from
pricing vendors to strike the NAV, and assuming that these bid prices
accurately reflect the bid price in the market, the primary benefit of
the final liquidity fee requirements would operate through the market
impact. Market impact costs are likely to be significant during periods
in which funds face large redemptions and short-term funding markets
are under stress, such that market impact costs are significant. These
are also periods in which dilution costs and run risk in affected money
market funds, and, hence, the benefits of liquidity fees, may be
highest.
    Based on an analysis of historical daily redemptions out of
institutional prime and institutional tax-exempt money market funds
between December 2016 and October 2021 and as discussed in greater
detail in section IV.D.4, net fund flows on most days are low. For
example, Table 6 shows that an average of 3.2% of the 47 institutional
prime and institutional tax-exempt money market funds that operated
during that time period would have exceed the 5% net redemption
threshold on any given day.

                             Table 6--Average Percentage of Institutional Money Market Funds per Day Above a Given Threshold
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Net redemption threshold
               Institutional funds                  Average   ------------------------------------------------------------------------------------------
                                                   fund count       4%           5%           6%           7%           8%           9%          10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Prime Only......................................           37          3.4          2.4          1.7          1.3          0.9          0.8          0.6
Prime + Tax-exempt..............................           47          4.4          3.2          2.4          1.8          1.4          1.1          0.9
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

    Importantly, the 5% net redemption threshold may allow funds to
recapture spread and market impact costs, and potentially prevent more
of the dilution from large redemptions, as compared to higher
thresholds. For example, as can be seen from Table 7, an analysis of
CraneData on outflows during the week ending March 20, 2020, suggests
that approximately 31% of ``fund days'' \642\ for institutional prime
and institutional tax-exempt funds exceeded the 5% threshold. In
contrast, only 11% of the fund days were in excess of 10%. This
analysis suggests that the final rule's 5% threshold would have
triggered mandatory liquidity fees for approximately one third of the
time during the week of March 20, 2020. Relative to a higher net
redemption threshold, under the final rule, the liquidity fee would
trigger more often, potentially recapturing more dilution costs and
having a greater effect on redemption incentives.
---------------------------------------------------------------------------

    \642\ ``Fund days'' refers to observations that consist of the
set of daily redemptions for the funds in our sample. For example, a
sample of 35 funds observed over 5 days produces a sample of 175
fund days.

                             Table 7--Percentage of Fund Days Above a Redemption Threshold During the Week of March 20, 2020
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Net redemption threshold
               Institutional funds                 Fund count ------------------------------------------------------------------------------------------
                                                                    4%           5%           6%           7%           8%           9%          10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Prime Only......................................           35           43           34           31           25           19           16           12
Prime + Tax-exempt..............................           43           39           31           28           21           17           14           11
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

    Overall, the net redemption threshold for the mandatory liquidity
fee framework influences the number of funds that experience
significant redemptions that generally would be required to assess a
liquidity fee during severe market stress. In the swing pricing
context, several commenters suggested the proposed 4% redemption
threshold for applying a market impact factor was too low.\643\ Below
we present additional analysis to further quantify the effects of the
redemption threshold. Specifically, we conducted an analysis of the
fraction of funds that would have dropped below certain liquid asset
thresholds and would have been required to assess a liquidity fee
during market stress of March 2020, had the final amendments been in
place. This analysis may shed light on the fraction

of funds that would have been required to assess liquidity fees under
different redemption thresholds.
---------------------------------------------------------------------------

    \643\ See, e.g., IIF Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    First, we combine daily redemption patterns from 42 public
institutional prime funds during the week ending March 20, 2020, with
20 equally sized bins representing different weekly liquid asset
distributions maturing across days 2 through 5 of the week (e.g., one
such distribution would be characterized by 30% of weekly liquid assets
maturing on day 2, 25% on day 3, 25% on day 4, 20% on day 5).\644\ This
combination results in 840 series corresponding to hypothetical paths
of liquidity during a period of stress.\645\ Given these paths, we
determine the proportion of days on which a fee would be triggered as a
percentage of days on which funds experience various declines in levels
of liquidity. For example, Figure 5 plots the results for the paths for
all funds starting with 25% in daily liquid assets and 50% in weekly
liquid assets, with the fraction of days funds would generally have
been required to assess a liquidity fee on the vertical axis, as a
function of various levels for the net redemption threshold on the
horizontal axis.\646\
---------------------------------------------------------------------------

    \644\ See section III.D.2.a and section III.D.2.a of the
Proposing Release where the Commission used the same models to
quantify the potential effect of various liquidity thresholds on the
probability that money market funds would confront liquidity stress.
    \645\ Applying the 42 redemptions paths to different day 2
through 5 weekly liquid asset distributions allows us to consider
how funds' liquidity would have fared under alternate portfolios
during the week of Mar. 20, 2020, while increasing the number of
data points for the analysis.
    \646\ Additional models with higher levels of initial liquidity
produced higher percentages of fund days for which funds that
eventually dropped below a given threshold would have been required
to apply liquidity fees as a function of the net redemption
threshold.
---------------------------------------------------------------------------

Figure 5--One Week of Stress: Percentage of Fund Days That Drop Below a
Given Daily Liquid Asset Threshold That Would Have Been Required To
Apply a Liquidity Fee as a Function of the Redemption Threshold
[GRAPHIC] [TIFF OMITTED] TR03AU23.004

    Next, we extend a model employed by one commenter \647\ and conduct
a similar analysis for more prolonged periods of stress, such as 3 to 5
weeks of sustained redemptions using the weekly redemptions seen for
the crisis week ending March 20, 2020, which could occur absent
government intervention. Specifically, we combine weekly redemption
patterns from 42 public institutional prime funds during the week
ending March 20, 2020, with 1,744 public institutional prime portfolios
observed in the monthly Form N-MFP filings over a period spanning
October 2016 to February 2020.\648\ The portfolio assets are binned
according to their maturities (ranging from 1 week to more than 10
weeks). This combination results in 73,248 series corresponding to
hypothetical paths of weekly liquidity during a hypothetical period of
sustained stress.\649\ All funds enter the stress period with over 50%
in weekly liquid assets. Figure 6 plots the results for a 3-week stress
period, while Figure 7 plots the results for a 5 week stress
period.\650\
---------------------------------------------------------------------------

    \647\ See ICI Comment Letter.
    \648\ See section IV.D.2.a for additional model details. To
address the robustness of the results, different model scenarios,
which removed redemption patterns associated with funds with weekly
liquid assets below 35% that may have exasperated redemptions, did
not change the result significantly.
    \649\ The redemption thresholds are adjusted so that weekly
outflows are comparable to daily redemption thresholds. For
instance, a 4% daily outflow sustained for a five day trading week
implies a weekly outflow of about 18.5%.
    \650\ Since these figures chart weekly redemption rates, this
analysis does not capture instances where net redemptions exceed a
given redemption threshold on a single day, but the average weekly
net redemption does not. Additional models extending the stress
period out to 10 weeks produced lower percentages of weeks for which
funds that dropped below a given threshold would have been required
to apply liquidity fees as a function of the net redemption
threshold.
---------------------------------------------------------------------------

Figure 6--Three Weeks of Stress: Percentage of Weeks During Which Funds
That Dropped Below a Given Weekly Liquid Asset Threshold Would Have
Been Required To Apply a Liquidity Fee as a Function of the Redemption
Threshold

[GRAPHIC] [TIFF OMITTED] TR03AU23.005

Figure 7--Five Weeks of Stress: Percentage of Weeks During Which Funds
That Dropped Below a Given Weekly Liquid Asset Threshold Would Have
Been Required To Apply a Liquidity Fee as a Function of the Redemption
Threshold
[GRAPHIC] [TIFF OMITTED] TR03AU23.006

    The above analyses show that, as the net redemption threshold
rises, the frequency with which funds experiencing severe declines in
their liquid assets would have been required to apply a liquidity fee
declines. This analysis may be interpreted as quantifying the impact of
the redemption threshold on how many funds with various levels of
liquidity would have been required to apply a liquidity fee had the
final amendments been in place under various durations of stress.
    Alternatively, we can examine the impact of the redemption
threshold by analyzing fund outflows during the worst days of market
stress in March 2020. This analysis may shed light on how the
redemption threshold influences the scope of the liquidity fee
requirements on days with the largest outflows out of all funds.
Specifically, Table 8 and Figure 8, using CraneData, quantify the
average percentage of fund days for which outflows exceeded various
threshold levels over multiple time periods, including the worst 3, 5,
and 10 days, measured by aggregate net redemptions, in March 2020.

                                 Table 8--Percentage of Fund Days for Institutional Prime Funds Above a Given Threshold
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Net redemption threshold
                      Dates                         Average   ------------------------------------------------------------------------------------------
                                                   fund count       4%           5%           6%           7%           8%           9%          10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Worst 3 days....................................           35           48           38           36           31           23           20           15
Worst 5 days....................................           35           43           34           31           25           19           16           12
Worst 10 days...................................           35           34           25           21           15           11           10            8
March 2020......................................           35           19           14           11            8            7            5            4

5 years Excl. March 2020........................           37          3.2          2.2          1.6          1.2          0.9          0.7          0.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

Figure 8--Percentage of Fund Days for Institutional Prime Funds Above a
Given Threshold
[GRAPHIC] [TIFF OMITTED] TR03AU23.007

    The final net redemption threshold impacts the number of funds that
will be required to calculate liquidity fees under both normal and
stressed conditions when faced with large outflows. Outflows in excess
of the 5% net redemption threshold occur with some regularity even
outside of stressed market environments. Accordingly, we consider the
extent to which various redemption thresholds were crossed in recent
years outside of the March 2020 stress event. We first conduct this
analysis at the fund level for each year from 2017 to 2020. Table 9 and
Figure 9, using CraneData, report the percentage of funds that, in a
given year, would have exceeded a given redemption threshold on at
least one day. This analysis helps inform the extent to which funds
would have had to calculate a liquidity fee at least once in a given
year had the final liquidity fee framework been in place and, thus,
reflecting associated fixed costs.

          Table 9--Percentage of Institutional Prime Funds That Would Have Exceed the Net Redemption Threshold at Least One Day in a Given Year
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Net redemption threshold
                      Year                          Average   ------------------------------------------------------------------------------------------
                                                   fund count       4%           5%           6%           7%           8%           9%          10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
2017............................................           33           79           79           76           70           64           55           52
2018............................................           31           84           81           74           68           58           52           42
2019............................................           32           72           69           63           53           47           38           31
2020............................................           35          100          100           97           89           83           74           63
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

Figure 9--Percentage of Institutional Prime Funds That Would Have
Exceed the Net Redemption Threshold at Least One Day in a Given Year

[GRAPHIC] [TIFF OMITTED] TR03AU23.008

    Next, Table 10 and Figure 10, using CraneData, report the
distribution of fund day percentages that would have exceeded a given
redemption threshold over 5 years (excluding March 2020). This analysis
reflects the distribution of percentages on which the fee would have
been charged industry-wide (as a percentage of fund-days over the 5-
year period) and, thus, reflects the variable cost associated with
crossing the redemption threshold outside of a crisis period when
liquidity costs are likely very low or zero.\651\ For example, net
redemptions exceeded the 5% redemption threshold on 7.1% of fund days
during this period.
---------------------------------------------------------------------------

    \651\ To illustrate the analysis, we observed around 37 funds
over 1,228 trading days over five years. We thus have around 45,436
(= 37 x 1,228) fund-day observations. A value on the Max curve (red
line) of around 7.1% on the y-axis for a 5% threshold on the x-axis
then means that net redemptions exceeded 5% threshold on 7.1%-or 87
(= 7.1% x 1,228) in total--fund days.

                         Table 10--Distribution of Fund Days Percentages on Which a Fee Would Have Been Implemented Over 5 Years
                                                                 [Excluding March 2020]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Net redemption threshold
           Percentile           ------------------------------------------------------------------------------------------------------------------------
                                     0%         1%         2%         3%         4%         5%         6%         7%         8%         9%        10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Max............................         74         32         21         14        9.0        7.1        5.2        4.4        3.1        3.0        2.4
75th...........................         53         27         15        8.7        5.3        3.8        2.6        1.7        1.1        1.0        0.9
Median.........................         49         20         10        5.5        3.3        2.2        1.3        1.0        0.9        0.5        0.3
25th...........................         46        8.1        3.7        1.5        1.0        0.5        0.5        0.3        0.2        0.0        0.0
Min............................         22        1.0        0.8        0.4        0.0        0.0        0.0        0.0        0.0        0.0        0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CraneData.

Figure 10--Distribution of Fund Days Percentages on Which a Fee Would
Have Been Implemented Over 5 Years (Excluding March 2020)
[GRAPHIC] [TIFF OMITTED] TR03AU23.009

    In addition, large fund outflows may be seasonal. To quantify
potential seasonality in fund outflows, we analyzed daily data from
CraneData covering outflows out of institutional prime and
institutional tax-exempt funds between December 1, 2016, and October
28, 2021.\652\ The discussion below shows that there are significant
outflow patterns by day of week and day of month among others. First,
institutional prime funds tend to have more large outflows on Fridays,
while institutional tax-exempt funds tend to have more large outflows
on Thursdays, as can be seen from Figure 11.
---------------------------------------------------------------------------

    \652\ This analysis uses 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 under
management. 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. For the purposes of this
seasonality analysis, outflows during Mar. 2020 were omitted,
because they may have been driven by stress and the purpose of the
analysis is to examine seasonality of routine fund flows under
normal market conditions.
---------------------------------------------------------------------------

Figure 11--Percentage of Institutional Prime Funds With Outflows Above
a Given Threshold as a Function of the Day of the Week
[GRAPHIC] [TIFF OMITTED] TR03AU23.010

    Second, Figure 12 below shows that the last day of the month
accounts for some of the largest outflows in excess of 5%.

Figure 12--Percentage of Funds With Outflows Above a Given Threshold as
a Function of Days From the End of the Month
[GRAPHIC] [TIFF OMITTED] TR03AU23.011

    The above patterns are consistent with institutional investors
relying on money market funds as a cash management tool (for example,
to meet payroll, tax, and other obligations). Moreover, large fund
outflows may be at least partly seasonal and unrelated to stress in
underlying asset markets. Under the final rule, outflows in excess of
5% would trigger the compliance costs related to the liquidity fee
requirement and the market impact factor analysis on each day with
large outflows.
    As discussed in the prior section, the implementation of liquidity
fees is expected to give rise to compliance burdens and other costs on
money market funds. These costs may be mitigated by four factors.
First, many affected money market funds may already be using bid prices
to strike the NAV. Second, the rule does not require a daily
recalculation of market impact factors. As discussed in section II, in
order to establish a good faith estimate of the market impact of
selling a vertical slice of the fund's portfolio to meet net
redemptions, a fund may document its estimates of the effect of selling
different amounts of its portfolio securities on each security's price
into pricing grids for different market conditions (such as periods of
credit stress, liquidity rate stress, interest rate stress, or a
combination of such stresses). The fund would refer to the appropriate
grid that reasonably approximates current market conditions on days
when its net redemptions exceed 5% to identify the market impact for
the assumed amount to be sold under the required vertical

slice analysis. This may reduce the marginal costs of market impact
factor calculations on days when funds experience net redemptions above
5%. Third, as discussed in section II, funds would not be required to
perform a security-by-security pricing analysis, and would be able to
pool similar securities into categories for purposes of the market
impact analysis. Fourth, as discussed in section II, under normal
market conditions, the calculated liquidity fee amount generally is
likely to be de minimis, mitigating the costs to redeeming shareholders
on days of predictably large outflows when market conditions are normal
and markets impacts (and, thus, liquidity externalities) are near zero.
    Finally, the Commission has considered how the net redemption
threshold for the mandatory liquidity fees may interact with the final
25% daily and 50% weekly liquid asset requirements. Specifically, Table
11 below illustrates a theoretical relationship between constant daily
outflow and the implied weekly outflow after 5 days. If a fund
experiences 5 consecutive days of 5% outflows, it would experience
cumulative 23% outflows by the end of the week. By contrast, if a fund
experiences 5 consecutive days of 10% outflows, it would experience
cumulative 41% outflows by the end of the week. While the final 50%
weekly liquid asset requirement could be enough to cover the outflows
for that week, depending on the maturity structure of weekly liquid
assets, the fund may not have enough liquidity to cover redemptions
over the course of the week. In that case, the liquidity fee may be
useful to recapture liquidity costs and dis-incentivize any redemptions
driven by a first-mover advantage as the wave of redemptions grows and
the markets come under stress. Notably, this is a numerical example,
and future patterns of redemptions under stress and portfolio maturity
structures of affected funds, particularly the maturity structure of
weekly liquid assets, as well as the way in which investors and money
market funds respond to various provisions of the final rule, may
influence the ability of funds to absorb redemptions out of daily or
weekly liquidity. However, this analysis suggests that a higher
redemption threshold for liquidity fees may reduce the amount of
dilution costs recaptured by funds during redemption waves.

      Table 11--Cumulative Weekly Outflows After 5 Days of Outflows
------------------------------------------------------------------------
                                                              Cumulative
                                                                weekly
                       Daily outflows                          outflows
                                                                 (%)
------------------------------------------------------------------------
4%.........................................................           18
5%.........................................................           23
6%.........................................................           27
7%.........................................................           30
8%.........................................................           34
9%.........................................................           38
10%........................................................           41
------------------------------------------------------------------------

    Overall, the 5% net redemption threshold may result in some
instances of the imposition of fees during normal market conditions,
and funds would be required to estimate liquidity fees when the
liquidity costs of large redemptions are very small. However, the 5%
net redemption threshold may enhance the benefits of liquidity fees for
non-transacting investors during redemption waves and under stressed
conditions, which may serve to reduce self-fulfilling run incentives,
protect non-transacting investors, and improve the resilience of money
market funds.
    The Commission proposed a swing pricing requirement, under which,
if net redemptions exceeded 4% divided by the number of pricing periods
per day, the swing factor would be required to include not only the
spread costs and other transaction costs, but also good faith estimates
of the market impact of net redemptions. The Commission received
comments stating that the threshold could act as a ``bright line'' that
could actually lead to runs.\653\ While the final amendments replace
the proposed swing pricing requirement with a liquidity fee framework
and utilize a higher 5% net redemption threshold for the imposition of
liquidity fees, the Commission has considered whether such a threshold
in the liquidity fee framework could lead to run risk.
---------------------------------------------------------------------------

    \653\ See, e.g., IIF Comment Letter; Federated Hermes Comment
Letter I.
---------------------------------------------------------------------------

    However, several aspects of the final rule are intended to mitigate
any such incentives. The net redemption threshold for mandatory
liquidity fees is based on same-day fund flows. As discussed in the
prior section, we believe that the net redemption threshold is less
susceptible to run risk than a weekly liquid asset threshold. Moreover,
because mandatory liquidity fees are based on same-day net redemptions,
an investor's decision to redeem directly influences the probability
that a liquidity fee will be assessed to their redemption. Further, to
the degree that institutional investors expect other investors have
similar expectations of net redemptions from a fund, the incentive to
strategically redeem shares ahead of other investors is diminished.
Finally, under the final rule and as discussed in greater detail in
section II.B and section IV.C.4.b.vi, funds may assess discretionary
liquidity fees on days when net redemptions are at or below the 5%
threshold. To the degree that fund boards (or their delegates)
determine to apply discretionary fees, this element of the final rule
may further reduce the ability of redeeming investors to strategically
redeem ahead of the likely imposition of a liquidity fee. However, we
recognize that funds may face disincentives to apply these liquidity
fees and money market fund boards have not historically applied
liquidity fees when they had the discretion to do so, which may reduce
the effectiveness of this mitigating factor.
ii. Fee Threshold: Using Fund Flows Received Within a Reasonable Period
After the Last NAV Strike Each Day
    In response to the proposed swing pricing requirement for money
market funds, some commenters discussed difficulties in obtaining
timely flow information to enable same-day NAV adjustments. While the
final rule imposes a liquidity fee framework, rather than swing
pricing, comments concerning flow timing and flow aggregation practices
by money market funds informed the design of the redemption threshold
for the liquidity fee framework. Specifically, some commenters
indicated that institutional money market funds that offer same-day
settlement may receive some flows overnight that will settle on a T+1
basis, and thus some of these funds do not have final order flow
information until the following morning. One commenter stated that one
of its former institutional prime funds offered same-day settlement and
therefore imposed order cut-off times, and these cut-off times were the
same as the NAV strike time.\654\ Another commenter stated that its
privately offered money market funds, in which other funds invest, do
not have sufficient flow data because the flow data from the underlying
investing funds is only available on a T+1 basis.\655\ Another
commenter stated that, over a representative period, one of its
institutional prime funds received 35.7% of trade notices after the
fund's NAV calculation time of 3 p.m. ET, with

these trades receiving that day's NAV, but settling on a T+1
basis.\656\ A few commenters requested that the Commission provide
guidance that if a NAV is adjusted based on reasonable inquiry and
estimates, a later determination that a fund did not have net
redemptions for the pricing period would not constitute a NAV
error.\657\
---------------------------------------------------------------------------

    \654\ See, e.g., Fidelity Comment Letter.
    \655\ See, e.g., Capital Group Comment Letter.
    \656\ See, e.g., Federated Hermes Comment Letter II.
    \657\ See, e.g., Capital Group Comment Letter; IDC Comment
Letter.
---------------------------------------------------------------------------

    As discussed in section II, institutional money market funds often
impose order cut-off times to be able to offer same-day settlement,
which requires that funds complete Fedwire instructions before the
Federal Reserve's 6:45 p.m. ET Fedwire cut-off time. Therefore, many
institutional funds would have a sizeable portion of their daily flows
within a reasonable period of time after the last pricing time of the
day. However, complete flow information may not always be available to
affected money market funds on the same day, and the availability of
flow information may depend on fund intermediaries, how the fund set up
custodian and omnibus accounts, and the timing for batching of orders
and transmitting them, among other things. For example, funds may
receive cancellations, or corrections of intermediary or investor
errors, which modify the flows. In addition, funds or some fund share
classes may settle some transactions on T+1 and still receive flow
information from intermediaries that is eligible to receive the NAV as
of the last pricing time. Thus, there will be circumstances in which
the flow information a fund uses to determine whether it has crossed
the net redemption threshold does not reflect the fund's full flows for
that day.
    As discussed in section II.B.2.a, funds would be able to use flows
received within a reasonable period after the last pricing time to
determine whether the fund has crossed the 5% threshold. To the extent
that a fund received additional flow information after determining that
it crossed the 5% threshold, but before applying a liquidity fee, the
fund could take the additional flow information into account when
determining the amount of the liquidity fee. This element of the final
liquidity fee framework will enable funds to assess liquidity fees
without requiring costly changes to intermediaries' technological
systems and order batching, validation, and transmission practices,
earlier order cutoff times, fund distribution networks, or the
reduction in the number of NAV strikes a day funds are able to offer.
    Moreover, as a result of this element of the final rule, liquidity
fees will be assessed based on same-day outflows, rather than the
previous day's flows. Information about historical flows may be
generally available in, among others, subscription databases and other
data feeds, while same-day flows are not predictable by investors at
the time they place their orders. This reduces the risk that investors
would be able to predict whether a liquidity fee will not apply on a
given day and time redemptions accordingly to avoid the liquidity fee.
In addition, under the final rule, redeemers will be charged for the
liquidity costs of their redemptions, rather than for the costs of
redemptions made by other investors on the previous day. Finally, this
element of the final rule may allow funds to recapture more of the
dilution costs of large redemptions on a given day, regardless of
whether a fund experiences a wave of redemptions or individual days of
large redemptions. Thus, this element of the final rule may enhance the
benefits of the liquidity fee framework for dilution costs and run
incentives.
    Fund flow information that is available within a reasonable period
after the last pricing period of the day may under or overestimate ex
post net redemptions on a given day. The direction and magnitude of the
difference between ex ante estimated fund flows and ex post fund flows
would depend on intraday redemption and subscription patterns of fund
investors, a fund's reliance on various distribution channels, the
timing of intermediaries' batch processing orders, including omnibus
accounts, and the propensity of intermediaries and investors to preview
delayed redemptions or subscriptions to fund managers. Thus, this
element of the final rule may result in some instances of liquidity
fees not being charged based on available flows when they would have
been based on ex post flows, and vice versa. While institutional
investors may theoretically have incentives to delay the submission of
large redemption orders after the NAV is struck to reduce the
likelihood that a liquidity fee is charged, an institutional investor
must submit its orders before the fund calculates its NAV to receive
that price.\658\ In addition, intermediaries face no such incentives.
Crucially, intermediaries commonly have cutoff times to receive same
day settlement, and it is intermediary technological systems and flow
aggregation and transmission practices that may drive when funds
receive orders. This may reduce the risk of strategic delays in the
submissions of redemption flows. Moreover, as discussed in the previous
sections, the Commission expects that any liquidity fees under normal
market conditions will be very low, further reducing incentives for
strategic order flow delays. Finally, as discussed in greater detail
below, the final rule will also allow funds to charge discretionary
fees even if same day outflows are below the 5% threshold, further
reducing certainty about the imposition of liquidity fees around the
threshold and mitigating the risk of strategic redemptions or order
flow delays.
---------------------------------------------------------------------------

    \658\ See 17 CFR 270.22c-1.
---------------------------------------------------------------------------

    The final rule will require affected funds to apply a liquidity fee
to all shares redeemed on the day the mandatory liquidity fee is
triggered, which may impose some costs on funds currently offering
multiple NAV strikes per day. Specifically, investors may redeem in
earlier pricing periods, before the fund knows that it has crossed the
net redemption threshold triggering the liquidity fee requirement for
the day. In such circumstances, funds offering multiple NAV strikes
would be required to develop a method for applying the fee to shares
redeemed in earlier pricing periods on that day. Section II.B.2.a
discusses various approaches funds may take to address this issue. In
addition, some funds may choose to reduce the number of NAV strikes
they offer or no longer offer multiple NAV strikes for operational
reasons. Depending on how different funds respond to these amendments,
redeeming investors may experience a reduction in their access to
liquidity relative to the current baseline. However, the mandatory
liquidity fees are unlikely to result in a redeeming investor being
unable to access same-day liquidity.
iii. Fee Amount: Costs of Selling the Pro-Rata Share of Fund Holdings
    The costs and benefits of the final rule's requirements concerning
the fee amount are informed by two sets of considerations.
    First, liquidity fees charged by a money market fund are intended
to make investors indifferent between selling shares in the fund and
selling the underlying assets if they were held by investors directly.
The liquidity fee is not intended to disproportionally discourage sales
out of money market funds relative to underlying assets, but rather to
reduce dilution that may arise out of the fund structure.
    Second, smaller fees may preserve a first-mover advantage in
redemptions out of money market funds suffering from short-term stress,
while larger fees may lock investors into failing funds if

underlying portfolio holdings do not retain their value in the medium
and long term. If a liquidity crunch is temporary and underlying fund
holdings retain their value in the medium and long term (such as during
March 2020, when issuers were not defaulting and redemptions were
driven by a dash for cash), funds lose value primarily when they sell
securities into stressed markets to meet redemptions. If, however,
underlying fund holdings lose their value in the medium- and long-term,
investors may run because of uncertainty about the extent of their
fund's exposures to defaulting assets (such as during the 2008
financial crisis). To the degree that money market fund investors face
uncertainty about the underlying source of stress, they have an
incentive to redeem in a flight to safety. In this setting, a fee that
makes money market fund investors indifferent between redeeming or
remaining in the fund is ex-post efficient in cases of liquidity
stress, but ex-post inefficient in the latter scenario, as it is more
likely to incentivize investors to stay in a failing fund. In sum,
higher fees may slow redemptions out of money market funds, but the ex-
post efficiency of such effects may depend on the nature of the crisis.
    Under the final amendments, if an affected fund experiences net
redemptions of more than 5% on a given day, it would be required to
assess a liquidity fee that includes not only the spread costs and
other transaction costs, but also good faith estimates of the market
impact of sales to meet net redemptions. To the extent funds are able
to estimate or forecast market impact costs accurately, the requirement
to assess the market impact of sales to meet net redemptions when daily
net redemptions exceed 5% would result in redeeming investors bearing
not only the direct spread and transaction costs from their
redemptions, but also the impact of their redemptions on the market
value of the fund's holdings. This may allow shareholders remaining in
the fund to capture more of the dilution cost of redemptions, which
includes not only direct transaction costs and near-term price
movements, but the impact of the redemptions on the fund's portfolio as
a whole. However, the magnitude of this benefit may be reduced by the
fact that the final amendments would only require the imposition of
liquidity fees when an affected fund's daily net redemptions exceed
5%.\659\
---------------------------------------------------------------------------

    \659\ See section IV.C.4.b.i. and section IV.D.4. for a
quantitative analysis of the frequency with which affected money
market funds may be expected to exceed the 5% daily net redemption
threshold.
---------------------------------------------------------------------------

    Importantly, the mandatory liquidity fee framework will require
funds to calculate the liquidity fee as if the fund were selling the
pro-rata share of all of the fund's holdings, rather than, for example,
assuming the fund would absorb redemptions out of daily liquid assets.
If a fund were to absorb large redemptions out of daily or weekly
liquid assets--and their ability to do so may be enhanced by the final
amendments' increased liquidity requirements--the immediate transaction
costs imposed on the funds would be lower. However, the fund would have
less remaining daily and weekly liquidity and transacting shareholders
would be diluting remaining investors in a manner not captured by
estimated transaction costs. Thus, this aspect of the final amendments
will make redeeming investors bear not just the immediate costs of
covering redemptions, but also the costs of rebalancing the fund
portfolio to the pre-redemption levels of liquid asset holdings.
    However, this element of the final rule will require redeeming
shareholders to bear liquidity costs larger than the direct liquidity
costs they may impose on the fund. Some commenters stated that this
approach is fundamentally inconsistent with how money market funds
operate because, given the nature of money market fund holdings, money
market funds typically absorb redemptions out of daily and weekly
liquid assets.\660\ However, assets other than daily and weekly liquid
assets--such as municipal securities and commercial paper that do not
mature in the near term--may become illiquid in times of stress and may
need to be held to maturity by the fund. Thus, the realized transaction
costs of most redemptions may be zero as funds absorb them out of daily
liquidity, while the true liquidity costs of redemptions may consist of
the depletion of daily and weekly liquidity during times of stress
(when rebalancing is especially expensive) rather than the sale of
illiquid assets. While there is a lack of research on portfolio
rebalancing by money market funds, some research in a parallel open end
fund context shows that funds may optimally rebuild cash buffers after
outflows to prevent future forced sales of illiquid assets.\661\ To the
degree that money market funds may also seek to rebalance liquid assets
after large outflows, this may suggest that liquidity costs should be
measured using a vertical slice assumption due to the cost of
rebuilding liquidity after redemptions that deplete liquid assets.
---------------------------------------------------------------------------

    \660\ See, e.g., ICI Comment Letter; State Street Comment
Letter.
    \661\ See, e.g., Yao Zeng, A Dynamic Theory of Mutual Funds and
Liquidity Management (ESRB working paper no. 2017/42, Apr. 2017),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723389 (retrieved from SSRN Elsevier
database).
---------------------------------------------------------------------------

    To the degree that this aspect of the final amendments could impose
a cost on redeemers that is larger than the realized trading cost of
their redemptions, it may reduce the attractiveness of affected money
market funds to some investors. Importantly, when direct trading costs
of redemptions are zero because redemptions are absorbed out of weekly
liquid assets, redemptions still dilute non-transacting investors by
leaving the fund depleted of liquidity. This aspect of the final
amendments would require redeemers to internalize a greater share of
the liquidity externalities that they impose on non-transacting
investors. In addition, liquidity costs paid by redeemers under the
liquidity fee requirement would flow back to remaining shareholders,
dis-incentivizing redemptions and reducing the first-mover advantage
during times of stress. This may attract longer-term investors into
affected money market funds.
    The Commission has also received comments that market impact
factors may be too difficult or costly to estimate and that this may
give rise to errors in assessed fees.\662\ As discussed in section II,
the final rule is tailored to address these concerns and reduce such
costs in six ways. First, section II provides guidance on one method
funds could use to make a good faith estimate of the costs of selling a
vertical slice of the fund's portfolio to meet net redemptions using
pricing grids relying on historical data. Second, consistent with the
proposal, the final rule permits a fund to estimate liquidity costs for
each type of security with the same or substantially similar
characteristics, rather than analyze each security separately. Third,
as discussed in section II and consistent with the proposal, it would
be reasonable to assume a market impact of zero for the fund's daily
and weekly liquid assets, since a fund could reasonably expect such
assets to convert to cash without a market impact to fulfill
redemptions (e.g., because the assets are maturing shortly).\663\
Fourth, since market impact costs of a transaction can be difficult to

estimate with certainty before a transaction occurs, the rule requires
good faith estimates of these costs. Fifth, the final rule provides
that if an institutional fund makes a good faith estimate that the
amount of the liquidity fee would be below one basis point of the value
of the shares redeemed, then the fund is not required to charge a
liquidity fee.\664\ Sixth, where a fund is unable to produce good faith
estimates of the costs of selling a vertical slice, for example, when
underlying security markets are frozen and transactions are scarce, the
fund would use a default liquidity fee, as discussed in greater detail
in the section that follows.
---------------------------------------------------------------------------

    \662\ See, e.g., ICI Comment Letter.
    \663\ See Proposing Release, supra note 6, at section II.B.1.
    \664\ Amended rule 2a-7(c)(2)(iii)(D).
---------------------------------------------------------------------------

iv. Fee Amount: Default Fee When the Costs of Selling the Pro-Rata
Share of Fund Holdings Cannot Be Calculated
    As a baseline matter, rule 2a-7 includes a default liquidity fee
provision for non-government money market funds with weekly liquid
assets falling below 10% of their total assets. Under the final rule,
if affected money market funds are unable to estimate the costs of
selling the pro-rata share of fund holdings in good faith and supported
by data, they would assess a default liquidity fee of 1%.
    In the swing pricing context, the Commission received comments
about difficulties in calculating transaction costs and market impact
factors under tightly compressed timelines.\665\ In addition, one
commenter referenced a lack of, or narrow, bid-ask spreads, making
calculation particularly difficult.\666\ Another commenter questioned
the feasibility of estimating market impact using the vertical slice
approach.\667\
---------------------------------------------------------------------------

    \665\ See, e.g., SIFMA AMG Comment Letter; BlackRock Comment
Letter; Capital Group Comment Letter.
    \666\ See, e.g., BlackRock Comment Letter.
    \667\ See, e.g., ICI Comment Letter.
---------------------------------------------------------------------------

    While the final rule imposes a liquidity fee framework, rather than
a swing pricing requirement, the Commission has considered how
difficulties in calculating the costs of selling the pro-rata share of
fund holdings may impact operational feasibility of the liquidity fee
requirement. Specifically, market impact factors and spread costs may
be difficult to estimate precisely when many of the assets money market
funds hold lack a liquid secondary market. This effect may be
particularly acute in times of stress in short-term funding markets
when transaction activity may freeze and trade and quotation data
necessary for an accurate estimate of market impact factors may not be
available. The ability of affected money market funds to assess a
default liquidity fee under the final rule may enable affected money
market funds to overcome these operational difficulties. Thus, the
default liquidity fee may serve as an additional tool for affected
money market funds facing redemption waves, and may reduce dilution of
non-transacting shareholders and the first-mover advantage in
redemptions.
    The default liquidity fee is fixed at 1% and does not vary
depending on the size of redemption flows, conditions in short-term
funding markets, or characteristics of a fund's portfolio holdings.
Thus, the default liquidity fee may, under some circumstances, exceed
the liquidity cost of redemptions, which poses a cost to redeemers; or
fall short of accurately capturing the liquidity cost of redemptions,
thereby failing to recapture the dilution costs of redemptions faced by
non-transacting shareholders. However, to the degree that discounts
experienced by ultra-short bond exchange traded funds in the peak
market stress of March 2020 may serve as a proxy for liquidity costs of
money market funds, the liquidity fee is generally consistent with the
range of money market fund liquidity costs during the same period.\668\
Importantly, the default liquidity fee is not intended to precisely
measure the liquidity cost of redemptions, but may enhance the ability
of affected funds facing large redemptions to manage their liquidity in
times of stress, reduce dilution costs borne by non-transacting
investors, and decrease run risk. The final rule does not alter the
amount of the default liquidity fee currently in effect under rule 2a-
7, but provides for a different scope of application of the default fee
that is not tied to publicly observable levels of weekly liquid assets.
---------------------------------------------------------------------------

    \668\ See Anadu, Kenechukwu, et al., Swing Pricing Calibration:
A Simple Thought Exercise Using ETF Pricing Dynamics to Infer Swing
Factors for Mutual Funds (Jan 21, 2022), available at https://ssrn.com/abstract=4014689 (retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------

    To the degree that investors may perceive the default liquidity fee
to be large, they may seek to redeem out of affected money market funds
earlier during the onset of stress, which may accelerate redemptions
during milder periods of stress in short-term funding markets. However,
affected money market funds may have strong reputational incentives to
compete on fees and may limit the application of the default fee to
rare times of severe market stress. Importantly, the baseline
application of the default fee under rule 2a-7 is tied to a fund's
publicly observable level of weekly liquid assets, whereas liquidity
fees under the final rule are triggered by same day net redemptions and
a fund's assessment of the liquidity costs of such redemptions. This is
expected to reduce run risk in affected funds relative to the current
baseline. Crucially, any liquidity fee, including the default fee,
accrues to the fund's non-transacting shareholders and enhances fund
performance, which can incentivize some investors to invest in affected
money-market funds, particularly during times of stress.
v. Fee Caps
    The final rule would not cap mandatory liquidity fees triggered by
the 5% net redemption threshold. Under the final rule, if an affected
fund's good faith estimate of the liquidity cost of large redemptions,
including spread and other transaction costs as well as market impact
factors of the hypothetical sale of a pro-rata share of portfolio
holdings, exceeds, for instance 2%, that larger fee would be assessed
to redeeming investors on days on which a fund experiences net
redemptions in excess of 5%. This element of the final rule will allow
funds to recapture a greater share of the dilution costs of large
redemptions and may reduce corresponding run risk, especially in times
of stress.
    Some commenters suggested that a liquidity fee framework should
include a cap on liquidity fees,\669\ for example, because a cap could
provide investors with confidence that a fee would not exceed a
specific threshold.\670\ We acknowledge that the possibility of a large
uncapped liquidity fee being applied to redemptions may reduce the
attractiveness of affected money market funds for some investors.
However, the possibility of large uncapped fees may also attract other
investors into money market funds because non-transacting shareholders
benefit from larger liquidity fees being charged to redeemers.
---------------------------------------------------------------------------

    \669\ See, e.g., ICI Comment Letter; Morgan Stanley Comment
Letter; SIFMA AMG Comment Letter; see also Federated Hermes Board
Comment Letter.
    \670\ See, e.g., Federated Hermes Comment Letter I; Western
Asset Comment Letter.
---------------------------------------------------------------------------

    Commenters indicated that it is difficult to imagine any scenario
where the cost of liquidity would exceed 2%, given the nature of money
market fund portfolio holdings and limits on weighted average maturity
and weighted average life, as well as historical price movements within
affected funds.\671\ We agree that funds are unlikely to charge fees in
excess of 2% for three primary reasons. First, given the portfolio
composition of affected money

market funds, market impact factors are extremely unlikely to exceed 2%
even under times of severe stress. For example, as discussed in section
IV.C.4.a, during the market stress of March 2020, commercial paper
spreads generally ranged between 20 and 50 basis points across
maturities, far lower than the 2% level. As another example, one
commenter indicated that their transaction costs during the crisis week
of September 2008 were less than 0.6%.\672\ Second, if short-term
funding markets are under severe stress, there may be little
transaction activity and funds may be unable to provide good faith
estimates of the costs of selling the pro-rata slice of the fund
portfolio, leading them to charge the default fee of 1%. Third, if
funds are able to provide good faith estimates, but there is
significant uncertainty about the costs of the vertical slice, for
example, during severe stress, funds may face incentives from private
party litigation to charge the default fee.
---------------------------------------------------------------------------

    \671\ Id.
    \672\ See, e.g., Comment Letter of Fidelity Investments on File
No. S7-03-13 (Apr. 22, 2014), available at https://www.sec.gov/comments/s7-03-13/s70313-339.pdf (Exhibit 4). Importantly, this is
an estimate of actual transaction costs incurred by the market
participant and does not include market impact or the vertical slice
assumption.
---------------------------------------------------------------------------

    Thus, large liquidity fees (potentially in excess of 2%) are likely
to be charged only when funds do not have sufficient liquid assets to
absorb redemptions, are unable to roll down assets into weekly liquid
assets given expected future outflows, and have transaction data from
liquidating portfolio securities to support a higher fee. If a fund
board's (or its delegate's) good faith estimates of liquidity costs do
exceed 2%, then the lack of a cap for mandatory liquidity fees will
allow funds to recapture more of the dilution of redemptions and manage
liquidity to meet future redemptions. This aspect of the final rule may
provide affected funds with flexibility to impose larger fees in crisis
conditions when liquidity costs are high, which may enhance their
resilience to stress.
vi. Discretionary Fees
    Some commenters suggested that fund boards should have discretion
to impose liquidity fees when in the best interest of the fund and its
investors.\673\ The final amendments retain a discretionary liquidity
fee provision, allowing non-government funds to charge discretionary
liquidity fees when the majority of the fund board of directors (or its
delegate) determine it to be in the best interest of the fund. The
discretionary liquidity fee provision provides more discretion to fund
boards (or their delegates) for determining when to impose fees and in
what amount in comparison to the mandatory liquidity fee provision.
While this discretion is generally consistent with the baseline, the
final rule removes the regulatory weekly liquid asset threshold, which
created incentives to redeem as funds approached the regulatory weekly
liquid asset threshold.
---------------------------------------------------------------------------

    \673\ See, e.g., 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.
---------------------------------------------------------------------------

    This aspect of the final rule may involve several benefits. First,
it may provide a broader scope of money market funds, including retail
and government funds, flexibility in using liquidity fees as an anti-
dilution tool.\674\ Moreover, it may allow institutional prime and
institutional tax-exempt funds to charge liquidity fees earlier in the
redemption wave or when liquidity costs of even smaller redemptions are
particularly high. Thus, it may enhance the ability of money market
funds to manage their liquidity and protect non-transacting
shareholders by reducing the dilution costs of redemptions that they
bear. Second, it may reduce the ability of redeeming investors to
predict whether a liquidity fee would apply on any given day and
strategically time redemptions around the likely application of
liquidity fees. To the degree that affected money market funds will
compete on liquidity fees and may face collective action problems,
discretionary liquidity fees may be infrequently applied, reducing the
above benefits of this element of the final amendments.
---------------------------------------------------------------------------

    \674\ Like the current rule 2a-7, a government money market fund
may choose to rely on the ability to impose liquidity fees. See
section II.
---------------------------------------------------------------------------

    Since liquidity fees charged to redeemers benefit non-transacting
shareholders and may enhance reported fund performance, some fund
managers may be incentivized to frequently charge discretionary
liquidity fees. However, this incentive may be dampened or altogether
outweighed by competitive pressures on reported fees and the
sensitivity of fund flows to fees. In addition, the frequent assessment
of discretionary fees would increase the variability of realized
returns for redeemers and reduce the attractiveness of such funds for
investors that rely on money market funds for cash management, which
can create a counterbalancing market disincentive to the frequent
application of discretionary fees. Moreover, the final rule would cap
discretionary fees at 2%, which may reduce the ability of affected
money market funds to overcharge redeemers for liquidity costs.
Finally, the final rule requires fund boards or a delegate overseen by
the board to make a determination that it is in the best interest of
shareholders to assess such a fee.
5. Amendments Related to Potential Negative Interest Rates
    As discussed in the proposal, in the event stable NAV funds begin
to experience negative yields, they will be able to convert to a
floating NAV.\675\ As modified in this release, funds also will be able
to engage in share cancellation (sometimes referred to as reverse
distribution mechanism, or ``RDM'') in the event of negative yields.
Funds engaging in share cancellation would be required to comply with
specified conditions in the final rule, including that the fund provide
timely, concise, and plain-English disclosure to investors.
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    \675\ As discussed in section V.B, the Commission estimates the
total annual costs attributable to the information collection
requirements in the amendments allowing share cancellation will be
$969,722 for all affected funds. This cost estimate includes both
initial and ongoing costs with the former being amortized over three
years.
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    Allowing stable NAV funds to use a reverse distribution mechanism
in the event of negative fund yields would reduce NAV fluctuations in a
negative yield environment, which may preserve the use of stable NAV
funds for sweep accounts. In the event money market fund yields turn
negative, this amendment may, thus, allow more types of investors to
continue to use these products than would be the case if the rule
required all stable NAV money market funds to convert to a floating
NAV. The Commission has received a number of comments in support of
providing the flexibility of stable NAV funds to use an RDM or similar
mechanism, in addition to the proposed conversion to a floating
NAV.\676\ The Commission also recognizes that an RDM is economically
equivalent to a floating NAV, and that many investors may prefer a
stable NAV.
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    \676\ See, e.g., ICI Comment Letter; SIFMA AMG Comment Letter;
Federated Hermes Comment Letter I; Allspring Funds Comment Letter;
Fidelity Comment Letter; BNY Mellon Comment Letter; State Street
Comment Letter; Sen. Toomey Comment Letter; Americans for Tax Reform
Comment Letter; Dechert Comment Letter; CCMR Comment Letter; IDC
Comment Letter.
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    As discussed in section II, under an RDM, investors would observe a
stable share price but a declining number of shares for their
investment when a fund generates a negative gross yield. This may
decrease the transparency and

salience of negative fund yields to investors, particularly for less
sophisticated retail investors.\677\ Importantly, many stable NAV funds
(government funds) are offered to a mix of more sophisticated
institutional and retail clientele. This may give rise to informational
asymmetries about the performance of the same stable NAV funds across
investors and reduce comparability of performance across stable NAV
funds. Crucially, these informational asymmetries may be mitigated by
the final rule's requirement that stable NAV funds seeking to use an
RDM provide timely, concise, and plain-English disclosures, including
in prospectuses and in account statements or in a separate writing
accompanying the account statements. While stable NAV funds seeking to
use an RDM would bear costs of producing such disclosures, they would
only choose to do so if the costs of disclosures arising out of the use
of an RDM are lower than the costs of floating the NAV. Overall, as
discussed in section II, investors may benefit from the ability to
continue to invest in stable NAV funds when interest rates are
negative, and the required disclosures may help inform investors about
differences between an RDM and a floating NAV.
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    \677\ See, e.g., Northern Trust Comment Letter; CFA Comment
Letter.
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    In contrast with the proposal, the final amendments do not require
stable NAV money market funds to keep records identifying which
intermediaries they were able to identify as being able to process
orders at a floating NAV and to no longer transact with those
intermediaries who are not able to process orders at a floating NAV.
This aspect of the final rule obviates the need for intermediaries to
upgrade their systems if they are unable to process transactions in
stable NAV funds at a floating NAV. This may avoid disruptions to
distribution networks of stable NAV funds if some of their
intermediaries would be unable or unwilling to upgrade systems to
process transactions at a floating NAV.
    The magnitude of these economic effects may be significantly
attenuated by two factors. First, negative interest rates have not
occurred in the United States, and persistent gross negative yields may
be unlikely to occur.\678\ Hence, money market funds are not currently
implementing RDMs and both the benefits and the costs of these
amendments may not materialize. Second, stable NAV funds may not
experience the same magnitude of redemptions observed in public
institutional prime and institutional tax-exempt funds, for example in
March 2020.\679\ Notably, in the long run, the initial shock of
negative rates that leads to redemptions from money market funds might
reverse due to the lack of alternative vehicles to store cash for a
short term.
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    \678\ The weighted average maturity (weighted average life) of
money markets funds must be 60 (120) days or less, meaning it may
take several weeks before securities with a positive yield mature
and gross yields turn negative.
    \679\ See, e.g., ICI Comment Letter; Morgan Stanley Comment
Letter.
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6. Disclosures
a. Benefits and Costs of the Prompt Notice of Liquidity Threshold
Events on Form N-CR and Board Reporting
    The final amendments will require money market funds to file a Form
N-CR report whenever a fund has invested less than 25% of its total
assets in weekly liquid assets or less than 12.5% of its total assets
in daily liquid assets.
    As a baseline matter, daily and weekly liquid assets are currently
required to be disclosed on fund websites on a daily basis. Relative to
that baseline, the primary benefits of the final Form N-CR reporting
requirement may be in providing additional information about the
circumstances of a fund's significantly reduced liquidity levels.
Information about the circumstances of a fund's significantly reduced
liquidity levels may help investors better analyze a fund's liquidity
management strategies and assess risks of dilution. The Commission has
received comments that public reporting of liquidity threshold events
can increase transparency of money market fund liquidity management
practices to investors and may help increase the salience of a fund's
daily and weekly liquid assets to investors, especially to less active
and less sophisticated investors.\680\ Some commenters suggested this
reporting should be confidential.\681\ As discussed in section II, we
believe investors would benefit from having contextual information to
understand the cause of a fund's declining liquidity, which may
facilitate their assessment of a fund's risks and ability to meet
redemptions. This requirement may enhance transparency about money
market fund liquidity during times of stress.
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    \680\ See, e.g., CFA Comment Letter; Better Markets Comment
Letter.
    \681\ See, e.g., ICI Comment Letter; Federated Hermes Comment
Letter I; Invesco Comment Letter; Schwab Comment Letter (expressing
support for ICI's perspective); SIFMA AMG Comment Letter; Bancorp
Comment Letter.
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    Publication of notices surrounding liquidity threshold events may
inform investors about the reasons behind the threshold event. To the
degree that some funds' liquidity threshold events may be indicative of
persistent liquidity problems or mismanagement of liquidity risk, and
to the extent that notices may better inform investors about such
causes (relative to baseline website disclosures of liquidity levels),
publication of such notices may trigger investor redemptions out of the
most distressed funds. While it is difficult to predict investor
behavior, the final disclosure requirements may reduce information
asymmetries between investors and funds about their liquidity
management, and would provide funds with liquidity fees as a tool to
manage redemptions, such that redeemers would be charged for the true
liquidity cost of their redemptions. In addition, funds with lower
weekly and daily liquid assets would charge higher fees due to higher
market impact costs, and the liquidity fee under the vertical slice
assumption would charge redeemers the liquidity costs they impose on
the fund, further dis-incentivizing strategic redemptions.
    The final amendments will also require money market funds to notify
their boards when they drop below the 12.5% daily and 25% weekly
liquidity asset thresholds, as discussed in section II. Since the final
amendments will require that liquidity threshold events are reported on
Form N-CR, funds will likely routinely notify the board of such events
without an explicit board notification requirement. One commenter noted
that the current policies and procedures of its members typically
include provisions to report to the board at specified levels of
liquidity, thus suggesting that the proposed board reporting is already
occurring in practice.\682\ To the degree that board reporting is
already a part of best practices for fund managers, this would reduce
the magnitude of the benefits and costs of this final requirement.
However, to the degree that some fund boards may not be notified of
some events subject to Form N-CR reporting or of significant declines
in liquidity, the board notification requirement could enhance the
oversight of fund boards over liquidity management, particularly during
periods of stress.
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    \682\ See, e.g., SIFMA AMG Comment Letter.
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    The final amendments to Form N-CR will impose direct compliance
costs by imposing reporting burdens discussed in section V.D.\683\
While we

acknowledge that Form N-CR filers may bear some additional reporting
costs as a result of the amendments, as one commenter suggested, we
believe these costs will generally be related to funds adjusting their
systems to a different data language. Due to economies of scale, such
costs may be more easily borne by larger fund families. In addition,
the prompt notice requirement may give rise to two sets of costs.
First, the requirement may lead fund managers to manage their
portfolios specifically to try to avoid a reporting event, rather than
in a way that is most efficient for fund shareholders. Second, this
aspect of the final rule may result in money market fund managers
spending compliance resources on amending Form N-CR to describe the
circumstances of the liquidity threshold event, which may divert
managerial resources away from managing redemptions in times of stress.
Costs borne by money market funds may be passed along to investors in
the form of higher fees and expenses. However, as discussed above, we
believe such costs are justified by the promptness of the notice
requirement which may enhance Commission oversight and transparency to
investors, incentivize funds to closely monitor their liquidity levels,
and ultimately better protect investors.
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    \683\ As discussed in section V.D, the Commission estimates a
total internal time cost of the information collection requirements
associated with the amendments to Form N-CR of $8,244 and total
annual external cost burden of $1,187 for all affected funds.
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b. Benefits and Costs of the Form N-MFP Amendments
    Final amendments to Form N-MFP will require reporting of certain
daily data points on a monthly basis, of securities that prime funds
have disposed of before maturity, of the concentration of money market
fund shareholders and the composition of institutional money market
funds' shareholders, and of additional information about repurchase
agreement transactions, among other changes. In addition, we are
amending Form N-MFP to require money market funds to report the date on