Money fund managers must adapt to the SEC’s changes to rule 2a-7 or exit the business. Funds that can’t comply by the deadlines for two major sets of changes that take effect in 2016 will no longer be able to call themselves “money market funds.” However, updates to Investortools’ Smart software make it easy to monitor compliance with the SEC’s new diversification limits and stress testing rules as part of an integrated portfolio management and compliance solution.
Diversification limit changes
One of the most substantive changes to rule 2a-7 involves revised diversification limits. The key changes are a difference in how guarantees are treated and the elimination of the “25 percent basket” not subject to diversification requirements. Funds used to be able to get around the diversification limits on issuers by diversifying their guarantee providers. That’s no longer true. With the elimination of the “25 percent basket,” the 10 percent diversification limit now applies across the board for non-municipal money market funds. Municipal money market funds are cut back to a 15 percent diversification limit. These changes were adopted by the SEC in July 2014 and take effect April 2016, as part of the SEC’s broader response to the role of money funds in 2008 financial crisis.
Money market funds must ratchet up their stress testing under changes adopted by the SEC in July 2014 and taking effect in October 2016. Prior to the rule change, stress testing could be done on each of the following factors in isolation: changes in interest rates, downgrades and defaults, changes in credit spreads, and redemptions. Now the SEC says each of the first three factors must be viewed together with redemptions.
To avoid problems with risk-limiting conditions, Smart’s revised interface now alerts users when a proposed trade would put the portfolio out of regulatory compliance. This automates a feature that was previously available upon clicking a button to run the rules. In addition, Smart’s compliance feature tests at the new, lower diversification limits.
Smart’s stress testing feature has been rebuilt to meet the new compliance standards and provide more transparent results. Unlike other solutions, Smart is not a black box. It lets you analyze the role of every security in your stress tests, which is helpful if your fund board questions your stress test results. Smart also accommodates both constant-NAV and floating-NAV funds, which helps funds adapt to the October start of floating NAVs for institutional money market funds.
Contact us at 630.553.0040 or contact us online to discover how you can take the pain out of Rule 2a-7 compliance. Ask for a demonstration if you’re new to Smart. If you’re a client, we offer training to ease your transition to the new rules.