DTCC Connection

Sep 07, 2016 • DTCC Connection

Mutual Fund Services Keeps Clients Ahead of the Curve on Money Market Reform

By Melanie Best

Mutual Fund Services Keeps Clients Ahead of the Curve on Money Market ReformWhen “Money Market Reform” takes effect on October 14, 2016, bringing significant changes to the U.S. mutual fund industry, DTCC Mutual Fund Services (MF) clients will have tools in hand to help them meet the new rules’ operational requirements.

Thanks to MF’s close collaboration with clients and industry working groups over the past two years, National Securities Clearing Corporation (NSCC)—a DTCC subsidiary—is introducing a series of service enhancements to help fund companies and distributors stay on target in implementing this reform.

Major Change

Money market mutual funds are low-volatility funds that historically sought to maintain a $1-per-share net asset value (NAV), typically by investing in short-duration government securities, certificates of deposit, corporate commercial paper and other highly liquid, low-risk securities. But, following the financial turmoil of September 2008—when the share value of a leading money fund fell to $0.97 after the fund wrote off its holdings in Lehman Brothers commercial paper—the U.S. Securities & Exchange Commission (SEC) began exploring ways to address the risks of shareholder runs on money market funds, while preserving the funds’ benefits.

The resulting SEC rule amendments, adopted in July 2014, require fund companies to segregate retail (natural persons) from institutional investors, float the NAV of prime institutional money funds, and impose liquidity fees and/or redemption gates if a fund’s level of liquid assets falls below the required regulatory threshold.

To implement these momentous changes by the October 2016 compliance deadline, mutual funds and intermediaries ramped up an intensive effort focused on reformulating their money fund line-ups, money-fund systems, operations and commercial strategies.

MF partnered with the industry from the outset, conferring with clients and attending various industry meetings focused on the reforms. As a participant in the working group established by the Investment Company Institute’s (ICI) Broker/Dealer and Bank, Trust and Retirement Advisory Committees (BDAC and BTRAC, respectively), MF played an instrumental role in identifying enhancements to Mutual Fund Services that would help our clients comply with the rule changes.

New Categories

“Money Market Reform does not affect NSCC directly or require any NSCC rule changes,” said Josephine Torelli, DTCC Executive Director, Mutual Fund Services. “But we knew, from our working group participation and by studying the SEC provisions, we could help the industry tremendously by creating additional service enhancements to address the reform’s operational requirements.”

The industry’s first priority was to categorize each money market fund as either retail, institutional, government or prime. To facilitate transaction processing, NSCC rolled out its first update—changes to social codes across all MF service offerings—in November 2015. MF clients utilize NSCC social codes to identify account types. The changes spelled out in Important Notice (IN) 8073—adding a new code and revising two existing codes—help clients identify account types more accurately by improving transparency.

A great deal of discussion preceded the drafting of IN 8073, recalled Yana Granovskiy, Director, Mutual Fund Services. “Once the working group agreed that NSCC social codes would be used to designate account types as institutional or retail, it still had to tackle questions about how to classify retail versus institutional trust accounts,” she said.

Extra Lead Time

Following the social code updates, additional MF service enhancements took shape as firms worked through business and operational decisions on how to implement floating NAVs, liquidity fees and redemption gates.

As explained in NSCC Important Notices 8159 and 8163, new features in Fund/SERV®, Networking and Mutual Fund Profile Service enable funds to communicate key data for money market funds, including liquidity fees and redemption gates, and multiple NAV strikes. “Our clients expect us to publish Important Notices three months prior to implementation,” said Granovskiy. “However, given the scope of these enhancements and clients’ compliance obligations, we provided even more lead time than usual.” The enhancements described in IN 8159, issued February 3, 2016, will take effect September 26, 2016.

Promoting Best Practices

To further aid the industry’s transition to new operational requirements, MF has developed educational resources. A User Guide/Best Practices document, released in May and available to clients at www.dtcc.com and DTCC Learning, details the changes, field by field, to each MF service and describes best practices as defined by the industry working group. [Note: clients must have a password to access the user guide.

The MF team continues to reach out to the industry, most recently in June when it conducted a webinar on adapting operational practices to Money Market Reform.

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