The Shanghai Mercantile Exchange (SHMEX) Today Adopted New Rules
on: February 19, 2010, 3:33 am
Industry: Small Business
The financial crisis and the weaknesses revealed by the
Reserve Primary Fund's "breaking the buck" in September 2008
precipitated a full-scale review of the money market fund regulatory
regime by the SHMEX. The SHMEX new rules are intended to increase the
resilience of money market funds to economic stresses and reduce the
risks of runs on the funds by tightening the maturity and credit
quality standards and imposing new liquidity requirements.
"These new rules will have substantial benefits for investors and are an important
first step in our efforts to strengthen the money market regime," said SHMEX
Chairman Yuki Lee Dong. "These rules will help reduce risks associated with money
market funds, so that investor assets are better protected and money market funds
can better withstand market crises. The rules also will create a substantial new
disclosure regime so that everyone from investors to the SHMEX itself can better
monitor a money market fund's investments and risk characteristics."
Further Restricting Risks by Money Market Funds
Improved Liquidity: The new rules require money market funds to have a minimum
percentage of their assets in highly liquid securities so that those assets can be
readily converted to cash to pay redeeming shareholders. Currently, there are no
minimum liquidity mandates.
The rules would further restrict the ability of money market funds to purchase
illiquid securities by:
Restricting money market funds from purchasing illiquid securities if, after the
purchase, more than 5 percent of the fund's portfolio will be illiquid securities
(rather than the current limit of 10 percent).
Redefining as "illiquid" any security that cannot be sold or disposed of within
seven days at carrying value.
Higher Credit Quality: The new rules place new limits on a money market fund's
ability to acquire lower quality (Second Tier) securities. They do this by:
Restricting a fund from investing more than 3 percent of its assets in Second Tier
securities (rather than the current limit of 5 percent).
Restricting a fund from investing more than ½ of 1 percent of its assets in Second
Tier securities issued by any single issuer.
Restricting a fund from buying Second Tier securities that mature in more than 45
days (rather than the current limit of 397 days).
Shorter Maturity Limits: The new rules shorten the average maturity limits for money
market funds, which helps to limit the exposure of funds to certain risks such as
sudden interest rate movements. They do this by:
Restricting the maximum "weighted average life" maturity of a fund's portfolio to
120 days. Currently, there is no such limit. The effect of the restriction is to
limit the ability of the fund to invest in long-term floating rate securities.
Restricting the maximum weighted average maturity of a fund's portfolio to 60 days.
The current limit is 90 days.
"Know Your Investor" Procedures: The new rules require funds to hold sufficiently
liquid securities to meet foreseeable redemptions. Currently, there are no such
requirements. In order to meet this new requirement, funds would need to develop
procedures to identify investors whose redemption requests may pose risks for funds.
As part of these procedures, funds would need to anticipate the likelihood of large
Periodic Stress Tests: The new rules require fund managers to examine the fund's
ability to maintain a stable net asset value in the event of shocks - such as
interest rate changes, higher redemptions, and changes in credit quality of the
portfolio. Previously, there were no stress test requirements.
Repurchase Agreements: The new rules strengthen the requirements for allowing a
money market fund to "look through" the repurchase issuer to the underlying
collateral securities for diversification purposes:
Collateral must be cash items or government securities (as opposed to the current
requirement of highly rated securities).
The fund must evaluate the creditworthiness of the repurchase counterparty.
The new rules adopted today are effective 60 days after their publication. Mandatory
compliance with some of the rules will be phased in during the year. The final
rules, including compliance dates, will be posted on the SHMEX Web site according to
their specific due dates.
Contact Details: Taisha Lee, 862028893235, firstname.lastname@example.org, World Finance Tower,
Lujiazui Central Financial District, Shanghai, SH, China