Weighted Average Maturity

We are amending rule 2a-7 to require that each money market fund maintain a

dollar-weighted average portfolio maturity (WAM) appropriate to its objective of maintaining a

stable net asset value or price per share, but in no case greater than 60 days.132 _{We believe that}

such a limit on the maximum WAM will result in money market funds that are more resilient to

changes in interest rates that may be accompanied by other market shocks, and thus reduce the

likelihood of a run and better protect money market fund investors. As we explained in the

Proposing Release, a portfolio weighted towards securities with longer maturities increases the

fund’s exposure to interest rate risk, amplifies spread risk, and decreases the ability of a fund to

pay redeeming shareholders.133

Most commenters that addressed this proposal supported further reducing the maximum

WAM of fund portfolios in order to reduce the funds’ exposure to related risk. Those

commenters were divided between those supporting the 60-day maximum WAM that we

proposed134 _{and those supporting a reduction to 75 days.}135 _{Other commenters argued for no}

reduction at all (i.e., leaving the limit at 90 days).136 _{Commenters supporting a maximum WAM}

limitation of 60 days believed that such a reduction would be appropriate to increase the stability

132 _{See amended rule 2a-7(c)(2).}

133 _{See Proposing Release, supra note 2, at Section II.B.1.}

134 _{See, e.g., Goldman Sachs Comment Letter; Comment Letter of the Institutional Money Market}

Funds Association (Sept.8, 2009) (“IMMFA Comment Letter”); Northern Funds Indep. Trustees Comment Letter.

135 _{See, e.g., Charles Schwab Comment Letter; Comment Letter of GE Asset Management}

Incorporated (Sept. 8, 2009) (“GE Asset Mgt. Comment Letter”); T. Rowe Price Comment Letter.

136 _{See, e.g., State Street Comment Letter; Comment Letter of Victory Capital Management (Sept. 8,}

and liquidity of money market funds137 _{and would reduce funds’ exposure to interest rate}

risk.138 _{One asserted that a 60-day limitation is appropriate as it prioritizes a money market}

fund’s safety and liquidity over yield.139

Commenters supporting a maximum WAM of 75 days argued that such a limitation

would achieve the Commission’s goal of reducing funds’ exposure to interest rate risk while

providing funds with sufficient flexibility to invest in high quality securities when shorter term

investments are scarce.140 _{Some expressed concern about whether a 60-day WAM would reduce}

a money market fund’s ability to generate sufficient yield.141 _{Still others argued that a shorter}

WAM could make some money market funds more risky because of the alternative investment

strategies they might employ as a result.142 _{Finally, two commenters opposing any change in the}

maximum WAM permitted by rule 2a-7 argued that liquidity risk to funds is more appropriately

limited by other aspects of our amendments to rule 2a-7, and that the resulting reduction in yield

would “homogenize” money market funds to such an extent that investors may be driven to

137 _{See Tamarack Funds Comment Letter.} 138 _{See TDAM Comment Letter.}

139 _{See Invesco Aim Comment Letter.}

140 _{See, e.g., Charles Schwab Comment Letter; GE Asset Mgt. Comment Letter; ICI Comment}

Letter.

141 _{See, e.g., Charles Schwab Comment Letter; Comment Letter of Crane Data LLC and Money}

Fund Intelligence (Aug. 31, 2009) (“Crane Data Comment Letter”); T. Rowe Price Comment Letter.

142 _{One commenter noted that a WAM limitation longer than 60 days would allow a fund to improve}

the credit profile of its portfolio by substituting longer term Government securities for shorter term corporate securities. See BlackRock Comment Letter. Another commenter argued that a reduction would lead to fund portfolios with a “barbelled” maturity structure in which the fund balanced the low yield offered by the large amount of very short-term securities it would be required to hold with an offsetting amount of riskier longer term securities, which could increase the riskiness of fund portfolios. See Comment Letter of Waddell & Reed/Ivy Fund Portfolio Managers (Sept. 8, 2009) (“Waddell & Reed Comment Letter”). Another stated that higher risk issuers tend to be limited to issuing shorter maturity securities, so a shorter WAM limitation could increase a fund’s credit risk profile. See Wells Fargo Comment Letter.

invest in unregulated funds, thus increasing systemic risk.143

We believe that the maximum WAM permissible for money market funds should be

reduced to 60 days in order to reduce the likelihood of funds breaking the buck. The increased

resilience to simultaneous stresses from interest rate and other risks that a money market fund

would achieve through a maximum WAM of 60 days is significant. A fund with a 90-day WAM

could withstand an instantaneous change in interest rates of 200 basis points before breaking the

buck.144 _{In contrast, a fund with a WAM of 60 days could withstand an interest rate change of}

300 basis points without breaking the buck.145 _{Although an interest rate change of such a}

magnitude may be unlikely to occur,146 _{funds must also be able to withstand multiple shocks}

occurring simultaneously, such as those that occurred in September 2008 when there was a

simultaneous increase in LIBOR rates and widening spreads due to credit deterioration and

liquidity pressures, together with extraordinary redemptions.147

143

See Fidelity Comment Letter; State Street Comment Letter. Several commenters also asserted

that any reduction in WAM would increase issuers’ reliance on short-term funding, also

increasing systemic risk. See, e.g., Am. Securit. Forum Comment Letter; State Street Comment Letter; Wells Fargo Comment Letter.

144 _{See Fidelity Comment Letter.}

145 _{Our staff supplemented stress test analysis conducted by commenters with more data points and}

stress scenarios to illustrate the impact on a money market fund’s net asset value per share from multiple stresses on that fund’s portfolio. A fund with a 75-day WAM could withstand an interest rate change of less than 250 basis points without breaking the buck. We note that these scenarios also represent the most conservative scenarios because they assume that the money market fund started with a market-based net asset value of $1.00. It is our understanding that at any point in time, a large number of money market funds will not start from a market-based net asset value of $1.00—many will start with a market-based net asset value of less than a dollar and thus a smaller interest rate change will cause the funds to break the buck.

146 _{Interest rate shocks of a 300 basis point magnitude over a relatively short period of time have}

occurred, although not since the late 1970s. See Federal Reserve Bank of New York, Historical Changes of the Target Federal Funds and Discount Rates, 1971 to present, available at

http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html. In low interest rate environments (such as today), a shock in interest rates could occur if the Federal Reserve determines to raise interest rates quickly, for example, to stave off inflation as the economy recovers or to strengthen the U.S. dollar.

A fund with a lower WAM has significantly greater protection in the circumstances

described above. For example, a fund with a 90-day WAM facing a change in credit spreads of

50 basis points and redemptions of 10 percent would break the buck with an interest rate change

of a little more than 100 basis points.148 _{Greater shocks from an even larger increase in spreads}

or redemptions would only lessen that interest rate cushion – last fall increases in spreads and

redemptions were considerably above this level.149 _{A fund with a 60-day WAM would be in a}

better position to withstand multiple shocks without breaking the buck than if it maintained a

90-day or 75-day WAM.150

We disagree with those commenters that asserted that a reduction of maximum

permissible WAM would have a significant adverse effect on money market funds’ investment

strategies or yield. We have not observed such adverse effect in funds with WAMs below 60

days or a greater tendency to invest in riskier short-term securities or to follow riskier portfolio

strategies to increase yield. These funds do not appear to have had great difficulties in creating

infra note 178 (discussing the increase in LIBOR during the financial crisis). Many money

market fund portfolio holdings at the time were tied to LIBOR.

148 _{This assumes a weighted average life limitation of 120 days. A fund with a 75-day WAM could}

withstand a 50 basis point increase in credit spreads across its portfolio, 10% redemptions, and an increase in interest rates of 125 basis points before breaking the buck, assuming a 120-day weighted average life.

149 _{In addition, we note that spreads have widened to significant degrees in the past. See, e.g.,}

Benjamin N. Friedman & Kenneth N. Kuttner, Why Does the Paper-Bill Spread Predict Real

Economic Activity?, NBER Working Paper No. 3879, at Fig.1 (Oct. 1991) (showing historical

spreads for 6-month commercial paper over 6-month Treasury bill rates from 1959 to 1990).

150 _{Based on staff review of various stress test scenarios, a fund with a 60-day WAM could withstand}

a 50 basis point increase in credit spreads across its portfolio, 10% redemptions, and an increase in interest rates of over 150 basis points before breaking the buck, again assuming a weighted average life limitation of 120 days. Others have recognized that exposure to multiple stresses may call for a lower WAM. See, e.g., Standard & Poor’s, Fund Ratings Criteria: Market Price

Exposure, at 3 (2007), available at

http://www2.standardandpoors.com/spf/pdf/events/MMX709.pdf (stating that money market funds with a greater liquidity risk due to a smaller asset size or shareholder composition may need to maintain a lower WAM than 60 days).

portfolios that generated competitive yields and attracted investors.151 _{Indeed, many domestic}

money market funds currently limit their WAM to a maximum of 60 days voluntarily, a limit

they likely would have discontinued if they had experienced the management or competitive

difficulties suggested by commenters.152 _{No commenter reported to us that any of these funds}

were doing so. We acknowledge that one consequence of our amendments may be to further

“homogenize” fund portfolios as managers have fewer avenues to acquire yield by exposing the

funds to risk, but we believe that the level of potential homogenization is justified to reduce the

risk to investors that a money market fund will break the buck. In addition, we are not persuaded

by comments that a likely consequence of a shortened maximum WAM will be riskier portfolios.

Accordingly, we are adopting the 60-day WAM limitation as proposed.