OCC Issues Guidance on Handling Money Market Funds

The OCC today issued guidance on money market mutual funds, or MMFs, for banks that offer MMFs to customers or that automatically sweep funds between deposit accounts and MMFs, as well as banks that invest in MMFs. The guidance highlights compliance, liquidity, operational and strategic risks the OCC has identified. The OCC added that it expects banks that make MMFs available to fiduciary and custody customers to “actively monitor rule changes and [Securities and Exchange Commission] guidance in this area.”

The SEC in 2014 amended regulations of MMFs, keeping the $1 per share valuation for retail and government funds, imposing redemption fees and limitations on retail and prime funds, and imposing a floating net asset value on prime funds. The rules also required an enhanced disclosure regime, which took effect in April. The new rules imposing a floating net asset value on prime MMFs are scheduled to take effect on October 14. The floating NAV does not apply to retail MMFs that are solely made available to “beneficial owners” who are natural persons, however. As a result, the OCC said, banks that make MMFs available to customers through fiduciary or custody activities should seek legal advice and structure their systems to ensure that that accounts not beneficially owned by natural persons do not purchase retail MMF shares.

The OCC also said banks should establish systems and processes to implement redemption limitations and fees when MMFs do and plan for the effects on the bank’s liquidity if banks make funds available to customers before actually received from MMFs and redemption limits are put in place. To handle the floating NAV, bank systems will need to report and process transactions to four decimal places and have processes to trade and settle orders within the timeframes established by the MMFs.

As for banks that sweep funds awaiting investment or distribution into MMFs, the OCC said it expects that only government MMFs would be used by banks for sweep arrangements due to “operational and liquidity considerations.” Finally, the OCC advised banks that hold MMFs on their balance sheets to ensure that they remain eligible for purchase and that they do not hold retail MMFs among the bank’s own investments. For more information, contact ABA’s Chris Naser or Phoebe Papageorgiou.