BlackRock has released its own proposal for money market fund reform which would impose circuit breakers or Standby Liquidity Fees (SLF) on money fund investors in times of crisis. Under this proposal, if a money fund’s mark-to-market NAV falls to 99.75%, an SLF would automatically be imposed on any future redemptions from the fund. BlackRock recommends that the amount of the fee be twice the difference between mark-to-market NAV and $1. So, if the mark-to-market NAV fell to 99.70%, the fee would be 60 basis points (30 bps x 2). As BlackRock explains:
“The rationale for this fee is to create a positive cycle as clients redeem in place of a negative cycle. As each client redeems and leaves behind twice the deficit, the NAV for the remaining shareholders is strengthened. In a run today, redeeming shareholders can weaken the fund as they leave and the NAV begins to spiral downward further accelerating the run. With SLFs in place, the NAV would improve as people who leave are charged a fee, which would create a natural brake on a run, and investors remaining in the fund would be protected from the behavior of those who redeemed.”
Fund boards would be given the discretion to end the SLFs after an appropriate recovery of the fund, and after a determination that it is in the shareholders’ best interests to do so. In addition, any excess liquidity fees collected (i.e., revenue not used to restore the fund’s mark-to-market NAV to $1), would be paid to all shareholders of record on the last day in which the SLFs were in force. This provides an extra incentive for investors to stay with a fund during a difficult time.