The "Gates" Are Closing: SEC Votes Through Money Market Reform

Tyler Durden's picture

It was nearly five years ago when Zero Hedge first wrote: "This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied" in which we predicted as part of the ongoing herding of investors away from every other asset class and into stocks, regulation will be implemented to enforce that "money market fund managers will have the option to 'suspend redemptions to allow for the orderly liquidation of fund assets" or in other words implement redemption "gates." The logic: spook participants in the $2.6 trillion money market industry with the prospect of being gated (i.e., having no access to ones funds) and force them to reallocate funds elsewhere.

Moments ago the gates arrived, when following a close 3-2 vote (with republican commissioner Piwowar and democrat Stein dissenting), the SEC adopted new rules designed to curb the risk of investor runs on money market funds, capping the end of a years-long heated debate between regulators and the industry dating to the financial crisis according to Reuters.

Among the changes, funds will have to switch to a floating share price instead of the current $1/share (hence the term breaking the buck). But the key part: "The SEC's rule will require prime money market funds to move from a stable $1 per share net asset value, to a floating NAV. It also will let fund boards lower redemption "gates" and fees in times of market stress."

And therein lies the rub, because the very presence of the "gate" effect will be enough to send money market investors rushing out (as they are all sophisticated enough to know that this fake, rigged market is a house of cards just waiting to come down) and into other asset classes.

Of course, it is the desire of the SEC, the Fed and the US Treasury that the one asset class picked as an alternative to money markets is equities: considering that the entire rally since 2009 has been on the back of the Fed and the primary dealers, with virtually none retail participation, the SEC decided it was about time to herd the "retail investor" out of the ZIRP "danger" of money markets and into the "safety" of an all time higher stock market where even Janet Yellen admits there is at least a biotech and a social media stock bubble.

Below are some of the concerns voice by one of the objectors, Kara Stein, via Bloomberg which incidentally are all spot on:

Redemption gates are the “wrong tool to address risk,” said SEC Commissioner Kara Stein during open meeting.

Fear incentives will result in “greater chance of fire sales in times of stress and spread panic to other parts of the financial system while denying investors and issuers access to capital”

  • “Money market funds are only one part of wholesale funding markets that need to be strengthened”
  • In the event the gate imposed increases, investors have a “strong incentive to redeem ahead of others”
  • While a gate may be good for one fund, “it can be very damaging to the financial system as a whole”
  • When the gate for a fund is used, it doesn’t mean the “impact on wholesale funding markets will be prevented”

She is spot on. But forget about our opinion, or even that of the SEC, because while on the surface this now enacted proposal to establish withdrawal limits is spun as benign, it was the Fed itself who warned in April of 2014 that "the possibility of suspending convertibility, including the imposition of gates or fees for redemptions, can create runs that  would not otherwise occur... Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs."

Clearly, everyone understand that the only purpose behind implementing "gates" is to redirect the herd. And with some $2.6 trillion in assets, money markets can serve as a convenient source of "forced buying" now that QE is tapering if only for the time being. The only question is whether the herd will agree to this latest massive behavioral experiment by the Fed, and allocate their funds to a stock market which is now trading at a higher P/E multiple than during the last market peak.

And should this particular exercise in inflating stock bubbles fail, then gating bond funds, another "reform" which as we reported last month is in the works, should certainly force equities to unseen bubble proportions.

On the other hand, a blow off top in which the S&P rises by a few hundred points in weeks if not days may be just what this market needs for its final catharsis before everyone realizes just how insane centrally-planned things have gotten, and the long-delayed reset can finally take place.

* * *

For those curious, here is the section in Kara Stein's objection remarks dealing with gating:

... while the rule contains improvements, I believe it has a significant shortcoming – redemption gates.  I agree with the staff that a floating net asset value, even when combined with these other improvements and the 2010 amendments, is not a panacea.  Money market funds remain vulnerable to runs because investors will still have an incentive to redeem in a crisis.

However, after careful study, I am concerned that gates are the wrong tool to address this risk.  As the chance that a gate will be imposed increases, investors will have a strong incentive to rush to redeem ahead of others to avoid the uncertainty of losing access to their capital.  More importantly, a run in one fund could incite a system-wide run because investors in other funds likely will fear that they also will impose gates.  I share the concerns of many commenters and economists that while a gate may be good for one fund because it stops a run in that fund, it could be very damaging to the financial system as a whole.

Even further, while a run by investors in one fund may be halted when the gate for that fund is used, that does not mean the impact on the wholesale funding markets will stop.  To the contrary, a fund that drops a gate likely would need to build liquidity to meet redemption requests when the gate is lifted.  This means the fund is likely to stop re-investing maturing securities during the gated period, or will invest primarily in government securities, thereby cutting off funding to issuers.  This effect could be amplified by investors, who likely will redeem assets from other funds if one fund imposes a gate.  And if investors are not able to redeem before the gate comes down, they will be harmed as they are deprived of access to their capital. Ultimately, this contagion could freeze the wholesale funding markets in much the same way as occurred during the recent financial crisis.

I appreciate that the rule seeks to mitigate some of these concerns by allowing the fund’s board to impose gates at a higher liquid assets threshold than was proposed, by shortening the length of the gate, and by requiring daily disclosure of a fund’s level of liquid assets.  However, I do not believe that these changes adequately address the risk of destabilizing pre-emptive runs for the following reasons.

First, adding discretion that makes it easier for a fund to impose a gate could actually increase an investor’s incentive to redeem because it makes the use of a gate more likely.  This could be especially problematic in a crisis, when an investor’s preference to avoid uncertainty could be magnified.  Second, shortening the gating period to ten business days may only marginally decrease the incentive to redeem since even a ten business day gate is significant, particularly for corporate treasurers or other investors seeking to make payroll or meet other daily demands.  Third, while disclosure could help, it also could have the opposite effect by highlighting that a fund could be at or approaching a threshold that would allow it to impose a gate.

I also am not sufficiently persuaded by the argument that many investors with a low tolerance for gates will seek alternative financial products that are better aligned with their risk-return preferences.  While this could happen, it seems just as likely that those same investors will continue to invest in money market funds because they believe they will be able to redeem before a gate is imposed, or that sponsor support will prevent the gate from ever being used.  While the rule requires disclosure of sponsor support, it unfortunately does little to address the moral hazard that is created by it.

In the end, these are difficult issues with uncertain answers.  Ultimately, despite the rule’s efforts to mitigate the risks posed by gates, I believe the incentives to avoid them will remain powerful.  I fear these incentives may result in a greater chance of fire sales during times of stress, and a spread of the panic to other parts of our financial system, while also denying both investors and issuers access to capital.  I am, therefore, in the unfortunate position of not being able to support the rule that the staff recommends adopting today, despite some of its well-considered and thoughtful components.

Whatever the result today, money market funds are only one part of the wholesale funding markets that needs to be strengthened.  We and our fellow regulators need to take additional steps to improve the transparency and resiliency of these markets.  I look forward to working with the staff, my fellow Commissioners, and my fellow regulators on this more comprehensive and necessary project as we move ahead.

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hedgeless_horseman's picture

  1. Do not own CDs, nor use a checking or savings account.
  2. Do ask your employer if they will deduct and pay regular bills such as a mortgage.
  3. Do have a credit card, preferably issued by the same bank as your employer.
  4. Do minimize the monthly bills you pay (utilities) and purchases you make with this credit card.
  5. Do take your paychecks to your employer's bank and cash them.
  6. Do take some of your cash and pay off your credit card, entirely and timely, while at the bank.
  7. Do take other checks you may occasionally receive to the maker's bank and cash them.
  8. Do keep your cash some place safer than a bank (not hard to do) and invest in tangible assets.

Newsboy's picture

The emergency exits are being barred.

Please leave through the main entrance now, in an orderly fashion, as the movie continues...

Colonel Klink's picture

And while you're going through the exit, you can only take so much with you and you'll have to pay a fee/tax at the door before you're able to leave with your own money.

SoberOne's picture

Moon labe. But if you do try and take it, please don't shoot my dog.

espirit's picture


I do believe you meant "Molon."

Colonel Klink's picture

Or he was saying to come take his ass?  Just saying.

Save_America1st's picture

Thank you for "herding" us....right into shiny phyzz!!!

Keep stackin', bitchez...silver's on freakin' sale!!!

Save_America1st's picture

Because our government loves us and wants to protect us...


Stackers's picture

For a reminder it was an "electronic run on money market accounts" in September 2008 that sparked the financial meltdown


As explained by the Capital Markets Committee Chairman of the time Paul Kanjorski on CSPAN

The Feds had no problem shutting down and gauranteeing the money market system last time.


ShorTed's picture

Excellent question.  Hell even The Reserve Fund which "broke the buck" returned over .995/dollar after all was said and done. 

I'm curious why stocks didn't front-run the shit out of this vote if the desire is truly to push investors into equities.  And if they didn't buy the rumor, why aren't they buying the fact?

CheapBastard's picture

The Reserve Fund, one of the oldest, most conservative, most reputable MMF on Wall Street has my money safe and sound:


Sept. 16 (Bloomberg) -- Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.


They actually suspended redemptions even in their other funds for months. I know that as  FACT! I am not sure if people got all their money back from some of their Reserve funds.


Bottom line for those who impossibly don't know it yet:


"If you don't hold it, you don't own it."

Bananamerican's picture

"The only question is whether the herd will agree to this latest massive behavioral experiment by the Fed, and allocate their funds to a stock market which is now trading at a higher P/E multiple than during the last market peak."

Cash bitchez

CrazyCooter's picture

In the past, I got down voted for suggesting cash in a safe deposit box was better than a 0% checking account. It is simply the risk of a home fire/robbery vs a bank robbery. If the banks start drilling boxes en masse, there are probably bigger things to worry about.

So, what happens to companies that need piles of short term obligations to float their business, payroll, etc? Hold it in a checking account and risk a huge ass bail-in/haircut? Are they seriously supposed to move those funds into equities and have all kinds of volatiility risk?

I always kept thinking the end is just around the corner ... for years now ... but this is a hell of a mile marker ...



Fish Gone Bad's picture

I keep thinking, "Things are pretty fucked up.  I wonder how much more fucked up they can get." 

Apparently, as hard as it seems to be believe, things have indeed gotten a little bit more fucked up. 

Call it fucked-up++

CrazyCooter's picture

FU++ ... I love it!



Elvis the Pelvis's picture

I try to look on the bright side.  At least I don't live in Djibouti.  Bitchez.

Four chan's picture

i remember when the dollar was the gold standard. 

DirkDiggler11's picture

Unfortunately for the US Citizens Cooter, stupidity of our government employees knows no bounds and appears to be truly endless.

August's picture

Cooter is wise.

I don't travel to the US all that often, but I do keep a fair amount of USD available for eventualities.... locked in safe deposit box... in Canada.

WillyGroper's picture

I know 2 people caught up in that cluster. Their financial advisor, (both had the same one) was caught totally unawares. There was a few weeks their money was in limbo. They eventually were made whole.

I really don't think that will happen next time.

Jack Napier's picture

I'm curious why stocks didn't front-run the shit out of this vote if the desire is truly to push investors into equities. And if they didn't buy the rumor, why aren't they buying the fact?

Considering that they need to herd real consumers into the market, and that they are not buying the rumor; both points point to maximum frothiness achieved.

RockyRacoon's picture

I believe that the answer is that the people who care don't matter, and the people who matter don't care.

That is until Santelli gets hold of it and hits the bricks with a nice long rant, then all bets are off.

MsCreant's picture

Rocks, good to see you posting. 

Kirk2NCC1701's picture

Note that when the Rule of Law applies, "Possession is 9 10ths of the Law".

When it no longer applies, and is replaced by the Law of Rule, "Possession is 10 10ths of the Law".

Suggest you plan and act accordingly, if you want to keep your Possession.

Save_America1st's picture

I think they just yelled, "FIRE" in the theater...

Deathrips's picture

Klink..hes referring to the moon labia. Where a woman moons you and you see some beef.


At least thats what I thought...



Colonel Klink's picture

That's always their first step.  Oh wait, second step, violating your Constutitional rights is usually the first one.

CaptainObvious's picture

Actually, the second step is convincing you that you really don't need those dusty old rights, anyhow.  But have a greenie anyways. ;)

Kirk2NCC1701's picture

He who panics quietly first, panics best. - Kirk.

espirit's picture

If you're in the system, Get Out Now.

Just get out.

CaptainObvious's picture

+1  I read about Cyprus last March and immediately dropped everything and did my own personal bank run.  Hey, let's make that the next big Twitter trend:  #personalbankrun  How many social media sheep would even begin to understand that?  That was rhetorical, but I'll answer it myself:  zero.

Sinnedi's picture

Captain obvious I know the perfect place to put that and to start it up. 4chans /pol/ they started 2 trends that took off recently


daemon's picture

" If you're in the system, Get Out Now.

Just get out. "

Soon, your advice will simply mean :" commit suicide " , you know.

takeaction's picture

Well...the gates are closing on Gold and Silver too..  I just received an inheritance from my father passing and I wanted to buy some more metals for my boat trip at the lake...My favorite Gold place has gone out of business, but I just wanted some gold under the radar.  Good luck with that.  I have a substabtial amount of money to play with, and now here in Portland, Or...I don't know if this is Nation wide, but if I purchase more than $3000 dolllars of metal I have to fill out a Federal Form along with giving my ID.  I walked out.  I have made purchases through Ebay, and Apmex but this is all as you can see, it is ALL slowly being shut down.  Also, while I was in Costa Rica, I found out that Amercans are no longer allowed to open Bank Accounts.....things just keep going and going...and the average sheeple does not see the fence being built.  I understand that I can go to shops and buy a little bit at a time...over and over and over...but this is my money...why can't I do with it what I want without the entire world tracking it.  I work every day....Sorry for the rant...

vulcanraven's picture

If you go to coin shows, you can usually find a few dealers that will sell to you in cash without paperwork. Hope this helps

DoChenRollingBearing's picture



+ 1

Some coin dealers will let you buy over $3000 without an Invoice.  You can also:

1)  Buy say $1500 or so every couple of days

2)  Find other nearby coinshops

3)  Buy Bitcoin (let us know if it starts catching on in Costa Rica!)

bagehot99's picture

You can buy $1500 every couple of days but not from the same place - they want sellers to report a 'pattern' of purchasers buying gold in amounts less than the trigger. 

You know the 10 grand cash rule? It's the same. If someone deposits 9 grand cash more than once, the bank/insurance co/stockbroker is required to report it.

They're watching. Seriously. 

takeaction's picture

Exactly....I asked the coin store if I could come in ever couple days...NOPE...after you reach the $3000 threshold, they have to report you.  ABSOLUTLEY SICK.

Kaiser Sousa's picture

that is insane...
i have a local dealer that i used to buy from bi-weekly and never was asked to fill out shit...
but its because they r sound money men like us and will not abide by the banker controlled govt. bullshit...
find a guy like that....they're out there...

Bad Attitude's picture

Buy ammo in common calibers. Ammo will remain very fungible. Unfortunately, ammo is not as compact a store of value as gold or silver.
Forward (over the cliff)!

davidalan1's picture

Im so sick of this fucking drama..."buy ammo" fuck you idiot....sick of it..