Friday, October 22, 2010
The President’s Working Group on Financial Markets released a report this week on Money Market Fund Reform Options. Here is an excerpt from the Executive Summary:
The Treasury Department proposed in its Financial Regulatory Reform: A New Foundation (2009), that the President’s Working Group on Financial Markets (PWG) prepare a report on fundamental changes needed to address systemic risk and to reduce the susceptibility of MMFs to runs. Treasury stated that the Securities and Exchange Commission’s (SEC) rule amendments to strengthen the regulation of MMFs—which were in development at the time and which subsequently have been adopted—should enhance investor protection and mitigate the risk of runs. However, Treasury also noted that those rule changes could not, by themselves, be expected to prevent a run on MMFs of the scale experienced in September 2008. While suggesting a number of areas for review, Treasury added that the PWG should consider ways to mitigate possible adverse effects of further regulatory changes, such as the potential flight of assets from MMFs to less regulated or unregulated vehicles.
This report by the PWG responds to Treasury’s call.1 The PWG undertook a study of possible further reforms that, individually or in combination, might mitigate systemic risk by complementing the SEC’s changes to MMF regulation. The PWG supports the SEC’s recent actions and agrees with the SEC that more should be done to address MMFs’ susceptibility to runs. This report details a number of options for further reform that the PWG requests be examined by the newly established Financial Stability Oversight Council (FSOC). These options range from measures that could be implemented by the SEC under current statutory authorities to broader changes that would require new legislation, coordination by multiple government agencies, and the creation of new private entities. For example, a new requirement that MMFs adopt floating net asset values (NAVs) or that large funds meet redemption requests in kind could be accomplished by SEC rule amendments. In contrast, the introduction of a private emergency liquidity facility, insurance for MMFs, conversion of MMFs to special purpose banks, or a two-tier system of MMFs that might combine some of the other measures likely would involve a coordinated effort by the SEC, bank regulators, and financial firms.
Importantly, this report also emphasizes that the efficacy of the options presented herein would be enhanced considerably by the imposition of new constraints on less regulated or unregulated MMF substitutes, such as offshore MMFs, enhanced cash funds, and other stable value vehicles. Without new restrictions on such investment vehicles, which would require legislation, new rules that further constrain MMFs may motivate some investors to shift assets into MMF substitutes that may pose greater systemic risk than MMFs.
The PWG requests that the FSOC consider the options discussed in this report to identify those most likely to materially reduce MMFs’ susceptibility to runs and to pursue their implementation. To assist the FSOC in any analysis, the SEC, as the regulator of MMFs, will solicit public comments, including the production of empirical data and other information in support of such comments. A notice and request for comment will be published in the near future. Following a comment period, a series of meetings will be held in Washington, D.C. with various stakeholders, interested persons, experts, and regulators.