Seeing their attempts at money market reform stuck in a rut indefinitely, the Financial Stability Oversight Council is considering a drastic, seemingly end-around measure to move supervision to the Federal Reserve.
After meeting a closed-door meeting on December 13, the FSOC reportedly said it might consider designating some large money market funds as “significantly important,” which would put them under the jurisdiction of the Fed. By law that is about as much as the council can do, although it would be unprecedented and drastic.
The Council for months has been pushing the Security and Exchange Commission to implement tough new regulations for MMFs, including a floating net asset value regime, hold backs and capital buffers; it even endorsed these measures with a unanimous vote on November 14. However, the SEC has been split over the new rules and in August, its Chairman, Mary Schapiro, cancelled what would have surely been a losing vote on the measures.
Undoubtedly frustrated, the 10-member FSOC, led by Treasury Secretary Timothy Geithner, is now considering the SIFI route. Interim SEC Chairman Elisse Walter does have a lot on her plate, dealing with likes of the Volcker Rule, high-frequency trading, the future of international accounting rules, expanded disclosure in the municipal bond market, legal challenges to Dodd-Frank Act provisions, among other challenges. So movement on MMFs looks doubtful and thus the SIFI treatment.
“The FSOC doesn’t have the authority to just say, ‘OK, all money market funds have to float the NAV,” said Lance Pan, Director of Investment Research & Strategy at Capital Advisors Group. “They’re not the primary regulator.”
The FSOC’s mandate, established by Dodd-Frank, is wide ranging and includes mainly supervisory powers. Its role in supervision has the broad supervisory authority to designate individual funds, sponsors or advisers as systemically important. If this were to happen, large money market funds would then be subject to stringent supervision by the Federal Reserve and potential capital requirements.
The FSOC is made up of the heads of 10 federal and state regulatory agencies, including the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, Office of the Comptroller of the Currency, the SEC, Treasury and the new Consumer Financial Protection Bureau.
After the November 14 vote by the FSOC, the public had 60 days to weigh in, after which the FSOC would take the recommendations and make further recommendations to the SEC. If the SEC does not adopt them, the regulator has to explain why it was unable to come to an agreement on adopting the rules. With the voting down to two Democrats and two Republicans, they may end up having a lot of explaining to do.