Having met with failure in their last go-round to tighten controls of money market funds, global regulators are regrouping. On Thursday the Financial Stability Oversight Board (FSOC), under pressure from all sides, held a closed-door meeting likely to discuss the next steps or whatever it is they can do to impose unpopular rules like a floating net asset value regime, hold-backs and capital buffers.
The meeting comes on the heels of several weeks of noises from the US Treasury, Federal Reserve Governor Daniel Tarullo and the International Organization of Securities Commissions (IOSCO), all calling for a continued effort to regulate MMFs. Back in August, SEC Chairman Mary Schapiro failed to gather enough votes to put forth proposals restricting MMFs. That result came after intense lobbying from treasurers and others who have said the rules, particularly floating NAV, will kill the vehicles altogether.
But regulators are trying again. In late September Mr. Geithner sent a letter to members of the FSOC seeking their help (he’s the head of the commission, by the way) in pressuring the SEC to change its rules on MMFs. “Further reform to the MMF industry are essential for financial stability,” Mr. Geithner wrote, also acknowledging that they are important source of short-term funding for business. “However, the financial crisis of 2007-2008 demonstrated that MMFs are susceptible to runs and can be a source of financial instability with serious implications for broader financial markets and the economy.”
Mr. Tarullo, with seemingly tireless Inspector Javert tenacity, has consistently blamed shadow banking and indeed all banking for the problems in the markets. MMFs are part of that shadowy world and he supports efforts to regulate them. “As many of us in the government have pointed out, money market funds remain a major part of the shadow banking system and a key potential systemic risk even in the post-crisis financial environment,” Mr. Tarullo said in a speech at the University of Pennsylvania Law School. He also wants the US Congress to get involved, although many say this is unlikely.
The IOSCO also weighed in in the last week or so, releasing a final report, “Policy Recommendations for Money Market Funds,” that calls for more regulation of MMFs like the floating NAV proposals.
While these attacks have been building, the Investment Company Institute (ICI) and dozens of other organizations have been fighting back. The ICI, shortly after the IOSCO release, issued a statement from ICI President and CEO Paul Schott Stevens and ICI Global Managing Director Dan Waters. “It is disappointing that IOSCO’s report on money market funds endorses the false notion that constant net asset value (CNAV or “stable”) money market funds are more susceptible to runs than variable NAV (VNAV or “floating”) money market funds,” they wrote in response. “This claim is contrary to empirical evidence and analysis of the history of CNAV and VNAV money market funds, including the 2008 financial crisis.”
So the fight continues. There is some hope that the SEC will revisit the issue; but as it stands three of the five commissioners still don’t support the measures put for the by Chairman Mary Schapiro. At the time of the scuttle SEC vote, the opposing commissioners said the changes proposed by the Chairman “were not supported by the requisite data and analysis, were unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation’s financial system.” One of the commissioners, Daniel Gallagher, has since softened his tone and seems to be in support of some of the regs.