Calls for limits on withdrawals as a disincentive for companies to take out all MMF cash.
The New York Federal Reserve recently released a paper that ratchets up the pressure on money market funds. The paper focuses on redemption restrictions on investor accounts to prevent runs on a bank.
It’s a variation on a theme the Securities and Exchange Commission has been proffering for several months. The paper introduces the concept of a “minimum balance at risk” (MBR) “that would provide a disincentive to withdraw funds from a troubled money fund.”
The Fed said the MBR would be “a small fraction” of each investor’s recent balances, which would be set aside when they withdrew from the MMF. “Most regular transactions in the fund would continue as before, but redemptions of the MBR would be delayed for thirty days,” the Fed said. “The delay would ensure that redeeming investors remain partially invested in the fund long enough to share in any imminent portfolio losses or costs arising from their redemptions.”
Treasurers of course hate the concept of limits to withdrawals – along with the “floating net asset value” of MMFs, which the SEC has been discussing, although not officially proposed, and requiring capital cushions. Many treasurers have said their companies would stop using MMFs if the proposals are adopted (see related story here). And a recent Association of Financial Professionals liquidity survey confirms this: “Financial professionals indicate that implementation of some or all of [SEC] proposals may cause their organizations to stop investing in MMFs and liquidate some, if not all, of their current MMF holdings,” the AFP said in its 2012 AFP Liquidity Survey.
Despite the ongoing pressure from regulators the industry has friends in Congress and in across the business spectrum. In April, two Republican House members, Rep. Spencer Bachus of Alabama and Rep. Jeb Hensarling of Texas sent a letter to SEC Chairman Mary Schapiro about the agency’s MMF ideas. The letter wondered how an agency that has already missed important deadlines on Dodd-Frank “is devoting time and resources to a discretionary rule without providing Congress or the public with empirical data and economic analysis to justify such a rulemaking.” The letter went on to remind the SEC that its mandate is to ensure that investors have all of the material information about an investment, not to engineer investments so that they are free of any risk.