The Investment Company Institute says SEC-mandated reforms of 2010 have made MMFs safe enough.
Money market funds have shown their resiliency in the face of continued shocks to the financial system in the last couple years and don’t need more regulation. That’s the conclusion of a recent Investment Company Institute (ICI) study on the impact of those reforms.
With its study the ICI likely is looking to slow any movement toward more regulation – most notably a floating net asset value regime. Recently a number of MMF companies began publishing the daily NAV’s of their funds, which some have said presages coming implementation (see related story here). Also possible are capital buffers and holdbacks.
The ICI study, Money Market Mutual Funds, Risk, and Financial Stability in the Wake of the 2010 Reforms, says that neither the debt ceiling standoff nor the eurozone crisis were able to throw the MMF industry into chaos — as the financial crisis did in 2008. After 2008 and the Reserve Primary Fund’s “broken buck,” the Securities and Exchange Commission implemented a number of rules to make funds safer. These requirements included, among other things, shorter maturity limits, higher quality assets and periodic stress tests.
After being hit by the debt ceiling standoff deteriorating conditions in eurozone debt markets, the ICI study found that “money market fund managers reacted appropriately to both events and money funds were well positioned to manage the events due to new requirements in place.” According to the ICI study:
- Money market fund managers prepared for the likelihood that the U.S. federal government would default in 2011. Anticipating that concerns about the debt ceiling impasse might lead investors to redeem shares, both government and prime funds shortened their maturities in the weeks leading up to a key August 2011 deadline. Funds also maintained levels of liquidity well above new liquidity requirements.
- Money market funds gradually reduced their holdings to banks most exposed to the unfolding debt crisis in Europe. Money market funds also showed a careful and proactive response to the unfolding sovereign debt crisis in Europe during the 2011 market turmoil. Managers reduced their overall holdings of securities issued by banks in the eurozone from 30 percent of their assets in May 2011 to 11 percent by December 2011. In addition, the evidence shows that prime funds also reduced their exposures to other European banks that, although outside of the eurozone itself, were exposed to eurozone banks.
- Evidence from 2011 shows that prime money market funds took only marginally more credit risk than did Treasury-only money market funds.
ICI data show “that money market fund managers proved themselves careful stewards of their investors’ assets, adjusting their holdings in response to changing conditions and maintaining liquidity levels above those stipulated by the 2010 requirements,” the ICI said.
In terms of its view of MMF actions toward Europe during 2011, the ICI said it disagreed with the perception that MMFs squeezed European bank funding in 2011. It acknowledges that prime MMFs reduced their dollar holdings of eurozone banks (as per bullet two), “but these reductions were merely a small part of a months-long, market-wide withdrawal from eurozone banks that reflected deteriorating financial conditions and rising credit concerns in Europe.”
And according to Fitch Ratings, MMFs are now creeping back to Europe. According to its Fourth Quarter Review and Outlook, Fitch said that a “subtle return to the eurozone banks continued to gain momentum through November 2012.”
“During 2012, the European Central Bank‟s efforts to stabilize the eurozone markets resulted in increased investor confidence, as evidenced by a gradual increase of Fitch-rated MMFs‟ lending to eurozone banks,” Fitch said.