The fight over further regulation of money market funds continues strong, albeit in “he said, she said” fashion. This week Federal Reserve Bank of New York Staff issued a study showing how financial institutions rely too much on MMF for financing, which makes the banking system unstable.
Meantime the Investment Company Institute sent a comment letter to the Financial Stability Oversight Council saying that its November proposals are flawed and could do irreparable harm to the MMFs, if not kill the industry entirely.
Both side of the MMF issue – industry and regulators, including the Fed, the Security and Exchange Commission and the FSOC – have been trading shots over tightening regulations on MMFs for several years. In 2010, the industry agreed to amendments to Rule 2a-7 of the Investment Company Act of 1940, which included shorter-dated assets, higher credit quality to those assets, overall improved liquidity as well as periodic stress tests. The ICI and others involved, including leading fund managers and regulators, felt the rules significantly increased the resilience of money market funds. But as regulators are often wont to do – they wanted do more.
More recently, many of the largest MMF managers announced that they would begin publishing “shadow” daily net asset values on their websites. This ostensibly was to show that the NAVs of MMFs really don’t move all that much, whether fixed or floating. Peter Crane of money fund research firm Crane Data noted at the time of the announcements that the assets in most funds were of such high quality and so short term that they wouldn’t move far from the “buck” level, no matter what happened.
Still, the volleys continue. In its Staff study, the Fed noted that MMFs have become “key providers of short-term funding, especially to the financial sector” – i.e., they’ve become intermediators. As such, in 2012 they were “among the largest investors in some asset classes, financing 43 percent of financial commercial paper and 29 percent of certificates of deposit.” This has a destabilizing effect, the Fed said. A banking system “intermediated through MMFs is more unstable than one in which investors interact directly with banks because MMFs are themselves subject to runs from their own investors.”
Like the FSOC and SEC, the Fed would also like to see MMFs more regulated, particularly by implementing a floating NAV regime, hold-backs and buffers, all of which regulators believe would prevent the runs they are so worried about. But the industry says that these rules will not put an end to runs. Said T. Rowe Price in its own letter to the FSOC:
“FSOC indicates that it believes a floating NAV would address the run risk inherent in the current structure of money funds and would change investor expectations that they would not bear any risk of loss. We disagree with these premises, and are not aware of any concrete data that has been shown to support them. More specifically, we believe the weight of evidence and past experience indicate that any reforms that impact the structure of money market funds should exclude Treasury money funds, US government money funds, tax-exempt money funds and retail prime money funds, and thus would be limited to institutional prime money market funds.”
For its part, the ICI, also rejects many of the conclusions of the Fed and other regulators, most notably the FSOC. In its letter to the latter, the ICI said that first any regulation should preserve the key features that make money market funds “so valuable and attractive to investors.” Second, industry and regulators should “preserve choice for investors by ensuring a continued robust and competitive global money market fund industry.”
“Unfortunately… [the] FSOC’s proposals are altogether at odds with these objectives. Rather, the proposals are of a nature that would eliminate or minimize the utility of these funds to investors, and would impose burdens on fund sponsors and intermediaries likely to impel many, if not most, to exit the business. Moreover, FSOC’s proposals would not achieve the very goals that FSOC has articulated for itself.”