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AFP Member Tells Congress: MMF Remedies ‘May Kill Patient’

  • By Konstantine Kastens, AFP Government Relations Coordinator
  • Published: 2013-09-19

AFP Government Relations Committee Chairman James P. Gilligan, CTP, told Congress September 18 that proposed changes to money-market fund (MMF) rules would damage a critical short-term financial source for treasurers.

It's "another case where the medicine may kill the patient," said Gilligan, assistant treasurer for Kansas City, Missouri-based Great Plains Energy Inc., a holding company of Kansas City Power and Light Company.

Gilligan gave his remarks before the U.S. House Financial Services Committee. He was joined by representatives from the MMF industry, municipalities and former Federal Deposit Insurance Corporation Chair Shelia Bair.

The proposed Securities and Exchange Commission (SEC) amendments to 2a-7, the rules governing MMFs, would remove amortized cost valuation for prime institutional MMFs, floating their net asset value (NAV), or impose gates and liquidity fees upon share redemption, or a combination of both. AFP believes any changes to 2a-7 must not eliminate the investment incentive that underlies MMFs' cash management function, and floating the NAV or setting redemption limitations would do just that.

Gilligan argued that the resulting cost of triggered investor withdrawal, accounting, tax and investment policy complications outweigh the effectiveness of the proposed changes aimed to thwart potential market runs.

As an issuer of commercial paper on behalf of his company, Gilligan further warned members of U.S. Congress that the almost half of all outstanding nonfinancial commercial paper purchased by MMFs could "drop significantly and the commercial paper market would be substantially less liquid," under the SEC proposals. Where his company can presently offer "interest rates to investors on our commercial paper in the current range of 30 to 70 basis points," he said, a constrained commercial paper market would force day-to-day liquidity needs to rely on the more costly alternative of bank credit facilities.

"On the investing side, corporations would be forced to withdraw from prime money market funds to ensure full access to their money," Gilligan said. "On the funding side, a decrease in 2a-7 capacity would lead to higher costs and less liquidity for commercial paper issuers."

Read Gilligan's full testimony here.

Read AFP's comment letter to the SEC here.

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All rights reserved.

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