Despite opposition from corporate practitioners, money fund organizations, municipalities and others, Federal Reserve Governor Daniel Tarullo and Boston Fed President Eric Rosengren voiced their support for further regulation of money market funds, and even offered some alternative solutions if those rule changes are not enacted.
In a speech on June 12, Tarullo expressed support for the proposals by SEC Chairman Mary Schapiro—a floating NAV, capital requirements, and restrictions on redemption—though he acknowledged other roads could be taken if said rules were unable to be enacted. One of those “second best alternatives,” he said, is the recent suggestion by Bank of England Deputy Governor Paul Tucker that regulators “consider setting new limits on banks’ reliance on funding provided by money market funds.”
Bloomberg reported that Rosengren is also “very supportive” of the SEC's push for further MMF regulation, though he is not sure if it will happen. Speaking on June 29 at the Conference on Post-Crisis Banking in the Netherlands, he said that if the rules are not enacted, it might be prudent to focus on bank-sponsored MMFs, which hold over half of the MMF assets in the U.S. “Based on the historical experience of their money-market funds, the historical experience of similar funds, and their money-market funds’ exposures, sponsors could calculate the likely capital support needed from the organization in a stress scenario,” he said.
Rosengren suggested the Fed expand the stress tests it uses to measure the health of banks to include MMFs. “Increasing the focus of stress tests beyond safety and soundness of individual institutions to more systemic concerns and implications—such as how markets and institutions behave during periods of stress—is an under-researched area that deserves more attention,” he said.
The five commissioners of the SEC have been presented with a staff proposal that would give money funds the choice between a floating NAV or holding more capital. A vote could come as soon as this month. Republican members Troy Parades and Daniel Gallagher and Democrat Luis Aguilar are opposed to the rules. However, former SEC Chairman Harvey Pitt said that opposition could wane if the Fed throws its support behind the proposed rule changes.
AFP asked Jim Gilligan, CTP, assistant treasurer of Great Plains Energy Inc., and an AFP board member, whether full support from the Fed would make implementation of the new rules is a certainty. “Not at all,” said Gilligan, who testified before Congress in May on MMF regulation. “I know that there is much concern in both houses of Congress on these rules and additional discussion is likely.”
Last month, AFP released preliminary results from its 2012 AFP Liquidity Survey, which found that organizations would be less willing to invest in MMFs and/or would reduce or even eliminate their holdings of MMFs under regulatory reforms supported by Schapiro.