The Financial Stability Oversight Council (FSOC), tasked with overseeing the stability of the U.S. financial system under the Dodd-Frank Act, approved three possible recommendations Tuesday—any one of which would drastically restructure money market funds (MMFs) if enacted. The FSOC’s recommendations, which closely mirror a stalled proposal touted by Securities and Exchange (SEC) Chairman Mary Schapiro and echoed by Treasury Secretary and FSOC Chairman Timothy Geithner, prompted immediate pushback from mutual fund representatives and businesses that rely on MMFs.
The FSOC’s three alternative recommendations include:
- Requiring MMFs to trade under a floating new asset value (NAV), thereby removing their current status fixed to a stable NAV of $1.00.
- Permitting MMFs to maintain a stable NAV, while holding a capital buffer of up to 1 percent of the fund's assets and requiring a marginal percentage be withheld from immediate investor redemption.
- Permitting MMFs to maintain a stable NAV, while holding a 3 percent buffer of the fund's assets for explicit loss-absorption, as well as additional measures, including diversification of fund investments.
Following a 60-day public comment period, FSOC will issue a final recommendation to the SEC, requesting, once again, that the agency take action. If the SEC fails to do so, FSOC could exercise its authority to declare MMFs systemically important and place them under the oversight of the Federal Reserve.
Impact on treasurers
Nilly Essaides, who has covered corporate treasury for 20 years as an author and expert, believes the new MMF regulations combined with low interest rates will make it harder for treasurers to achieve yield without making some changes to investment strategies.
“While levels of cash continue to rise far above what companies need for immediate or even medium term operating requirements, the appetite for risk among even cash-rich companies continues to be moderate to low, based on recent conversations I've had with treasurers,” she said. “With the exception of a handful of companies that are extending duration and diversifying their asset classes, the majority seem resigned to staying with the confines of MMFs and government-guaranteed instruments—directly or not.”
As MMF companies and banks reassess their own liquidity
and capital requirements, Essaides believes they may find that they will have to place a value on
the option to access liquidity. "You can think of it in terms of a stable dollar
'put,'" she said. "What remains to be seen is how
much is that put worth and who pays for it."
With the push to overhaul MMFs contingent upon removing the very incentives that encourage their use by businesses and investors for liquidity and capital management, AFP will continue to oppose efforts to undermine the basic utility provided by MMFs. In this regard, AFP will soon issue a comment letter reaffirming our position.