Just weeks after U. S. Securities and Exchange Commission (SEC) Chairman Mary L. Schapiro canceled a vote on her proposals to address the susceptibility of money-market funds (MMF) to runs, Treasury Secretary Timothy Geithner added new fuel to the proverbial fires.
In a letter to the Financial Stability Oversight Council (FSOC) on September 27, Geithner acknowledged that MMFs were a “significant source of short-term funding for businesses” and agreed that MMFs “provide an important cash management vehicle for both institutional and retail investors” but called for the FSOC to begin the process of regulating the funds in the event that the SEC is “unwilling to act in a timely and effective manner.”
The FSOC was created by the Dodd-Frank Act to make recommendations to enhance the integrity, efficiency, competitiveness and stability of U.S. financial markets; promote market discipline; and maintain investor confidence. With an additional focus on financial risk, the FSOC could identify individual fund companies for heightened scrutiny by the Federal Reserve and possibly deem them to be systemically important. Similarly, the Fed also could limit the exposure of banks to the money-market funds that buy their short-term debt.
Geithner urged the FSOC to “use its authority under Section 120 of the Dodd-Frank Act to recommend that the SEC proceed with MMF reform.” Further, he suggested that the Council issue a set of options for reform for public comment and provide a final recommendation to the SEC which would then be required to adopt the recommended standards or explain in writing why it had failed to act.
Geithner indicated that he would like the FSOC to vote on his recommendations and take action during their next meeting in November. However, no specific date has been set. It is expected that the meeting and possible vote will occur after the elections—which could themselves have a major impact on future actions.
In his letter, Geithner laid out three reform options that he would like the FSOC to consider at their November meeting. Those options are:
- Float the net asset value (NAV) by removing the special exemptions that allows them to use amortized-cost accounting and rounding to maintain stable NAVs
- Require MMFs to hold a capital buffer of adequate size to absorb fluctuations in the value of their holdings that are currently addressed by rounding the NAV
- Imposing capital and enhanced liquidity standards, potentially coupled with liquidity fees or temporary “gates” on redemptions that may be imposed.
Additionally, Geithner says that he would be open to “alternative approaches that satisfy the critical objectives of reducing the structural vulnerabilities inherent in MMFs and mitigating the risk of runs.”
AFP has been vocal on this issue and our members have provided formal comments to policymakers to explain the impact that MMF proposals would have downstream on both their investment choices and on their sources of funding.
AFP argued that such changes to MMFs would greatly reduce investors’ interest in utilizing MMFs as a cash management and investment tool, whether applied to all investors or just institutional investors. For purchasers of MMFs, the return of principal is a much greater driver of the investment decision than the return on principal. For a large number of institutional investors, the potential of principal loss would preclude floating NAV MMFs from being an internally approved investment alternative.
In June and July 2012, AFP released the results from its 2012 AFP Liquidity Survey, which found that organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings in MMFs in their short-term investment portfolio under three regulatory reform proposals, which were reported to be under consideration by the SEC at the time.
Survey results indicated that:
- 77 percent of companies would stop investing if the NAV were allowed to float, with 56 percent immediately liquidating all or some of their current MMF holdings
- 80 percent of companies would stop investing if MMFs were subject to redemption holdback provisions, with 73 percent immediately liquidating all or some of their current MMF holdings and
- 66 percent of companies would stop investing if fund companies were required to raise reserve capital (e.g., through fees), with 55 percent immediately liquidating all or some of their current MMF holdings.
AFP will continue to monitor this issue and provide updates as they occur. To learn more about AFP’s position on MMFs and stay in tuned in to the latest developments, visit the Money-Market Fund Resource page at www.afponline.org/moneyfunds.