The Security and Exchange Commission's proposed regulations
for money-market mutual funds, which include a floating NAV in one scenario and gating and liquidity fees in another, are causing anxiety for some corporate treasury departments.
While it is the nature of risk managers to be cautious of all potential sources of risk, including potential regulatory activity—and rightly so, given historical market turbulence—I believe this particular case is different, and should be viewed as such for several reasons.
First, the new proposals are part of a preemptive attempt by the SEC to enhance already sound legislation put in place after the 2008 financial crisis. As we all know, much of the chaos centered around money-market funds (MMFs). Treasurers lacked the transparency necessary to make sound decisions around their MMFs and thus elected to exit, at least temporarily, rather than risk further issues. That sparked a run on MMFs, which understandably concerned regulators.
Rule 2a-7 amendments enacted in 2010 proved over time to be calming and beneficial for MMF investors. In fact, the 2010 amendments, including higher liquidity requirements, greater fund transparency and more frequent reporting, triggered the rapid growth of exposure analytics and overall fund transparency, putting the controls and power into the hands of corporate treasury.
In effect, the Rule 2a-7 amendments helped to disintermediate the outdated risk management model operated by the credit rating agencies, banks and insurance companies. At a minimum, it created a permanent spotlight on money fund risk management for treasurers, who are now fully aware and armed with the tools necessary to manage the risks appropriately. In the current proposal, the SEC showed respect for its constituents and even-handedness in articulating the issues surrounding money-market funds—especially the importance of preserving their functional benefits for lenders and depositors.
Second, given the historical regulatory process, it will be some time before any of the proposed language makes its way into corporate America. It is expected that this regulatory process will take many months, if not years, before any new rules become law. History tells us that there are likely to be additional changes, new developments, and further debate before any determination is reached. Fundamentally, it would likely be 2015 before any real substantive changes—particularly the floating NAV—could be implemented.
Finally, the current arguments for keeping MMFs fundamentally unchanged have been demonstrably more compelling than the arguments for further sweeping regulation. Money-market funds are too strong, too efficient and too stable to merit more changes. Government regulators, the Treasury Department and the Federal Reserve have had little success in substantiating MMF susceptibility to runs. MMFs remain strong because of their superior design and construct. Tampering with them places too great a risk in damaging the viability of the short-term credit marketplace.
In 2008, the U.S. credit crisis had an enormous impact on global economies but the bubble didn’t happen overnight and MMFs weren’t to blame. As Treasury Strategies’ Anthony Carfang argues, “By August of 2008, only two major liquidity-related asset classes remained standing—U.S. government securities and money market funds.” Even as the credit crisis continued, MMFs remained as the preferred flight to quality investment.
I am convinced that further study and analysis will reconfirm that MMFs are uniquely resilient as they are and that they are necessary and vital investments to local and state governments and corporations across the U.S.
ICD is on record against the floating NAV and continues to believe it is against the best interest of the money-market community. However, I believe the gating and liquidity components warrant further investigation and could provide additional support in the right context. Still, there is ultimately no compelling evidence to support fundamental changes to MMFs.
For these reasons, treasurers should not have to react to the proposals, but rather take the time to voice their opinions and shape the outcome, while simultaneously preparing for possible alternatives.Thomas C. Knight, CCM, is senior vice president and treasurer of ICD, an institutional investment and risk management company.