In November 2012, the Financial Stability Oversight Council (FSOC) offered its recommendations on reforming money market mutual funds (MMFs). In its proposal, the FSOC examined three alternatives: requiring MMFs to implement a floating, rather than stable, net asset value (NAV) per share; keep stable net asset values, but require a buffer as well as a minimum balance at risk; or keep a stable net asset value, but with a buffer and other measures.
The FSOC asked for comments on its proposals, and recently received some. A letter from the presidents of the 12 Federal Reserve banks – unusual in itself – starts by noting that “the conduct, nature, size, scale, concentration and interconnectedness of MMFs’ activities and practices could create or increase the risk of significant liquidity and credit problems spreading among bank holding companies, nonbank financial companies, and the financial markets of the United States.” The letter goes on to say that “fundamental change to the current MMF structure is necessary.”
The letter says its comments focus primarily on prime MMFs, as those contain the greatest risk. It describes these as MMFs that invest substantially in private debt instruments, like commercial paper and certificates of deposit.
As a starting point, under any reforms, market-based NAVs (also referred to as shadow NAVs) need to be computed accurately. That would mean MMFs valuing all fund assets at market value, rather than amortized cost. The Fed letter also expresses support for more frequent reporting of portfolio holdings. Right now, funds need to report portfolio information by five business days after month end. Daily or weekly reporting “would ensure that investors are well informed as to what assets are in the fund, and may reduce contagion effects from one fund breaking the buck,” the letter states.
In examining the three alternatives offered in the FSOC’s November proposal, the Fed presidents say “that more than one MMF reform alternative could address the financial stability concerns posed by MMFs.” The letter provides an example: Fund sponsors could offer both a floating NAV fund and a stable NAV fund with a capital buffer.
The industry, perhaps not surprisingly, sees things a little differently. In a January letter to the FSOC, the Investment Company Institute expressed its support for “liquidity gates,” stating, “we would support FSOC’s recommending that the SEC propose requiring a prime money market fund to impose a liquidity ‘gate’ if its ‘weekly liquid assets’ fall to a specific, objective ‘trigger point.’” Such gates would automatically be imposed after the close of business to suspend redemptions received for processing the next business day.
The ICI letter railed against the FSOC’s other proposed changes, stating, “the other recycled regulatory proposals FSOC suggests would not accomplish regulators’ stated goals and, in fact, would be counter-productive in light of the harm they would inflict on investors and the economy.”
The Fed presidents had this to say about redemption gates: “Standby liquidity fees and temporary redemption gates may increase the potential for industry-wide runs in times of stress, and therefore do not meet the Council’s reform requirements,” their letter states.
A January letter to the FSOC from SIFMA, or the Securities Industry and Financial Markets Association, was a bit more measured than the ICI letter. SIFMA would consider more frequent public disclosure of information on portfolio holdings and market value per share, it states.
The SIFMA letter also states that many of its members support continuing stable net asset values, rather than moving to floating NAVs. At the same time, if meaningful discussion of a potential move to floating NAVs is to occur, the tax and accounting issues such as move would precipitate need to be specifically outlined. The FSOC’s proposal, however, leaves this for a future date, SIFMA’s letter points out. SIFMA’s letter also mentions redemption gates as a possible reform.