The Group of Thirty, a "private, nonprofit, international body composed of very senior representatives of the private and public sectors and academia" recently issued a publication entitled, "Financial Reform, a Framework for Financial Stability," which contains suggestions that, if implemented, would change money market funds dramatically and could threaten the very existence of the money fund business.
The report's introduction says, "The report addresses flaws in the global financial system and provides 18 specific recommendations to: improve supervisory systems by redefining the scope, boundaries, and structure of prudential regulation; enhance the role of the central banks; improve governance practices and risk management; address pro-cyclicality via capital and liquidity standards; enhance accounting practices; strengthen the financial infrastructure; and increase coordination internationally. The project was led by Paul Volcker, Chairman, and Tommaso Padoa-Schioppa and Arminio Fraga Neto, Vice Chairmen."
Under the subtitle, "Money Market Mutual Funds and Supervision, Recommendation 3," the report suggests, "Money market mutual funds wishing to continue to offer bank-like services, such as transaction account services, withdrawals on demand at par, and assurances of maintaining a stable net asset value (NAV) at par should be required to reorganize as special-purpose banks, with appropriate prudential regulation and supervision, government insurance, and access to central bank lender-of-last-resort facilities."
It continues, "Those institutions remaining as money market mutual funds should only offer a conservative investment option with modest upside potential at relatively low risk. The vehicles should be clearly differentiated from federally insured instruments offered by banks, such as money market deposit funds, with no explicit or implicit assurances to investors that funds can be withdrawn on demand at a stable NAV. Money market mutual funds should not be permitted to use amortized cost pricing, with the implication that they carry a fluctuating NAV rather than one that is pegged at US$1.00 per share."
We encourage money fund participants, customers, and supporters to express their displeasure with these recommendations, as they could endanger the very existence of the almost $4 trillion money fund industry. A change of this magnitute could cause severe trauma and repercussions in the broader financial markets, and would deny consumers one of the most efficient, effective and popular means of parking cash.
