U.S. Treasury Secretary Tim Geithner, testifying at a House Financial Services Committee Hearing yesterday morning, discussed failures, financial regulatory reform, and "new requirements for money market funds to reduce the risk of rapid withdrawals." He says, "To address these failures will require comprehensive reform -- not modest repairs at the margin, but new rules of the road. The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market."
In a written statement, under "New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals," Geithner says, "In the wake of Lehman Brothers' bankruptcy, we learned that even one of the most stable and least risky investment vehicles -- money market mutual funds -- was not safe from the failure of a systemically important institution. These funds are subject to strict regulation by the SEC and are billed as having a stable asset value -- a dollar invested will always return the same amount. But when a major prime MMF "broke the buck," the event sparked a run on the entire prime MMF industry. The run resulted in severe liquidity pressures, not only on prime MMFs but also on financial and non-financial companies that relied significantly on MMFs for funding."
He continues, "In response, we commit to strengthening the regulatory framework around money market funds. We believe that the SEC should strengthen the regulatory framework around MMFs in order to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole less susceptible to runs."
Separately, U.S. Securities and Exchange Commission Chairman Mary L. Schapiro in "Testimony Concerning Enhancing Investor Protection and Regulation of the Securities Markets before the Senate Committee on Banking, Housing and Urban Affairs. says on the topic of "Regulation of Mutual Funds and Other Pools of Investor Money," "A particular focus of the Commission in coming weeks will be proposals to enhance the standards applicable to money market mutual funds, which are widely used by both retail and institutional investors as a cash management vehicle. The SEC has been closely monitoring money market funds and their investments, since we permitted the first money market fund in the early 1970s. Over that time, we have built up significant money market fund expertise. We will bring that expertise to bear as we act quickly this spring to strengthen the regulation of money market funds by considering ways to improve the credit quality, maturity, and liquidity standards applicable to these funds. These efforts will be aimed at shoring up money market fund investments and mitigating the risk of a fund experiencing a decline in its normally constant $1.00 net asset value, a situation known colloquially as 'breaking the buck'."
