BlackRock, the fourth largest money fund manager in the world with $235.0 billion and the seventh largest money fund manager in the U.S. with $140.5 billion (according to Crane Data's Money Fund Intelligence XLS and MFI International), hosted its Second Quarter Earnings Call yesterday. While CEO Larry Fink normally addresses money funds and gets questions on the topic, he only mentioned the cash space once on the most recent call. Just over 35 minutes into the call, Fink says, "Let me move on to regulatory. This uncertain regulatory environment and recent bank missteps in financial services will undoubtedly call for more regulation, and asset managers may be impacted. This is the new reality and BlackRock is trying to stay ahead of the curve in preparing for increased global regulation. Let me just discuss money market funds. Being in Washington yesterday, I believe we are going to see the SEC finally come out for comment period a proposal."
He continues, "I don't know what the proposal is, but I think the gridlock within the SEC may be broken. I may be premature in talking about it, but that is the kind of noise I heard in Washington. We have publicly acknowledged the need to further reduce the systemic risk in money market funds without undermining money market funds' source of value to investors and funding to the short term capital markets. We have maintained a constructive posture with the SEC and with the FSOC staff throughout this debate."
Fink adds, "[On] SIFI designation, the Office of Financial Research is conducting a study of assets managers. We have encouraged them to try to be more transparent in their study. The study should be completed sometime in fall and then there is going to be a lengthy comment period. So at this moment I don't have any information on what that means for Blackrock or any other non-bank organization and that is being reviewed with the Office of Financial Research. So at this time I can't give any more color on this. But we will learn at the same time everyone else learns when the official proposal is introduced by the FSOC."
In other news, the Financial Stability Oversight Council, or FSOC, released its 2012 Annual Report yesterday. It says, "Stable wholesale short-term funding markets are a critical component of a well-functioning financial system, but if they suffer disruptions, these markets can rapidly spread shocks across financial institutions. The Council continues to be particularly focused on structural vulnerabilities in money market funds (MMFs) and the tri-party repo market, as follows."
The FSOC writes on page 11, "The Council continues to support the implementation of structural reforms to mitigate the run risk in MMFs.... [T]he SEC's 2010 reforms did not address -- and were not intended to address -- two core characteristics of MMFs that continue to contribute to their susceptibility to destabilizing runs. First, MMFs have no mechanism to absorb a sudden loss in the value of a portfolio security, without threatening the stable $1.00 NAV. Second, their continues to be a "first mover advantage" in MMFs, which can lead investors to redeem at the first indication of any perceived threat to the value or liquidity of the MMF."
They continue, "SEC Chairman Schapiro recommended two alternative reforms to address these remaining structural fragilities. They are (1) a mandatory floating NAV; and/or (2) a capital buffer to absorb losses, possibly combined with a redemption restriction to reduce the incentive to exit the fund. The Council supports this effort and recommends that the SEC publish structural reform options for public comment and ultimately adopt reforms that address MMFs' susceptibility to runs."
Finally, FSOC adds, "In addition, the OCC issued a proposed rulemaking in April 2012 that would partially align the requirements for short-term bank common and collective investment funds (STIFs) with the SEC's revisions to Rule 2a-7 under the Investment Company Act. In an effort to impose comparable standards on comparable financial activities, the Council further recommends that, where applicable, its members align regulation of cash management vehicles similar to MMFs within their regulatory jurisdiction to limit the susceptibility of these vehicles to run risk." (FSOC also addresses the "Tri-Party Repo Market.")