Late last week, the Fox Business Network interviewed Federal Reserve Bank of Boston President Eric Rosengren, and the discussion included several minutes on money market funds. (The money fund-related comments start at 4:40 minutes on the video.) Fox Senior Washington Correspondent Peter Barnes said to Rosengren, "I do want to get to this money market fund issue. You've been very concerned about the health of money market funds, which have held a lot of European bank debt, for example, short-term funding from them. You've been critical of the industry. But the funds, if you look at the composition of their holdings, have been reducing their positions in Europe. They've been hedging more. What's your assessment of the money market mutual funds? What's your assessment of their health right now, of the risks to them right now?"
Rosengren answered, "I think they have changed their portfolios and some of the risks I was concerned about six months ago or a year ago in terms of their European exposure they have brought down the risk in those exposures, which I think is a very positive sign. There's still a structural issue that has to be addressed. The money market funds are agreeing to provide a dollar for every dollar you put in. But they don't hold any capital and they do take risks. So during times of stress, that structure is going to come under stress as well. So I still think there are structural things that have to be done to the industry. But we'll have to see if the SEC is able to do that."
Barnes continued, "So far it has not, which has led to some speculation that the Financial Stability Oversight Council, the FSOC, which includes the SEC, Chairman Bernanke, the Federal Reserve, and other regulators. If they don't see something out of the SEC, and all the regulators agree that they'd like to see something out of the SEC, there's been some speculation that the FSOC might declare money market systemically significant institutions, and thus subject to additional regulation. Do you think that's a good idea?
Rosengren replied, "The current structure of money market funds poses a financial stability issue. We need to reduce that financial stability issue. No one wants to repeat the kind of experience that we had in 2008. I think we'll have to see what the best way to make sure that those financial stability concerns are appropriately addressed. FSOC may be one direction to go, but I think there are other directions as well. And I'm still hopeful that the SEC may be able to take further action."
In other news, an announcement entitled, "Next Meeting of the Financial Stability Oversight Council (FSOC) says "Secretary Geithner will chair the next regularly scheduled meeting of the Financial Stability Oversight Council on Friday, September 28 in closed session at Treasury." There is no official word on whether money market funds will be a main item on the agenda.
The FSOC's description says, "Created by the Dodd-Frank Wall Street Reform and Consumer Protection Action, the Council provides comprehensive monitoring to ensure the stability of our nation's financial system. The Council is charged with identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system. The Council consists of 10 voting members and five nonvoting members and brings together the expertise of federal financial regulators, state regulators, and an insurance expert appointed by the President. More information about the Council is available at www.fsoc.gov."
Finally, note that many "offshore" money market fund providers are in Monaco this week for Europe's biggest corporate treasury show, the 21st annual International Cash and Treasury Management conference, which runs Sept. 26-28. (See Eurofinance.co.uk for more info.) Unfortunately, we won't be able to make it, but we hope the near-negative yields on E105 billion Euro money market fund marketplace don't put too much of a damper on the festivities.