The Financial Times continues its odd fascination the heavily U.S.-centric money market mutual fund sector with two articles Sunday, "No let up for money market funds" and "Plan to ban money fund bailouts." In a first for major media coverage, the FT questions the effectiveness and collateral damage of proposed reforms, writing, "Mary Schapiro, chairman of the US Securities and Exchange Commission, tried and narrowly failed to push through tougher reforms that would either force funds to abandon their fixed $1 share price or restrict liquidity by requiring funds to set aside a capital buffer, possibly combined with restrictions or penalties on withdrawals. These proposals were fiercely opposed by the industry, but their demise has brought little cheer; other regulators such as the Financial Stability Oversight Council have instead taken over the reform baton. Europe's regulators are also on the case."
The first article explains, "Emil Paulis, a director at the European Commission, said recently the Commission had a "firm intention" to overhaul the rules. Paul Tucker, a deputy governor of the Bank of England ... dismisses money market funds as "narrow banks in mutual fund clothing". Now, as we report in this issue, the European Systemic Risk Board, set up post-crisis to monitor risks to the financial system, is keen for a piece of the action. Indeed, money market funds are considered so vitally important that they are the subject of the ESRB's first “occasional paper"."
The FT adds, "Some of the proposed reforms may make sense. Penalties for withdrawals during periods of market stress, such as an unrecoverable liquidity fee, proposed by HSBC, would remove the bulk of the first-mover advantage that early escapees from a constant net asset value fund might hope to capture, although this might need to be backed by the power to limit withdrawals in a full-blown crisis. Abandoning the CNAV structure full stop would appear to make sense, as these are investment funds. But given that some variable NAV funds experienced runs and needed sponsor support during the crisis, it is unclear what it would achieve."
The article ends, "However, the greatest oversight is that very few of the regulatory reviews even attempt to analyse what the effects of their proposed reforms would be. Money market funds have traditionally been the major provider of short-term financing to banks. If regulators are going to propose further changes they should first commission independent impact studies of the likely ramifications. Hobbling banks further might please populists but it isn't going to help anyone’s economy grow faster."
In its other piece Sunday, the Financial Times comments, "European regulators are believed to be exploring controversial plans to ban managers of money market funds from bailing out investors if their funds suffer a loss. Such "sponsor support" has proved crucial to the stability of the $4.1tn money market fund industry, which is a vital source of short-term funding for banks, governments and companies."
The article explains, "[T]the European Systemic Risk Board, an EU-wide body established in 2010 to monitor risks to the continent's financial system, is believed to be readying a consultation on whether sponsor support should be outlawed. The ESRB declined to comment but in a paper published in June said that "uncertainty about availability of [sponsor] support", which although often expected is not guaranteed, "may have fuelled runs" on money market funds."