We learned from ignites about an Investment Company Institute comment letter entitled, "ICI Files Letter Regarding Banking Organizations' Regulatory Capital Proposals," which discusses potential changes to the risk-weighting treatment of money market mutual funds on bank's balance sheets. The letter, addressed to the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, and regarding the Basel III Capital Proposals, says, "The Investment Company Institute appreciates the opportunity to comment to the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation on the three notices of proposed rulemaking to implement the Basel III capital accords in the United States. ICI's comments focus on (i) the removal of the 7 percent risk-weighting option for equity exposures to money market funds under the Advanced Approaches NPR, (ii) the suggestion that this removal would subject money market fund exposures to a 20 percent risk-weight floor; (iii) the look-through approaches under the Standardized and Advanced Approach NPRs and, in particular, their application to investments in money market funds; and (iv) the proposed deduction for investments in unconsolidated financial institutions. Each of these issues is discussed below." (See the original proposal, "Agencies Seek Comment on Regulatory Capital Rules and Finalize Market Risk Rule.")
ICI argues that "The 7 Percent Risk Weighting for Money Market Funds Should Be Retained," writing, "Section 54(e) of the Agencies' existing advanced approaches rules allows banking organizations to apply a 7 percent risk weight to equity exposures to money market funds that are subject to Rule 2a-7 under the Investment Company Act of 1940 and that have an external rating in the highest investment grade category. The Advanced Approaches NPR proposes to eliminate the 7 percent risk weighting, positing that money market funds demonstrated "at times, elevated credit risk" during the recent financial crisis."
The letter explains, "ICI strongly disagrees with the Agencies' proposal to eliminate the 7 percent risk weighting option for money market fund exposures and questions the scant rationale provided by the Agencies for doing so. In 2007, the Agencies adopted the 7 percent risk weighting for money market funds in express recognition of the "low risk" posed by such funds, which the Agencies acknowledged are subject to Rule 2a-7's “portfolio maturity, quality, diversification and liquidity" requirements. In ICI's view, this rationale continues to apply, and the Agencies have provided no data demonstrating to the contrary."
ICI continues, "Rather, in the wake of the financial crisis, which affected not only money market funds but most other financial services industry participants, the Securities and Exchange Commission took steps to enhance significantly the stability and resiliency of money market funds. Specifically, in 2010, the SEC revised Rule 2a-7 to make money market funds more resilient by, among other things, imposing new credit quality, maturity, and liquidity standards, and increasing the transparency of these funds, as well as requiring the funds to conduct extensive stress tests. In the SEC's words, these changes have made money market funds even more "consistent with the objectives of preserving principal and maintaining liquidity.""
The letter says, "All of the foregoing requirements are already in effect, and the cumulative effect of these reforms has been to improve meaningfully the safety and liquidity of money market funds, making money market funds even more appropriate for investment by banks. Notwithstanding these significant and important regulatory changes to money market funds, the Agencies do not acknowledge the changes or explain why the SEC's enhanced regulatory framework for money market funds is insufficient to address any concerns that the Agencies may have. In the absence of any such explanation, ICI believes that the Agencies' elimination of the 7 percent risk weighting for money market fund exposures is arbitrary, capricious, and unduly severe."
ICI General Counsel Karrie McMillan also tells the Agencies, "Under both the Standardized and Advanced Approaches NPRs, equity exposures to investment funds would be risk-weighted according to the Full, Simple Modified, or Alternative Modified Look-Through Approaches. These approaches essentially allow banking organizations to calculate risk weightings based on the underlying assets of, or permissible investments of, the investment funds in which the banking organizations invest. ICI supports the use of the Look-Through Approaches but urges the Agencies to ensure that banking organizations are able to utilize fully the Full Look-Through Approach. In particular, because the Full Look-Through Approach appears to require that a banking organization have extensive information about a fund's underlying investments on a "real-time" basis, any constraint on a banking organization's ability to access such information may prevent it from using this approach and may result in a less favorable capital calculation. This may be a practical issue for banking organization investments in money market funds. As noted above, money market funds publicly disclose certain portfolio holdings information on their websites within 5 business days from month end, and more detailed information (including mark-to market prices) through Form N-MFP 60 days after month end."
Finally, ICI adds, "To address this timing issue, a banking organization should be permitted to apply the Full Look-Through Approach to its money market fund investments in reliance on such funds' most recent public disclosures. Given the limitations of Rule 2a-7, the risk profile of money market funds will not change materially over any 35 day (or even a 60-day) period. Accordingly, banking organizations' use of public money market fund disclosures to conduct Full Look-Through analyses should not raise supervisory or safety and soundness concerns."