Measuring money... faster, cheaper, cleaner

The Comments on the FSOC's "Proposed Recommendations Regarding Money Market Mutual Fund Reform" keep coming, though the pace has slowed following the exension of the Council's original Jan. 18 deadline to the new February 15 date. The latest is a letter from T. Rowe Price Associates, the 21st largest manager of money market mutual funds (out of 71) with $15.1 billion in assets. T. Rowe's Edward Bernard writes, "In November 2012, the Financial Stability Oversight Council ("FSOC") published recommendations for structural reforms of money market funds. Those recommendations included three alternatives for consideration: (1) requiring money market funds to maintain a floating net asset value ("NAV"); (2) continuing to allow money market funds to maintain a stable NAV with a capital buffer and the maintenance of a minimum balance at risk ("MBR"); and/or (3) continuing to allow money market funds to maintain a stable NAV with a larger capital buffer and additional reforms designed to further mitigate portfolio risk and increase investor transparency. Our comments will primarily focus on alternative one, which would require money market funds to have a floating NAV per share by removing the special exemption that currently allows money market funds to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV. We would also like to make some general observations about the impact that such reforms may have on our money market funds."

The letter continues, "As an initial matter, we believe that the 2010 amendments to Rule 2a-7 under the Investment Company Act of 1940 significantly increased the resilience of money market funds. This resilience was confirmed during 2011 when money market funds withstood the volatile markets related to the escalation of the crisis in the Eurozone, a U.S. debt ceiling crisis, and a downgrade of the U.S. government's credit rating by a rating agency. Therefore, we do not believe that further structural money market reforms are necessary. However, if the FSOC is intent upon additional reforms, because such changes could be detrimental to shareholders and may have an impact on the broader economy, we believe that any FSOC recommendations should be narrowly tailored to avoid unnecessary disruption and to target the primary FSOC concerns, one of which is the possible vulnerability of money market funds to run risk. FSOC indicates that it believes a floating NAV would address the run risk inherent in the current structure of money funds and would change investor expectations that they would not bear any risk of loss. We disagree with these premises, and are not aware of any concrete data that has been shown to support them. More specifically, we believe the weight of evidence and past experience indicate that any reforms that impact the structure of money market funds should exclude Treasury money funds, U.S. government money funds, tax-exempt money funds and retail prime money funds, and thus would be limited to institutional prime money market funds.”

The T. Rowe letter explains, “Even at the height of the financial crisis in September 2008 and as evidenced by our own analysis related to the Price retail money funds discussed below, our retail funds, including our prime and U.S. Treasury money funds, did not experience the level of redemptions that were reportedly experienced by certain institutional prime money market funds. For example, our retail prime funds did not experience weekly net redemptions over 3% of fund assets during the period from September through December of 2008. Our municipal money funds generally showed similar redemption patterns during the crisis with no weekly net redemptions greater than 6% of fund assets. In contrast, our Treasury money market fund experienced significant net subscriptions during the same time period. We also note that these redemption patterns are comfortably below the weekly liquidity requirements imposed by the 2010 money fund reforms, which require money funds to hold 30% of their assets in securities that can be liquidated in 5 business days."

It says, “Although we are aware of no direct evidence that a floating NAV will meet the FSOC’s goal of preventing a run on money market funds, and because a stable NA V is a critical feature of money funds generally, FSOC’s recommendation should be narrowly applied to ameliorate run risk in only those funds that may be subject to such a risk. Certain types of money market funds that do not present the concerns enumerated by the FSOC, including the likelihood for investors to rapidly redeem their investments, should be permitted to continue to maintain a stable NAV. Our retail money funds did not experience the type of rapid and coordinated redemption activity that FSOC posits is a structural flaw of a stable NAV money fund. We believe FSOC should develop a bright-line distinction between retail and institutional funds based on quantifiable facts, and that the FSOC should recommend that the Securities and Exchange Commission ("SEC") limit the consideration of a floating NA V to institutional prime money market funds.”

Price adds, “Finally, we believe that any recommendation by the FSOC that includes a requirement for a floating NAV should acknowledge that money market funds with a floating NAV will not have the same tax convenience, accounting simplicity and operational convenience of money market funds in their current form. We believe that the resolution of these issues by various regulators is integral to an assessment of the costs and benefits of the floating NAV. Therefore, the FSOC should instruct the SEC to address these issues in coordination with Treasury and other FSOC members to give the industry greater clarity as to how they might be resolved in any proposal that the SEC releases so that the industry can provide meaningful comments on the impact of a floating NAV.”

In other news, The Wall Street Journal writes "Money Funds Beset by Excess Cash". The article, though a little late to the TAG party, says, "Money-market funds have a high-quality problem: investors are entrusting them with too much cash. The flood of money is prompting the funds, which buy short-term, top-rated debt, to seek higher returns in investments that until recently were seen as too risky, including French bank debt. Investors plowed $149 billion into U.S.-based money-market funds between the start of November and Jan. 30, bringing total assets under management to $2.695 trillion, close to the most since mid-2011, according to the Investment Company Institute. The funds have received billions of dollars that until recently were stashed in zero-interest checking accounts held by businesses, municipalities and charitable organizations. Those accounts had been guaranteed by the federal government, but the guarantees expired in December 2012 for balances over $250,000."

The Journal piece adds, "But finding places to park that new cash is proving tricky for fund managers, as yields on the ultrasafe debt they usually buy push recent lows. Some are taking on more risk.... Some funds are buying assets they recently viewed as too risky, including returning to French bank debt to an extent unseen since the early days of the euro debt crisis. French bank debt made up 6.5% of money-market fund assets in December, the highest since September 2011, according to Fitch Ratings. Money funds also are buying Treasurys and corporate debt with longer maturities, which offer a higher yield to compensate for the higher default risk."

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