Measuring money... faster, cheaper, cleaner

While Friday' deadline passed for Comments on the FSOC's Proposals for MMF Reform, we're still digging our way through the more thoughtful responses. Today, we features a letter from The Dreyfus Corporation's J. Charles Cardona, who writes, "Dreyfus appreciates the Council's critical role in monitoring the stability of the U.S. financial system and its corresponding desire to advance the discussion on money market fund regulation by publishing these Proposals. We also respect the Commission's role as the nation's primary securities regulator and we were pleased to learn about the Council's preference for the Commission taking the lead in matters of money market fund regulation. Thus, we hope our comment letter informs both the Council and the Commission in their respective deliberations. We thank the Council for the opportunity to share our views on this important topic."

He explains, "The Council has placed substantial emphasis on the contribution of money market funds to destabilizing the U.S. financial system in 2008 when the evidence, in our view, suggests that the crisis was characterized more broadly by a general "run on risk." As a result, we believe too much emphasis has been placed on stopping money market fund redemptions to the exclusion of considering how a money market fund's structure and resiliency determines how it will perform in a time of crisis, and tailoring any further regulations accordingly."

Dreyfus says, "We believe deliberation over further money market fund regulation should be guided by a fair assessment of historical money market fund shareholder investment and redemption activity and whether or to what extent that activity contributed (or could contribute) to destabilizing the financial system. Thus, we do not believe that government and municipal money market funds should be subject to additional regulation. There is no historical evidence of destabilizing net redemption activity (if any net redemption activity at all) associated with these types of money market funds.... Accordingly, we respectfully urge the Council and the Commission to continue to consider the value of improving the resiliency of prime money market funds rather than seeking only to address the perceived "structural vulnerabilities" of money market funds with reform proposals that, in our view, would do more harm than good."

They continue, "We believe maintenance of the stable $1 net asset value ("NAV") money market fund is preferable to a shift to a floating NAV money market fund. Such a change would eliminate the usefulness of the product without providing a disincentive for redemption activity. A floating NAV money market fund would be subject to a different kind of "first mover advantage" that could accelerate redemptions in a time of crisis. If a floating NAV cannot resolve one of the key structural vulnerabilities identified by the Council, then the benefits of preserving stable NAV money market funds should outweigh any benefits from their elimination."

Cardona tells FSOC, "We believe implementation of either of these alternatives would drive a considerable amount of assets out of money market funds. Surveys of money market fund shareholders and service providers including corporate treasurers, institutions, and cash sweep providers, among others, have indicated that a significant majority of invested assets would migrate away from money market funds to other cash management vehicles if a floating NAV were implemented. Similarly, we do not believe money market fund investors or their service providers (e.g., cash sweep providers) can be expected to support an MBR requirement that both severely hampers ready liquidity and poses prohibitive operational challenges."

He adds, "To the extent the Council pursues issuing recommendations to the Commission, we hope the Council's deliberations will be guided by the views expressed herein.... Thus, we respectfully request that the Council defer issuing recommendations on money market fund reforms to the Commission at this time. If the Council suspends its Section 120 activity at this time, we believe it will provide clarity to the regulatory process for the benefit of the industry and its millions of fund shareholders."

Dreyfus concludes, "However, we do not agree with how the Council has advanced the concept of "run risk" in forming these Proposals, and we also believe implementation of these Proposals will have unintended consequences. To one degree or another, adoption of any one of these Proposals would compromise the current utility of money market funds for millions of investors' and ultimately drive considerable amounts of assets out of money market funds into other liquidity vehicles (e.g., bank deposits, of offshore or other unregistered liquidity vehicles),' the result of which would be to transfer systemic risk to alternate (and perhaps less regulated) venues within the financial system rather than reduce it in the aggregate. We believe there is a different interpretation of the 2008 financial crisis that is supported by evidence and that does not justify the extent to which these Proposals potentially compromise the utility of money market funds."

Finally, they add, "To summarize, for the reasons stated above, we respectfully ask that the Council suspend its Section 120 process at this time and, to the extent the Council re-initiates the Section 120 process after the Commission completes its review of money market fund regulation, consider our proposals for money market fund regulation as reasonable yet effective means for reducing systemic risk associated with money market funds without compromising their utility and popularity as stable NAV cash management vehicles. We have confidence, though, that the Commission's regulatory process, with the money market fund industry's active participation, will achieve fair, balanced, and meaningful results."

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