Today's Wall Street Journal, in "SEC Divided on Money-Market Fund Rules", says that it may be some time before we see money market fund reforms, and that another regulatory stalemate is a real possibility. This follows a speech by SEC Commissioner Kara Stein, where she made comments indicating that she'd like to go back to the drawing board on regulations. The Journal article comments, "Six years after money-market mutual funds became a source of vulnerability in the financial crisis, U.S. securities regulators are still hashing out how to limit the risks they pose to the financial system. Tighter rules might not be finalized for several months, according to people familiar with the process."
The Journal's Andrew Ackerman writes, "The five members of the Securities and Exchange Commission have been unable to reach agreement on how to finish long-awaited rules to curb structural features of money funds -- cashlike instruments used by millions of individuals, businesses and municipalities to safely park cash -- that make them prone to investor stampedes during periods of market stress, these people said. The inability to agree on a plan stems in part from the recent addition of two SEC commissioners, Democrat Kara Stein and Republican Michael Piwowar, who are still fleshing out their views on what should be done to rein in fund risk. No clear consensus has emerged on the best approach and there is no agreement yet on how to move forward, according to people close to the process."
He explains, "The commissioners have all indicated they agree money-fund risks need to be addressed but final rules could be delayed until the fall, a setback to SEC Chairman Mary Jo White who had pushed in private for the commission to wrap up its work by the end of April, according to people familiar with internal SEC discussions. In a speech on systemic risk in Washington Thursday, Ms. Stein raised a series of questions about redemption limits, including whether they would exacerbate the risk of investor runs by encouraging "pre-emptive" redemptions just before the measures are implemented."
The WSJ piece also says, "Mr. Piwowar opposes coupling redemption limits with floating share prices, warning such a combination would make money funds untenable for investors, according to a person familiar with his thinking. He continues to meet with industry representatives to develop his views, the person said. Fund firms warn at least some of their customers will shun money funds if they are at risk of seeing their investments decline in value or if they are unable to access their cash because of a redemption limitation. Mr. Piwowar's views appear at odds with those of Daniel Gallagher, the SEC's other Republican member, who has backed an approach that combines a floating share price with redemption limits. Ms. White also has expressed support for a combined approach, according to people familiar with her thinking."
It adds, "Peter Crane, president of Crane Data, which tracks money funds, said most in the industry expect a combined approach. Yet a move to floating share prices is seen as contingent on the Internal Revenue Service easing certain tax burdens on the funds and it is unclear if the IRS will act. "Stalemate is a very real possibility" at the SEC, he said."
Finally, the Journal adds, "Further complicating discussions are upcoming summer travel plans, according to SEC officials. At least one commissioner is traveling in each of the remaining weeks in June, these people said. The SEC has a narrow window in which it could meet to finalize tighter fund restrictions in July and August but only if commissioners are able to reach an agreement that so far remains elusive, the people said."
In her speech yesterday, SEC Commissioner Kara Stein said, "[W]e need to focus on improving the stability and resiliency of the short-term funding markets, including securities lending and repurchase agreements (repo).... The short-term funding markets are large and interconnected. The collapse of these markets during the crisis was profound. Money market funds experienced runs. The commercial paper markets dried up. Securitizations and conduits stopped completely in their tracks. And firms suddenly demanded more and better collateral to support securities lending and repos."
She continued, "Our short-term funding markets have their benefits. Money market funds and other investors can purchase short-term funding obligations and make higher returns, and broker-dealers can fund their positions very cheaply with high-quality collateral. At the same time, short-term funding for long-term obligations can create serious problems. Ultimately, an over reliance on short-term funding may accelerate credit supply and asset price increases in the good times, but it may also accelerate precipitous declines in asset prices and credit in the bad. The Commission is working hard on rules to prevent runs on money market funds, and I think everyone wants to get it right. There have been a lot of discussions about capital, insurance, floating net asset values, redemption fees, gates, and restricting sponsor support. Each tool has its pros and cons."
Stein explained, "For example, if there are fees and gates, couldn't this trigger pre-emptive runs by investors that otherwise would not have occurred? Or will fees and gates reduce run risk? We have seen arguments by very sophisticated firms and economists on both sides. In short, is it more likely (1) that fees and gates can cause, or exacerbate, a crisis; or (2) that fees and gates can actually prevent or stop one? And what happens to the borrowers when the money fund providing their short-term financing slams its gate down? Will the money fund decline to renew their repo arrangement? Does that impact, not just that borrower, but the rest of the short-term lending market, or the entire financial system? In an industry this important to our financial system, we should be very confident in the answers to these questions before moving forward. And while I hope we're able to finish a rule soon, a money market fund rule would only address part of the issues. It would only address some of the lenders. We also need to address the borrowers and the intermediaries."
Finally, she said, "The Federal Reserve Bank of New York and others, including the SEC, have been making a lot of progress. For example, the clearing banks' intra-day credit exposures in the tri-party repo market have been dramatically reduced. The Financial Stability Board's Workstream on Securities Lending and Repos has also been putting forward some great ideas, including collecting more data, enhancing disclosures, and imposing meaningful discounts."
