The most recent issue of Vanguard's shareholder newsletter "In the Vanguard" features the article, "Jack Brennan discusses industry-wide money market reform effort," which interviews the Vanguard and ICI Money Market Working Group Chairman on the "group's effort, its findings, and the outlook for money market funds."
Brennan says the "goal of the Money Market Working Group ... was to get industry participants together, study the situation, and make recommendations for improvement and change without waiting for regulators or politicians to act. Money market funds have been a great success story for investors over the past three decades, but that doesn't mean we can't make them even better. We want to make sure that investors never lose confidence in these critical components of our financial system and, frankly, our economy."
He continues, "The recommendations for improving the stability of money market funds focused on five key themes: Mandating daily and weekly liquidity requirements for funds and requiring regular stress tests to evaluate a fund's ability to meet redemptions in all market scenarios. Limiting maturity of fund holdings from an average of 90 days to 75 days, which will reduce interest-rate risk. Requiring money market fund advisors to adopt 'know your client' procedures.... Raising minimum quality standards ... and giv[ing] special scrutiny to new money market instruments.... Enhancing disclosure to investors and transparency to regulators."
Brennan adds, "These concepts are nothing new. When properly followed, they've resulted in the extreme stability money market funds have offered since their introduction. The guidelines, once adopted, would raise the minimum industry standards currently in place to a 'best practices' level.... We anticipate this industry-wide effort will help restore a lasting confidence in money market funds and ensure they should not again have to be supported by short-term insurance policies at a cost to shareholders."
Finally, he says, "It's interesting when commentators from outside the industry describe money market funds as 'loosely regulated.' I feel that viewpoint is ironic and uninformed. Few financial products are as tightly regulated as money market funds. There are very tight limits in the way funds can invest; fund distribution practices are overseen by the Financial Industry Regulatory Authority (FINRA); the SEC regulates these funds; and every fund has an independent board of directors responsible for the implementation of investment policies and strategies. I hope the regulatory regime remains largely unchanged. The changes that the Working Group recommends build on a success story of funds, independent directors, and the regulators that is perhaps too rare in today's environment."
