PricewaterhouseCoopers just released a whitepaper entitled, "Why Change Money Market Funds?" which calls for a "balanced approach in regulations for money market funds". The press release says, "The paper ... highlights the important role that money market funds have played since their inception in the 1970s and provides an objective overview of recent proposals for changing the money market fund regulatory model. PwC contends that the risks of money market funds need to be evaluated, but the benefits that money market funds provide to individual investors and to the broader financial markets need to be preserved."
The release explains, "According to the paper, money market funds totaled $3.8 trillion in assets by the end of 2008, representing 40 percent of the mutual fund industry's net assets. The funds provide investors income from investing in Treasury bills, jumbo certificates of deposit and other short-term instruments that are not available to them directly. In addition, they have become an increasingly important source of nonbank short-term financing for companies as well as for municipal governments and the U.S. government and its agencies."
It continues, "However, in the latter part of 2008, the liquidity crisis in the credit markets caused turmoil in money market funds, and the bankruptcy of Lehman Brothers led to the first significant money market fund in the industry's history to 'break the buck.' Given that money market funds have become such a significant contributor of short-term liquidity to the financial markets, they do represent a risk to the stability of the financial markets if their investors were to redeem in enormous amounts. As a result, the Federal Reserve Board, the U.S. Treasury Department, the Securities and Exchange Commission and the Internal Revenue Service all stepped in to provide relief. Now the U.S. Congress is debating how to address calls for additional regulation."
Barry Benjamin, U.S. leader of PricewaterhouseCoopers Investment Management Group says, "We learned in 2008 that money market funds are not immune to catastrophic market events -- from the sudden credit downfall or from market panics -- even when issuers are continuing to meet their obligations. Extraordinary redemption levels by money market fund investors placed significant stress on the financial markets, and these risks need to be evaluated." He says a "balanced approach" is needed for regulation, adding, "It is clear that money market funds have provided investors and the U.S. and global financial markets with significant benefits since the 1970s, and any changes to the money market fund business model need to balance the interests of savers and investors with the need for the safety and soundness of our financial institutions and markets."
PricewaterhouseCoopers says, "The paper raises a series of questions that should be addressed to assess the known and unknown risks that money markets may pose." The release adds, "According to PwC, the key questions for America's political and regulatory leaders is whether money market funds are advantaged because they do not have the same regulatory requirements as other financial institutions that provide similar services and, if so, whether this represents a systemic risk to the U.S. and global financial systems. The PwC whitepaper also says U.S. leaders will need to consider whether money market funds offer, at relatively low risk and cost, opportunities for more innovation and choice to both investors and major borrowers, such as governments and businesses, and whether any regulation that curtails money market funds might result in greater concentration of financial market activity in banks and other financial institutions, which exhibited at least equal levels of stress and systemic risk in 2008."
