As promised, we have yet more excerpts from last week's Center for Capital Markets Competitiveness seminar, "The Money Market Mutual Fund: Why it Matters. Today, we quote from panelists on "The Future of Money Market Funds and Reform Enhancements," who discussed the concept of a floating rate net asset value for money market funds at some length. (The floating NAV discussion is about 1:50 into the webinar, in case you want to watch and don't have the full three hours.)
Buddy Donohue, Director of the Division of Investment Management at the U.S. Securities and Exchange Commission, said, "I thought that the [ICI MMWG] Report went to great lengths to really provide support for the benefits that derive from a stable NAV of the dollar. I don't think that the report did a good job of addressing the flip side, which are the consequences that derive from the stable NAV. I think that there were some aspects of the stable NAV that have been very problematic. It's the implicit guarantee ... it works really well. When they believe in it it's great, but when they don't believe in it, it is terrible.... That is one of the reasons why I do talk about a fluctuating NAV a $10 NAV to get at some of those particular issues that I don't think the report dealt with effectively that I think I have to deal with."
Randall Merk, Executive Vice President of Investment Management Services at The Charles Schwab Corp., said, "I think that the fact that Buddy and his team had to deal with [support actions from] 30 different fund families for 100 funds ... is an example of the fact that it [the money fund] isn't guaranteed and we can't assume that that's the case. But I think the Working Group spent a lot of time thinking about the variable NAV question. I think it's a very legitimate and a great topic of discussion, because there is that concern that money funds are ultimately a maturity mismatch and that there is some risk there that needs to be addressed. We really did look at that and took that seriously. [But] I think part of the reason why we still have trepidations about a variable rate NAV is because we're not necessarily sure that is going to stop a run either."
Donohue responded, "You don't know. You have a $4 trillion industry here that was built on a stable NAV and has been hugely successful. So you feel somewhat like a doctor in, 'First do no harm'.... Is there a way that weans people off of the belief that they're always going to get a dollar? Are there ways to deal with issues that come with the $1 that make the stable NAV that much better? You could approach it from either side, but I like to have the discussion. We have an opportunity to take the money fund model that's been so hugely successful and improve it but not break it."
George Gatch, Chief Executive Officer of JP Morgan Funds Management replied, "All financial intermediaries create a mismatch of some sort between either duration or credit. I think that the money funds are unique in the fact of how miniscule the mismatch is between the daily liquidity and the length of the maturity of the portfolio and the credit risk the portfolios are taking. Our effort has been to continue to reduce that mismatch while maintaining the very significant benefits of the money market funds to the economy and to investors.... There is no indication that a floating NAV would solve the systemic issue that we have as it relates to a run on the industry.... I think the question is weighing the relative mismatch that money funds have relative to other alternatives. I think the steps that we have taken have really substantially reduced the risks."
Finally, Barry Barbash, Partner at Willkie Farr & Gallagher LLP, said, "When it comes to trying to change up a fundamental aspect of a rule that's been around for 30 years, I think the SEC needs to really tread carefully. This rule has been out there. It's been amended seven times. The basic concept has remained the same and attempts have been made to perfect it. I think to then turn around and pull it at this point in time, the SEC, if it was going to do that, would need to have a very substantial, clear-cut case as to why that should happen, why we should go to a floating rate NAV. Frankly, I don't see it. I don't see that that kind of finding was made. I think it's right to ask the question. But ultimately I'm not sure what happened that's so different from what's happened before. In some respects, it's the scenario we never really wanted to face.... But on balance it seems as if the industry survived."
