The Committee on Capital Markets Regulation, an "independent and nonpartisan 501(c)(3) research organization dedicated to improving the regulation of U.S. capital markets" that counts a number of mutual fund industry heavyweights among its members, recently released a report entitled, "The Global Financial Crisis: A Plan for Regulatory Reform. This report incudes a brief section that weighs in on the issue of changes in money market mutual fund regulations. The CCMR Report supports the ICI's recent recommendations, but also appears to come out in favor of continuing a system of government guarantees for money funds.
The Committee on Capital Markets Regulation Report says on "Money Market Mutual Funds," "Since they began operations in the 1970s, money market mutual funds (MMMFs) have come to play an increasingly important role in the U.S. money markets. Offering a very low-risk, stable investment mechanism for retail as well as sophisticated investors, MMMFs also provide a key source of short-term liquidity for the secondary markets. A distinguishing feature of MMMFs is their historically stable share price, usually $1.00 per share, which has facilitated their use as cash management devices as an alternative to banks. By law, MMMFs are limited to investing in high-quality, low risk assets with very short maturities, to best limit risks and thereby maintain this stable share price."
It continues, "Despite their low-risk profile, the financial crisis, as it escalated in the wake of Lehman's collapse, created tremendous instability for money market funds, drying up the flow of short-term liquidity they provided to the market. The Primary Reserve Fund was shown to have been exposed to increasingly risky Lehman commercial paper that, while giving it the competitive advantage gained from offering higher yields to its investors, nevertheless set the stage for large losses once Lehman fell. Significantly, as a result of the losses and the rush by investors to redeem their investments, the Primary Reserve Fund 'broke the buck,' prompting further runs on other MMMFs. As a result of this increasing spread of systemic risk, the U.S. Government through the Treasury Department decided to guarantee the accounts of shareholders in MMMFs existing on the date the guarantee was issued."
The Report says, "The crisis has highlighted the need for a reform of the regulatory structure underpinning MMMFs. In particular, we recommend that MMMFs adopt better crisis management and more robust mechanisms for risk monitoring, transparency and analysis. In this regard, we endorse a number of proposals that recently have been put forward by the Investment Company Institute. In addition, we note the possibility that the government support that is currently provided to guarantee certain shareholder accounts in MMMFs could continue into the future -- either explicitly or implicitly -- in view of their collective systemic importance. We believe that MMMFs must ultimately be required to compensate the taxpayer for any such protection provided going forward, and we invite policymakers to give further thought to formulating a suitable fee structure. As an alternative, there is a need to explore whether MMMFs might protect themselves through purchasing credit derivatives on themselves or issuing credit-linked notes that would absorb losses up to a certain percentage of NAV."
