Yesterday, the Obama Administration and Department of the Treasury unveiled a white paper entitled, "Financial Regulatory Reform: A New Foundation", which spends less than two of its 89 pages discussing money market funds. It says under the section, "Reduce the Susceptibility of Money Market Mutual Funds (MMFs) to Runs," "The SEC should move forward with its plans to strengthen the regulatory framework around MMFs to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole less susceptible to runs."

But the report also advises, "The President's Working Group on Financial Markets should prepare a report assessing whether more fundamental changes are necessary to further reduce the MMF industry's susceptibility to runs, such as eliminating the ability of a MMF to use a stable net asset value or requiring MMFs to obtain access to reliable emergency liquidity facilities from private sources."

It explains, "When the aggressive pursuit of higher yield left one MMF vulnerable to the failure of Lehman Brothers and the fund 'broke the buck,' it sparked a run on the entire MMF industry. This run resulted in severe liquidity pressures, not only on prime MMFs but also on banks and other financial institutions that relied significantly on MMFs for funding and on private money market participants generally. The run on MMFs was stopped only by introduction of Treasury's Temporary Guarantee Program for MMFs and new Federal Reserve liquidity facilities targeted at MMFs. Even after the run stopped, for some time MMFs and other money market investors were unwilling to lend other than at very short maturities, which greatly increased liquidity risks for businesses, banks, and other institutions."

The white paper's section on money funds continues, "The vulnerability of MMFs to breaking the buck and the susceptibility of the entire prime MMF industry to a run in such circumstances remains a significant source of systemic risk. The SEC should move forward with its plans to strengthen the regulatory framework around MMFs. In doing so, the SEC should consider: (i) requiring MMFs to maintain substantial liquidity buffers; (ii) reducing the maximum weighted average maturity of MMF assets; (iii) tightening the credit concentration limits applicable to MMFs; (iv) improving the credit risk analysis and management of MMFs; and (v) empowering MMF boards of directors to suspend redemptions in extraordinary circumstances to protect the interests of fund shareholders."

It says, "These measures should be helpful, as they should enhance investor protection and mitigate the risk of runs. However, these measures should not, by themselves, be expected to prevent a run on MMFs of the scale experienced in September 2008. We propose that the President's Working Group on Financial Markets (PWG) should prepare a report considering fundamental changes to address systemic risk more directly. Those changes could include, for example, moving away from a stable net asset value for MMFs or requiring MMFs to obtain access to reliable emergency liquidity facilities from private sources. For liquidity facilities to provide MMFs with meaningful protection against runs, the facilities should be reliable, scalable, and designed in such a way that drawing on the facilities to meet redemptions would not disadvantage remaining MMF shareholders."

Finally, the paper says, "The PWG should complete the report by September 15, 2009. Due to the short time-frame and the work that is currently on-going, we believe that this report should be conducted by the PWG, rather than the proposed Council, which we propose to be created through legislation."

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