On Friday, during the company's quarterly earnings conference call, Federated Investors President & CEO Chris Donahue commented, "Now, the SEC's adoption of new money market rules was a welcome development. We believe that the changes announced will strengthen the regulatory framework that money funds operate within, and do what all of the regulators and governmental officials have said is their goal, enhance the resiliency of money funds. It was clear to us that the SEC carefully considered the comments made by Federated and others in arriving at these changes."
He added, "We anticipate that these changes will not materially alter the way we manage our funds or even the yields of our products as we have generally applied these standards already. We are encouraged by the process, and expect that any future changes follow the path of preserving the key characteristics of money funds that enable those products to play a vital role in our capital markets."
Asked to handicap the likelihood of 'transformational reform' with Paul Volcker 'back on the scene,' Donahue responded, "Considering sin is not the same as committing sin.... Mary Shapiro has made it clear that they are going to continue to look at an array of issues. We don't place much likelihood at all on changing the NAV to a fluctuating NAV. No matter how often someone talks about doing it, you have to face the reality of the importance of these funds in the capital markets in terms of the securities that are owned a $3.3 trillion dollar industry."
He continued, "[A]bout $325 trillion dollars has gone through money fund since the SEC's successful initiation of Rule 2a-7.... You also have to note that there's been over the last 24 years about $450 billion paid to investors more than they would have gotten in the MMDAs. So, yes you can consider all of these things, and that's fine. But we don't place much weight on the idea that they are going to change the NAVs. What we have seen is a regulator, especially the SEC and especially on 2a-7, that over decades has consistently gotten it right because of aggressive study, back and forth, and considered judgment in the end. And that is what will look forward here in to the future."
When queried on capital requirements, Donahue said, "Yes, we do have a lot of confidence that that will not happen [capital requirements for money markets] despite protestations and commentaries by others in the marketplace.... [Y]ou have to ask yourself, 'Is this business supportable by a 10%, or a real bank capital, [requirement] on it?' Go ask JPMorgan ... with $400 billion in money market funds as to how that business would function if they put real bank capital requirements on them. The need for it is a little odd when you consider that the money funds don't do the leverage thing, and they surely don't fail the way banks fail."
He added, "Even in The Reserve situation, they got 99 cents at the end. Now it wasn't a pleasant result because of the delay, but don't forget that in the Putnam situation it was all able to be resolved within the context of other money funds and some cooperation from various regulators. So when Mary Shapiro is summarizing the various things that she's looking at, capital wasn't one of the ones that she listed during her call earlier this week."
Finally, Donahue said, "So, it's again one of those things that gets mentioned out in the marketplace a lot.... But we don't think that it is going to come about. A footnote: Mary Shapiro did mention of course the private liquidity facility to provide liquidity to money market funds in times of stress.... So there may be some modest capital requirements in however that ends up being structured. But that is all that I can say about that so-called liquidity bank."
