As we noted in a Money Fund Intelligence subscriber e-mail on our website late Thursday, the U.S. Treasury released its long-awaited "Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options." As we said Friday, while the report doesn't strongly endorse any option, it should be well-received by the money fund community as it appears to discount the possibility of a floating NAV and support the concept of a private liquidity facility. Below, we review the report, the next steps and we quote from several comment pieces on the new PWG paper.
The Treasury's press release says the PWG report's purpose was to "assess options for mitigating the systemic risk associated with money market funds and reduc[e] their susceptibility to runs." It says, "The PWG now requests that the Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, consider the options discussed in this report and pursue appropriate next steps.... [T]he Securities and Exchange Commission, as the regulator of money market funds, will solicit public comments ... [a] request for comment will be published in the near future. Today's release is one part in a series of steps that the regulatory community will be taking in the coming months to implement financial reform and to help ensure that the financial system continues to become more resilient."
The first response to the report was "ICI Responds to PWG Report on Money Market Funds," which quotes Paul Schott Stevens, "The President's Working Group on Financial Markets' report on money market funds provides a variety of options for consideration in the regulation of this vital investment vehicle.... We look forward to working with regulators and policymakers to develop ideas that will strengthen money market funds against any future crisis. The report represents the latest step in a multi-layered process of strengthening money market funds since 2008. The fund industry has consistently supported reforms to make these funds more resilient in the face of extreme market conditions. Money market funds provide valuable cash management services to a wide range of investors, including households, state and local governments, businesses, and nonprofit entities.... Throughout their 30-year history, money market funds have an outstanding record of strength. We look forward to further discussions on the options offered by the PWG. For more information on ICI's views on money market funds, please see the July 2010 speech by Paul Stevens."
Joan Ohlbaum Swirsky of Stradley Ronon published a Fund Alert Friday entitled, "President's Working Group Reports on Alternatives for Money Market Fund Reform". It says, "On Oct. 21, 2010, the President's Working Group on Financial Markets (PWG) released its long-awaited report on reform of money market funds (the Report), overdue by more than a year from its original target release date of Sept. 15, 2009. As expected, the Report is an analysis of the alternatives for the fundamental reform of money market funds, rather than a recommendation of any of the alternatives."
Swirsky explains, "The Report does not rule out any of these alternatives. But the Report shows a recognition of and appreciation for the potential difficulties and drawbacks of certain of the alternatives that have been widely opposed in the industry.... [T]he Report cautions that the [floating NAV] benefits 'would have to be weighed carefully against the risks that such a change would entail' and 'may have several unintended consequences.' Also, the Report details the 'significant hurdles,' 'uncertainties' and 'unintended consequences' that could arise if money market funds were required to reorganize as 'special purpose banks.' On the other hand, the Report is more sanguine about the possibility of a private liquidity facility. The Report says, 'Notwithstanding [certain] concerns' about a private liquidity facility, such a facility 'could play an important role in supplementing the SEC's new liquidity requirements for MMFs.'"
She adds, "The Report states that the goal of money market fund reform is not to prevent any individual money market fund from ever breaking the dollar, nor to 'to eliminate all risks posed by MMFs.' Further, the Report recognizes that liquidity requirements that would cover all redemption scenarios 'probably would be impractical and inefficient.' Also, the Report repeatedly acknowledges the continuing role of the SEC as 'the regulator for MMFs.' Accordingly, the Report does not appear to contemplate a complete transformation of money market funds.... The fact that the Report does not emphasize a bank-regulatory approach to money market funds may indicate that the involvement of FSOC does not necessarily portend a bank-regulatory approach to money market fund reform.... The Report notes repeatedly the possibility that reform of money market funds may push investors to less regulated investment vehicles, which would create more systemic risk. The Report suggests new ideas to enhance constraints on unregulated money market fund substitutes."
See also, "U.S. Chamber Warns Against Moves That Would Harm Money Market Funds, Treasury Strategies' WSJ Blog post "President's Working Group Report Extends Uncertainty for Money Fund Managers", and Reuters' "Debate likely on floating NAV for money funds".
