Like everyone else in the money fund industry, we're trying to find time to read all 52 of the response letters on the President's Working Group Report on Money Market Fund Reform. Given this week's blizzard in Boston and the launch of our new Crane's Money Fund University Thursday, we've chosen to focus on the big important ones first. Today we highlight the letters from the largest money fund manager in the world, JP Morgan, and the largest money fund manager in the country, Fidelity Investments.
The JPM letter, written by George Gatch, says, "J.P. Morgan Asset Management appreciates the opportunity to comment on the President's Working Group Report on Money Market Fund Reform. J.P. Morgan is one of the largest money market fund managers in the world, with fund assets under management of $456 billion ... including the JPMorgan Prime Money Market Fund, the industry's largest money market fund, with assets of $133 billion. We commend the President's Working Group's efforts to report on and analyze the potential advantages and disadvantages of options that seek to mitigate the risks of industry-wide runs on money market funds. We agree with the President's Working Group that the significance of [money market funds] in U.S. financial systems suggests that the changes must be considered carefully. We believe that it is critical to strike the proper balance between achieving that goal and ensuring that money market funds remain a stable and viable part of our financial system."
It continues, "Over the past two years, J.P. Morgan has worked closely with the Investment Company Institute and other industry groups to consider issues relating to the money market fund industry. J.P. Morgan was part of the ICI Money Market Working Group that issued, in March 2009, extensive recommendations to strengthen money market funds in response to the market crisis of 2008. J.P Morgan also submitted its own comment letter, in September 2009, and worked closely with the ICI on the ICI's comment letter to the Securities and Exchange Commission in response to the SEC's proposed amendments to Rule 2a-7 of the 1940 Act."
Gatch says, "J.P. Morgan more recently has been involved with efforts to develop an industry-sponsored liquidity facility to provide liquidity to 'prime' money market funds in periods of unusual market conditions. We believe that the Liquidity Facility is the best single option presented in the Report to address the objective of further mitigating the risk of runs on money market funds, without damaging money markets funds' ability to operate in their current structure and continue their important role in the financial markets.... We are particularly concerned with the option of a floating NAV. The success of money market funds over the past decades has been due to the combination of competitive market yields with the ease and convenience of transacting at a $1.00 NAV."
Finally, he adds, "We expect that the implementation and operation of the Liquidity Facility will result in ongoing costs to money market funds and shareholders. As with the recent changes to Rule 2a-7 noted above, we believe that those costs are appropriate in that they will promote the stability of money market funds without significantly diminishing the viability of money market funds as a short-term investment option for investors. We acknowledge that the Liquidity Facility, although simple in concept, has the potential to be complex in structure and operation, and has a number of issues that need to be thoughtfully addressed including capacity, governance, structure and pricing. We believe, however, that those issues can be satisfactorily addressed, and urge our industry colleagues and regulators to work towards finding solutions."
Fidelity Investment's Scott Goebel writes, "Fidelity Investments appreciates the opportunity to provide comments to the Securities and Exchange Commission on the Report of the President's Working Group on Money Market Fund Reform Options. Fidelity is the largest money market mutual fund provider in the country, with more than $450 billion in MMF assets under management. As of November 30, 2010, funds we manage represent more than 16% of MMF assets. More than 13 million customers, who include retirees, parents saving for college and active investors, use Fidelity's MMFs as a core brokerage account or cash investment vehicle. We believe that our focus on stability of principal, liquidity and shareholder return, in that order, have delivered great value to our shareholders over our more than 30 years in the MMF business. Continued viability of MMFs is important to investors, issuers and financial markets, and it is important to us."
Goebel says, "The PWG has requested that the 'FSOC consider the options discussed in this report to identify those most likely to materially reduce MMFs' susceptibility to runs and to pursue their implementation.' Fidelity recognizes the balanced approach taken by the PWG in drafting the PWG Report. Most importantly, the PWG Report concludes that there is no easy additional change to regulation of MMFs that will insulate the funds from the risk of potential losses in the future. In fact, the PWG Report points out that such an outcome is neither desirable nor achievable -- and that 'preventing any individual MMF from ever breaking the buck is not a practical policy objective.' However, Fidelity believes that the options identified in the PWG Report ultimately will not reduce the risk to MMFs of large, unexpected redemptions and in some cases could actually cause shareholders to redeem more quickly."
The Fidelity letter says, "The least desirable option is any proposal that involves floating the NAV of MMFs, either for all funds or for some funds in a two-tier structure.... Imposing a floating NAV on MMFs will create, rather than reduce, systemic risk by increasing concentration of short-term assets in the banking system. Some believe that in a period of market turmoil, funds with floating NAVs would be at lower risk of significant redemptions from shareholders. We are not aware of empirical evidence to support this belief."
Finally, it adds, "We have concerns that the costs, infrastructure and complications associated with private liquidity facilities are not worth the minimal liquidity that would be provided. Although we are not aware of a proposal for a private liquidity facility that we support, we understand that some financial regulators may wish to establish an emergency infrastructure that would allow the federal government to act in an extreme crisis.... Given the unprecedented difficulties the banking industry has experienced recently, it seems bizarre to propose that MMFs operate more like banks, which have absorbed hundreds of billions of dollars in government loans and handouts."
They explain, "Although Fidelity has concerns that the options described in the PWG Report are not advisable, we believe the creation of a well designed reserve within MMFs could further improve the stability and viability of MMFs. This reserve would be funded by a holdback of a portion of a fund's income, similar in size to the amount shareholders paid for the Guarantee Program. The holdback would be disclosed in the MMF prospectus, as either a shareholder 'charge' or 'fee'. Each fund's reserve would be used to protect shareholders of the fund in the event of an unrealized or realized loss in that fund."
