We finally seem have gotten a breather in the recent heavy money market fund news cycle, and found time to go back and read some more of the Comment Letters on the President's Working Group Report on Money Market Fund Reform. Today, we excerpt from Karla M. Rabusch, President, Wells Fargo Funds Management, LLC. Wells writes in its letter, "We agree with the President's Working Group that the recent amendments to Rule 2a-7 under the Investment Company Act of 1940 adopted in January 2010 were an important first step in mitigating systemic risk, and commend the additional efforts undertaken to analyze certain other features of money market funds that could contribute to their susceptibility to significant redemption activity."
Rabusch says, "It is critical to preserve the structural integrity of money market funds as they have long played an important role in our nation's economy, providing both retail and institutional investors with a liquid and stable investment option, while at the same time providing a vital source of funding to businesses and municipalities. Money market funds also contribute to the health of the broader financial system. The most recent market dislocation that occurred in 2007-2008 and the resultant run on prime money market funds highlighted their susceptibility to market dynamics and exacerbated strains in the short-term funding markets."
She continues, "While we support some of the options presented in the PWG Report with certain modifications, we do not view any of the options presented, whether implemented individually or in combination, as a means to entirely eliminate systemic risk or the risk to money market funds of extreme redemption activity. However, we do believe that certain of the options discussed have the potential to further the resiliency of money market funds to certain market stresses. We believe it is critical to preserve the availability of stable value money market funds. While we do not oppose the idea of establishing money market funds with floating net asset values ... we do not support the wholesale replacement of money market funds that seek to price their shares at a stable $1.00 net asset value."
Wells also writes, "We believe that a backstop liquidity facility for money market funds is a desirable objective, recognizing that money market fund access to central bank funding through the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility ('AMLF') was instrumental in halting the run on prime money market funds in 2008. The liquidity facility should be constructed and used in a manner that would prohibit money market funds from using borrowed funds for leverage or purposes other than meeting shareholder redemptions."
The letter continues, "While we believe that direct access to borrowing from the Federal Reserve through a mechanism similar to its discount window for banks is the most straightforward means of achieving this objective, we appreciate the desire expressed in the PWG Report that money funds should seek liquidity first from private sources. For this reason, we would be supportive of a collateralized liquidity facility which would provide liquidity to money market funds from a syndicate or consortium of banks through temporary loans collateralized by fund assets. We also appreciate the expressed concern that borrowing by money market funds to meet shareholder redemptions might leverage the credit risk on the remaining shareholders. For this reason, despite our conclusion that a collateralized liquidity facility is more desirable, we would be receptive to a private liquidity facility, but with several important caveats."
It explains, "First, we feel that it is important that sponsors of all participating funds be treated equally. As part of the broad agreement on capital and liquidity, Basel III, reached by the Group of Governors and Heads of Supervision at their meeting in September 2010, banks subject to supervision under this agreement will need to account for such things as contingent funding obligations associated with stable value managed funds in their Liquidity Coverage and Net Stable Funding Ratio calculations and hold liquid assets, stable funding, or capital accordingly. While the final rules need to be developed and are subject to the discretion of National Supervisors, the risks to the financial system posed by these obligations are the same irrespective of whether the sponsorship of the stable value fund is from a bank or non-bank. As a result, it would be reasonable for the liquidity facility to incorporate and adopt a consistent set of rules for bank and non-bank participants as regulatory rulemaking develops with respect to Basel III."
Rabusch adds, "There are many challenges to be faced in the design of a liquidity facility, including governance issues, a fair allocation of responsibility for the initial capital contribution and on-going commitment fees, the disposition of the capital of the bank in the event of a wind down, and the fact that because of its size, the liquidity facility would only be able to address the liquidity needs of a very limited number of funds and would not be able to meet the needs of the entire industry in the event of a run. In that event, only the resources of a central bank would be large enough. Yet, despite these drawbacks, we find the concept of back up liquidity to be attractive were it to be structured in a way that could successfully address these challenges."
Finally, Wells also comments, "While we do not agree that a two tier system would necessarily reduce systemic risks posed by money market funds, we do not oppose, as a means of providing enhanced investor choice, the possibility of two different money market fund structures to be regulated under Rule 2a-7. The importance of SNAV Funds is clear; the importance of VNAV Funds and their impact on the money market industry as a whole is somewhat less clear. That being said however, there are some advantages of VNAV Funds that are worth noting. Most significant are that the risks associated with VNAV Funds are factored into their transactional net asset value so that shareholders would take any resultant fund losses with them upon redemption. Such losses would not be leveraged, as they are in SNAV Funds, on shareholders who remain in the fund."
