Bloomberg writes "Hedge Funds May Pose Systemic Risk in Crisis, U.S. Report Says," which discusses which non-bank financial institutions will be designated "systematically important" by the new Federal Stability Oversight Council (or FSOC). The article says, "Hedge funds and insurers might threaten U.S. economic stability in a time of crisis, according to a report aimed at helping regulators decide which non-bank financial companies warrant Federal Reserve supervision."
While most of the article deals with hedge funds and insurers, there are some comments on money funds towards the end of the piece. Bloomberg says, "Money market funds, or MMFs, have systemic impact when they incur losses because the industry can be susceptible to runs, the report said. In 2008, the $62.5 billion Reserve Primary Fund became the biggest money-market fund and the first in 14 years to 'break the buck,' meaning the value of a share fell below $1 and investors faced losses. Reserve failed after investing in debt issued by Lehman Brothers Holdings Inc., the investment bank that declared the biggest-ever U.S. bankruptcy."
Under the subtitle, "Money-Market Funds," Bloomberg quotes the yet-to-be-released FSOC report, "Even a modest-sized MMF breaking the buck could, in principle, trigger a broad and damaging run.... However, no individual MMF may warrant designation applying the factors." The Dodd-Frank law listed a series of factors to determine what is "systematically important". (See Crane Data's Nov. 16, 2010, News "Comment Letters Argue Against Added FSOC Supervision for MMFs" or search for FSOC on www.cranedata.com for more.)
The Bloomberg story adds, "So-called liquidity funds, or unregistered money-market funds, suffered large investor withdrawals in 2007, the report said. It quotes the report, "Although these runs may have been disruptive, they do not appear to have become systemic." The article says, "If the funds grow rapidly there could be 'greater potential to pose systemic risk in the future.'
The Financial Stability Oversight Council website says, "As established under the Dodd-Frank Act, the Financial Stability Oversight Council (FSOC) will provide, for the first time, comprehensive monitoring to ensure the stability of our nation's financial system. The Council is charged with identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system."
The President's Working Group Report on Money Market Fund Reform under its "Request for Comment," says, "The Commission requests comment on the Report. Comments received will better enable the Commission and the newly-established Financial Stability Oversight Council (which will be taking over the work of the PWG in this area) to consider the options discussed in this Report to identify those most likely to materially reduce money market funds' susceptibility to runs and to pursue their implementation. As the Report states, we anticipate that following the comment period a series of meetings will be held in Washington, D.C. with various stakeholders, interested persons, experts, and regulators to discuss the options in the Report."
