The first comment letter directly in response to the SEC's recent "Roundtable Discussion on Money Market Funds and Systemic Risk" (see archived webcast here) has been submitted. The post (which is not available on the SEC website yet) from Vice Chairman John McGonigle says, "Federated Investors, Inc. would like to thank the Securities and Exchange Commission for allowing John Hawke to present our views on money market fund reform to the SEC Roundtable on Money Market Funds and Systemic Risk. We would also like to take this opportunity to (1) address squarely the public policy concerns raised by various regulators during the Roundtable, (2) respond to some of the agenda items that the Roundtable did not have time to address, and (3) substantiate certain claims made during the Roundtable."
Federated writes under "Public Policy Considerations," "The central policy question is whether tax dollars should be used to prevent a run on money market funds. There was really no disagreement on this point -- the answer is no and the real question is how best to prevent this from happening. We hope that the SEC noted that none of the representatives of money market fund investors, managers or industry associations assumed that any form of federal guarantee would ever be provided to money markets. Only the current and former representatives of regulatory agencies alluded to an 'implicit government guarantee' of the funds' stable net asset values. Given that there is no such government guarantee (implicit or explicit) and that the authority for the temporary guarantee provided to shareholders in 2008 was rescinded by the Dodd-Frank Act, there is no basis for these assertions. Statements by public officials that presume some form of government guarantee for money market funds can only foster expectations of support, which is contrary to our shared policy objective."
They continue, "Given that we all seek to avoid any need for a government guarantee of money market funds, there is no reason to suppose that money market funds create any moral hazards for the financial system. We have already explained how the temporary guarantee program did not create any moral hazard on the part of managers or shareholders. The Roundtable participants representing investors confirmed that they do not view funds as guaranteed by the government and do not encourage funds to take undue risks to generate yield. No one who claims a moral hazard has provided evidence to substantiate the claim, or even provided a plausible explanation of how the hazard might have been created."
McGonigle's letter explains, "A wholesale run on money market funds need not present a systemic risk to the broader financial markets or the U.S. economy so long as borrowers can obtain alternative short-term funding from other sources. Many money market instruments are already structured to include an alternative funding source, such as stand-by liquidity facilities for commercial paper and municipal demand obligations. Other instruments have collateral that can be used to secure alternative funding. Establishing a liquidity facility bank will provide an additional funding source during periods of financial crisis. The liquidity facility bank will help to shield the rest of the credit market from the effects of a large scale run on the funds, and will do so at the expense of the funds and their managers -- not the taxpayer."
He says, "Most of the other reforms discussed at the Roundtable seek to avoid a run on the funds. Some reforms, such as floating the NAV, have already proven to be ineffective in preventing runs. Other reforms, such as capital requirements, cannot provide sufficient protection on a cost-effective basis to prevent a run. More fundamentally, raising investor expectations of safety is antithetical to the objective of avoiding a government guarantee. If investors who regard money market funds as 'riskless' are part of the problem, reducing the perceived risk of the funds cannot be part of the solution."
McGonigle comments, "Federated also thinks that the policy questions regarding the liquidity facility bank were exaggerated. Although a central bank is only required to provide liquidity to the banking system, the 'social contract' requires banks to use that liquidity for the benefit of the financial system, including providing liquidity to the market. Money market funds would not consider a special purpose bank if they could rely on other banks to provide liquidity in times of stress. A severe financial crisis is apt to affect banks first, however, and to a greater extent than other sectors of the financial markets. Indeed, if the Dodd-Frank Act reforms work as intended, during the next financial crisis money market funds can expect one or more major financial institutions to undergo a rapid 'resolution,' with a corresponding reduction in market liquidity."
The letter explains, "Federated does not agree that the creation of a liquidity facility bank raises any far-reaching policy implications for the Fed. As Mr. Hawke noted at the Roundtable, the liquidity facility bank would be subject to regulatory oversight by the Fed and would use the discount window on the same basis as other banks. The demand for loans at the discount window is always a consequence of the lending and other business activities of the banks requesting the funds. The Fed has never viewed this as a justification for regulating the panoply of companies that rely on these banks to finance and conduct their businesses. A liquidity facility bank would be uniquely transparent: funds obtained at the discount window could be traced to specific transactions, rather than disappearing into a welter of activities. We do not see why this transparency would justify Fed regulation of money market funds, insofar as the Fed has never asserted jurisdiction over any other ultimate beneficiary of borrowings at the discount window."
Finally, Federated's letter concludes, "We continue to be surprised by the double-standard being applied to money market fund reforms. Banks required more extensive and costly government support than money market funds during the financial crisis of 2008. While extensive regulatory reforms have been proposed for banks, these reforms would not require fundamental structural changes comparable to requiring money market funds to float their NAVs or start to maintain capital. Although banks continue to pose greater systemic risks than money market funds ever could, no one is conducting roundtables to discuss whether banks should be forced to change their essential nature so as to eliminate these risks. We do not understand why federal regulators feel compelled to hold money market funds to higher standards than other financial institutions."
