We continue to see an inordinate amount of time being spent on the debt ceiling and its potential impact on money market funds, and we also got a glimpse of the SEC's thinking on regulations and European concerns. USA Today's John Waggoner writes "Could U.S. debt default ding money market funds?." He says, "How would a government default affect money funds? Money funds have $684 billion in U.S. government debt. In the event of a default -- the government not paying interest or principal -- funds are generally required to sell that security in an orderly fashion.... The likelihood of a government default is fairly low, but it increases every day Congress fails to act. If Congress raises the debt ceiling without any meaningful effort to reduce the annual federal budget deficit, ratings agencies have warned that they may reduce the nation's credit rating. In that case, it's unlikely that Uncle Sam's credit rating would fall enough to make funds sell their T-bills."

Standard & Poor's also released a publication on the debt ceiling issue entitled, "The Implications Of The U.S. Debt Ceiling Standoff For Global Financial Institutions." It gives 3 scenarios, including: "Scenario 1: We affirm the 'AAA/A-1+' ratings on the U.S., remove them from CreditWatch, and assign a negative outlook ; Scenario 2: We remove the ratings on the U.S. from CreditWatch, lower the long-term rating to 'AA+' with a negative outlook, and affirm the 'A-1+' short-term rating; and, Scenario 3: We revise the ratings on the U.S. to 'SD' (selective default) and then raise them to 'AA/A-1+' with a negative outlook a few weeks later. In this scenario, we would expect a systemic market disruption to follow the revision to 'SD', which would have a significant impact on ratings in the financial institutions sector. If a selective default occurs, but without a systemic market disruption, we would expect this scenario to have less of an impact on global financial institutions ratings."

S&P explains, "Money market funds issue and redeem shares at $1.00, provided that their marked-to-market net asset value (NAV) per share is between $0.995 and $1.005. Given this very small margin of error, deviations of greater than plus or minus 0.5% can create a situation in which a fund sells and redeems shares at a price other than $1.00, or, in other words, "breaks the buck." Should a market disruption caused by an 'SD' event lead to a decline in the prices of U.S. Treasury and government securities (and other short-term money market instruments), money market funds may experience a precipitous drop in their NAVs, increasing the likelihood of money funds breaking the buck. Principal stability fund ratings (PSFRs) are assigned to money market funds and address a fund's ability to maintain principal value. Therefore, a downward movement in a money fund's NAV could trigger a downgrade, including to 'Dm', if a fund has failed to maintain its principal value (i.e., $1.00 per share). PSFRs are closely linked to the short-term ratings on the U.S. government because a fund's investments should have a Standard & Poor's short-term rating of 'A-1+' or 'A-1' for the fund to be rated investment grade. A downgrade of the U.S. sovereign rating to below 'A-1+' would have significant implications for principal stability funds that invest a majority of their assets in U.S. government debt."

While she barely mentioned money funds in her prepared remarks, Reuters reports that SEC Chairman Mary Shapiro commented on money funds in the Q&A and afterwards in their story, "Floating money funds rate under discussion: Schapiro." The article says, "Regulators are discussing whether to abandon the $1-per-share standard value long used by money market funds, Securities and Exchange Commission Chairman Mary Schapiro said on Thursday. Regulators have been tightening oversight of banks and brokerages after the collapse of Lehman Brothers in September 2008 forced the government to backstop the industry."

Reuters writes, "Schapiro said that doing away with the $1 standard and allowing net asset values (NAV) to "float" is one of several issues under discussion." They quote her, "I would say nothing has been decided," Schapiro told the Senate Banking Committee at a hearing on the one-year anniversary of the Dodd-Frank financial oversight law."

The piece also says, "Some market analysts have raised concerns in recent weeks about money market funds' exposure to European banks amid anxiety that a smaller euro zone country could default on its debt. Schapiro disputed that notion, in an interview following the hearing. "We know that there's little or no direct money market fund exposure to the peripherals," she said. "But there is significant exposure to European banks, which may in turn be exposed to the peripheral countries, so it is something we are all watching very closely."

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