Earlier this week, Bank of America Merrill Lynch hosted a Banking and Financial Services Conference, which featured a number of investment company leaders. Two of them, Invesco President & CEO Marty Flanagan and BlackRock Chairman & CEO Larry Fink, briefly addressed money market fund issues in their Q&A sessions. We quote from their comments below.
Invesco's Marty Flanagan was asked on Tuesday, "There's been a lot of talk in the last couple of weeks about what the SEC may do with money markets.... I know you are involved with the ICI. Can you tell us what the ICI stands with regulations on money markets and how you think this all plays out? He answered, "That's a very topical question. You can see the end-game in sight. I think there is absolute dedication by the regulators that they really want an answer into next year. [Then] it might take the year to get done."
He continued, "The first round of regulations that was put in place, which most people know was greater liquidity, shortening duration, increasing quality.... It was beyond just a good idea. It was tested over the summer with the crisis in Europe. I think the feedback we are getting is that the regulators are feeling quite good about that outcome. That was not a make-believe test but a real test. So that is a good start."
Flanagan added, "They have continued to say that they want [more strengthening]. There is talk of elements of some round of buffers and the like. Anything to stop what they perceive as a run is really what they want to put in place, whether it be gates at the end or those types of things. It's unclear what the outcome will be. But I would say this, the principles that they are operating on is: they want broad participation in the money market business. They don't want it concentrated. They want many players in it. They want money funds to exist. They recognize how important it is to the financial eco-system, so that's a good thing. So I think that means the money funds will exist for the benefit of clients."
Finally, he said, "Where's the floating NAV idea? It feels like, from my perspective, this is my opinion, that it is likely off the table. The conclusion is that the knee-jerk reaction is what a great idea, but upon further study they've seen that it would not stop a run if that's the idea.... If you float the NAV, it's over.... Whatever the solution is, it needs to work in multiple capital environments."
Then on Wednesday, BlackRock's Fink, "I was wondering if you could comment on the money market reforms, that may or may not be coming?" Fink answered, "Well, they are coming. I can say that with certainty. Unfortunately, 2008 showed that money market funds are systemically risky. That is a fact; you can't deny it. The failure of The Reserve Fund and the subsequent run on all money market funds, if we did not have the Federal Reserve stabilize the system it would have been a real severe kick.... I have always believed, let's be factual about what happened and let's try to find a resolution. I am actually against the floating rate NAV as a solution. I think that it destroys a lot of the good things about money market funds. It would [push] a lot of money that would be leaving money market funds into banks."
He explained, "If we're trying to make banks too big to fail, things like destroying the money market fund industry would put all that money into the too big to fail banks. We need to find a resolution that works and we have always been a believer [that] to make money market funds competitive and safe, there needs to be associated capital. We have been asking our auditors, 'Can we set aside capital?' I think as far back as 7-8 years ago. They would not allow us to set aside capital because [that is] called managing earnings.... Under GAAP, you can't set aside a reserve when there is no need for a reserve.... So our view is we need some form of capital plan that should be done over a five year period of time. The SEC has already demanded a lot more transparency on money market funds."
Fink continued, "So, if we set aside some capital, let's say 50bps or 25bps.... We'll see where it comes out. The question is, 'How fast do you put that capital aside?' Can you do that through allocating a few basis points a year? Or can you do that through a guaranteed LOC from a bank? So how it is manifest, I don't know. But we are assuming at BlackRock that we are going to have a much more regulated entity. We assume there is going to be some form of change, whether is capital, which we believe is the right answer. [But] it could be a variable NAV, which we think would be damaging a least a subset of the money market fund industry."
A follow up question asked, "Will the business model work with capital?" Fink responded, "Yeah, sure. I think you are going to see fewer money market funds. We believe you are going to see a shrinkage in the amount of money market fund entities, but the bigger, capitalized entities should be fine."
