Yesterday, SEC Chairman Mary Schapiro spoke at a reporter's breakfast hosted by the Christian Science Monitor. When asked the question, "What keeps you up at night?" She responded, "Everything keeps me up at night. I do feel a sense of urgency about the structural weaknesses that exist in money market funds, despite the fact that the series of rules we did to improve the credit quality and liquidity were important. [The] tremendous steps that we took in 2010 ... clearly helped these funds weather a lot of the volatility of the European crisis this summer."
Schapiro added, "There is a structural weakness that makes them prone to runs, and I feel that we need further debate and discussion around some concrete ideas there." (See the Christian Science Monitor's story, "What keeps SEC chairwoman up at night? Money market funds (+video)" and the video here.)
Bloomberg's coverage, "SEC's Schapiro Says Money Funds’ Makeup Makes Them Run-Prone ", says, "Money market fund regulations need to be revamped quickly to fix the funds’ inherent vulnerability to runs, said U.S. Securities and Exchange Commission Chairman Mary Schapiro.... The SEC has been working on two possibilities to change aspects of the $2.6 trillion money funds industry that make them 'prone to runs,' she said, with the agency considering either a departure from the traditional $1 share price or mandating capital cushions. Regulators have debated how to make the funds more stable since the 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run by clients that helped freeze global credit markets."
Their story adds, "The agency enacted changes two years later in an attempt to prevent runs, including new liquidity requirements, shorter maturity limits and enhanced disclosure mandates. Schapiro said in a November speech that the agency would soon propose revamping fund rules. The commission hasn't yet voted on a proposal. Republican Commissioner Daniel M. Gallagher has stated that the agency should hold off on such an overhaul."
In other news, Fitch Ratings put out a release entitled, "Rated US MMF Limit Nongovernment Collateral Backing Repos" late yesterday. It says, "The `Federal Reserve Bank of New York's recently stated that the goal of the triparty repo market reform to reduce the market's dependency on intraday credit provided by clearing banks was not achieved. "The amount of intraday credit provided by clearing banks have not yet been meaningfully reduced, and therefore, the systemic risk associated with this market remains unchanged," the Fed said."
Fitch continues, "The Fed is now expected to increase its direct oversight of the clearing banks and, potentially, introduce restrictions on the types of collateral that can be financed in triparty repo. We believe these additional restrictions would introduce more sound risk management and collateral practices. However, regulatory restrictions on the collateral types and haircuts, if introduced, would most likely negatively affect yield if they reduced the collateral supply and emphasized higher quality, lower risk securities."
They add, "Money market funds rely heavily on the repo market as a means to invest short term and meet daily liquidity requirements. Our analysis of repo transactions in rated money market funds focuses on the credit strength of the counterparty and the quality of the collateral.... For higher risk securities, Fitch ignores the collateral backing the repo and looks solely to the counterparty as if the exposure were unsecured. We note that extremely low interest rates amid constrained supply of MMF-eligible assets have prompted some U.S. prime MMFs to increase their allocations to higher yielding repos backed by nongovernment collateral. At the end of 2011, Fitch-rated U.S. prime MMFs allocated, on average, 6.5% of their total assets to repos backed by nongovernment collateral."
