Several more postings have been made in recent days to the SEC's "President's Working Group Report on Money Market Fund Reform (Request for Comment)" website. The latest batch includes another submission by "John D. Hawke, Jr., Arnold & Porter LLP, on behalf of Federated Investors, Inc., which breaks assets into investor types and estimates sweep assets at 14% (over $360 billion) of all money fund assets, yet another posting by "John W. McGonigle, Vice Chairman, Federated Investors, Inc., Pittsburgh, Pennsylvania," which blasts minimum balance requirements, and one by Tony Carfang and Cathy Gregg, Treasury Strategies, Inc., which analyzes a capital buffer requirement. We excerpt from each below.
The latest Hawke submission states, "We are writing to supplement our comment letters dated December 15, 2011 and February 24, 2012, on behalf of our client Federated Investors, Inc., with information on the approximate size of each of the segments of specialized commercial users of money market mutual funds that are described in our previous letters. As discussed in our prior letters, radical changes to MMF regulation, including movement to a continuously floating NAV, a holdback or minimum balance requirement, or bank-like capital requirements, would seriously undermine the utility of MMFs to businesses, governments, investors, and other private and public sector participants for a variety of specialized applications, including corporate payroll processing, storing corporate and institutional operating cash balances, bank trust accounting systems, storing federal, state and local government cash balances, municipal bond trustee cash management, consumer receivable securitization cash processing, escrow processing, 401(k) and 403(b) employee benefit plan processing, holding broker-dealer and futures commission merchant customer cash balances, and holding cash sweep balances in cash management type accounts at banks and broker-dealers. MMF shareholders in these segments operate using automated systems and processes that depend upon a predictable NAV, and same day and next-day settlement of the full balances redeemed or invested."
The comment continues, "Federated has prepared these estimates using its own data as well as data that is commercially available from other sources. For some of the segments, the available information is nearly complete and provides a very close indication of the amounts involved in the segment. For certain other segments, the estimates are based on limited data and may be higher or lower than the actual amounts by a significant amount. The numbers indicate that individually and in the aggregate these specialized uses of MMFs represent very large dollar amounts and may represent 50% or more of aggregate MMF balances."
Hawke's post adds, "In light of operational and legal impediments to the continued use of MMFs in these segments after implementation of holdbacks, minimum balance requirements, continuously floating NAV, bank-like capital requirements or other substantial changes to MMF regulation that are being considered, we believe that the changes to MMF regulation currently under discussion within the SEC Staff would result in significant disruptions for investors in these segments. The Commission's regulation and oversight of MMFs has been robust and successful, and the recent amendments to Rule 2a-7 appear to have been highly effective in enabling MMFs to weather periods of unusual redemptions during last year. Imposition of a holdback, minimum balance requirement, bank-like capital requirements, a continuously floating NAV, or other substantial changes to MMFs regulation would harm each ofthese specialized applications that have come to rely on MMFs, and would have adverse ripples throughout the economy. The economic importance of these segments, and the amounts involved, are very substantial. Far more detailed and accurate data needs to be gathered before the size of these segments and their economic importance can be fully understood, and the potential impact of any of the major changes upon these segments can be gauged."
The new McGonigle comment says, "We are writing to supplement the comments made in the letter of February 24, 2012, filed by Arnold & Porter LLP on behalf of Federated Investors, Inc., regarding proposals to impose redemption restrictions on money market funds. In this letter, Federated would like: first, to expand upon the March 2, 2012, comment letter of DST Systems, Inc. regarding the insurmountable operational difficulties entailed in imposing a minimum balance on money market fund accounts; and second, to direct the Commission's attention to state laws and provisions of fund organizational documents that would prevent money market funds from imposing any form of redemption restriction. Federated believes that the facts reviewed in this letter, coupled with our earlier comments, demonstrate that any form of continual redemption restrictions would seriously impair the utility of money market funds and tremendously increase the cost of their operations."
Finally, the TSI letter says, "On behalf of Treasury Strategies, Inc., we write to call your attention to our recent analysis of the consequences of requiring money market mutual funds to maintain a capital buffer. There are several troubling potential consequences of such a requirement. As we have noted in the enclosed copy of our report, a capital buffer may create incentives for investors and fund managers, as well as new compliance burdens, that would have the opposite result of the intended goals of financial reform."
It explains, "In brief, the existence of a buffer may create an initial false sense of comfort among investors, thereby attracting investors who are not properly cognizant of risk. Yet, this false confidence could easily give way to a run if and when losses are charged against the capital buffer. Any such charge would be likely to act as an "early warning" signal to fund investors, encouraging them to exit the fund before the buffer was exhausted. Similarly, while financial reform is intended to result in decreased concentration and lower systemic risk, we conclude that a capital buffer may lead to greater risk-taking as asset managers seek to increase yield, or to greater concentration of capital in the largest banks, as money fund sponsors exit the business. Perhaps most importantly, our analysis reviews the anatomy of financial runs, and summarizes how the Commission's 2010 amendments to Rule 2a-7 have addressed the circumstances that trigger runs. We urge the Commission to consider how those rule changes have benefited the markets, and to evaluate whether further changes are truly needed, or would only result in unintended consequences."
