Karrie McMillan, General Counsel for the Investment Company Institute wrote a comment letter to the International Organization of Securities Commissions regarding "IOSCO Money Market Fund Systemic Risk Analysis and Reform Options" which was posted on the SEC's President's Working Group comment page as well as on the ICI's website on Friday. Written to Mohamed Ben Salem, General Secretariat of IOSCO, it says, "The Investment Company Institute is pleased to provide comments on the Consultation Report on money market funds issued by the Technical Committee ofthe International Organization ofSecurities Commissions ('IOSCO'). Money market funds playa vitally important role for investors and the global economy and constitute one of the great success stories of modern financial regulation. In the interest of preserving the important benefits these funds provide, ICI and its members have devoted significant time and effort to considering how to strengthen the regulation of money market funds and make them more robust under even the most adverse market conditions -- such as those caused by the widespread bank failures in 2008." (See also Crane Data's May 2 News "IOSCO Money Market Fund Risk, Reform Report Is Europe's Answer to PWG".)
ICI writes, "Over the past few years, the U.S. Securities and Exchange Commission ("SEC") and the U.S. fund industry have made a great deal of progress toward their shared goal of strengthening the resiliency of money market funds. Taking the initiative to respond quickly and aggressively to the events of fall 2008, ICI formed a Money Market Working Group to study the money market, money market funds and other participants in the money market, and recent market circumstances. The March 2009 Report of the Money Market Working Group addressed these topics and advanced wide-ranging proposals for the SEC to strengthen money market fund regulation."
They explain, "In 2010, with the industry's strong support, the SEC approved far-reaching rule amendments that incorporated many of the MMWG Report's recommendations and enhanced an already-strict regime of money market fund regulation: The amended rules make money market funds more resilient by, among other things, imposing new credit quality, maturity, and liquidity standards and increasing the transparency of these funds. In the event a money market fund proves unable to maintain a stable $1.00 net asset value ("NAV") per share, the fund's board of directors is empowered to take prompt action to assure an orderly liquidation of the fund and equitable treatment for all shareholders. These reforms proved their value last summer when U.S. money market funds-withour incident-met large volumes of shareholder redemptions during periods of significant market turmoil, including a credit event involving the historic downgrade of U.S. government debt. Indeed, so far reaching were these reforms that today's money market fund industry is dramatically different from that of 2008."
McMillan tells IOSCO, "U.S. policymakers, industry participants, and other stakeholders have continued to examine possible additional reforms to money market fund regulation even after adoption of the SEC's 2010 amendments. For example, the President's Working Group on Financial Markets conducted a review of money market funds and in late 2010 issued a report ("PWG Report") seeking comment on various money market reform options. Like the Consultation Report, the PWG Report did not endorse any particular course of action. The PWG Report spawned a voluminous and still growing comment record that reflects not only many good faith attempts to respond to policymakers' concerns, but also a striking absence of consensus around whether further action is needed, and if so, how to proceed."
She states, "In the United States, this lack of consensus stems in part from the substantial reforms already implemented by the SEC in 20lO. It also stems from the fact that since the onset of the global financial crisis, regulators around the world have undertaken numerous broader financial reform efforts designed to prevent a recurrence of the events of 2008 and address other perceived gaps in financial regulation. Many aspects of these efforts benefit money market funds, which, like other financial market participants, have a strong interest in a well-functioning global financial system that can withstand periodic shocks. When evaluating the need for further reforms specific to money market funds, it is important to take into account not only the changes already made to strengthen money market fund regulation but also other financial market reforms designed to reduce the likelihood of, and provide better regulatory tools to cope with, any future financial crisis."
The ICI letter continues, "For our part, as a result of ICI's own initiatives and extensive engagement with regulators over the past several years, ICI already has conducted extensive analysis of many ofthe reform options outlined in the Consultation Report (several of which also were included in the PWG Report). ICI's views on possible additional money market fund reforms also have evolved in recent months, for several reasons. First, as mentioned above, we have had the opportunity to observe the success of the SEC's 2010 amendments in helping U.S. money market funds withstand market stress, which strongly calls into question the need for additional reforms. Second, we have concluded that reform options reportedly under the most serious consideration in the United States are severely flawed and would prove extraordinarily detrimental to investors, issuers of short-term debt, and the country, not to mention the industry."
It adds, "We remain committed to working with regulators on this inlportant issue, but we submit that this process should be guided by two principles. First, we should preserve those key features of money market funds (including the stable $1.00 per-share NAV and ready liquidity) that have made them so valuable and attractive to investors. Second, we should preserve choice for investors and competition by ensuring a continued robust and competitive global money market fund industry. Unfortunately, the proposals we understand some U.S. regulators currently are considering are altogether at odds with these principles."
McMillan also says, "Our comments below begin with a brief discussion of why the difficulties that the money market and U.S. money market funds faced during the financial crisis of 2007-2008 do not support the conclusion that money market funds are particularly susceptible to runs, as some claim (Section I). We then review how the SEC's 2010 amendments have made U.S. money market funds more resilient and how their experience under these new requirements during last summer's market events should help inform IOSCO's consultation and recommendations (Section II). Next, we examine three policy options identified in the Consultation Report -- requiring money market funds to let their share prices fluctuate or "float," requiring money market funds or their advisers to maintain capital buffers against money market fund assets, and imposing permanent redemption restrictions-which reportedly are the options U.S. regulators are considering (Section III). Finally, with respect to a number of the other options outlined in the Consultation Report, to the extent we have previously examined those approaches, we summarize our views and provide links to our more detailed, earlier comment letters (Section IV)."
The letter comments on "runs", "The Consultation Report begins by suggesting that the financial crisis of 2007-2008 highlighted that money market funds are particularly "susceptible" to runs. We disagree. The highly unusual events during the 2007-2008 time period, compared to the only other time a money market fund failed to return a full $1.00 per share (or "broke a dollar"), illustrate the importance of context. How investors react in the very rare event that a money market fund is unable to return a full $1.00 per share depends, in our judgment, entirely on the context -- i.e., events that precede and surround that occurrence. Money market funds were not the cause of the financial crisis, but were directly affected by its enormous scale, duration, and by the lack of coherent, consistent government policy responses. Like many market participants, money market funds were hit by a global crisis that began to take hold long before September 2008."
Finally, it explains, "The financial crisis was, first and foremost, a crisis in the real estate markets and the "originate to distribute" phenomenon that developed as regulators stood by. As the real estate markets collapsed, the banking system experienced enormous stress as structured investment vehicles (SIVs), originally designed to move liabilities off of banks' balance sheets, suddenly were brought onto those balance sheets.' The banking crisis that followed was catastrophic. At least 13 major institutions went bankrupt, were taken over, or were rescued in the 12 months before Lehman Brothers failed. Lehman's failure was an especially difficult shock for the market because it represented an abrupt reverse in direction by the U.S. government from its previous decisions to intervene and rescue Bear Stearns, Fannie Mae, and Freddie Mac."
