The web page hosting Comment Letters for the President's Working Group Report on Money Market Fund Reform is seeing another burst of activity recently with the initial May 31 deadline (since extended, see our "Link of the Day") to post comments to the International Organization of Securities Commissioners passing. We covered ICI's and Fidelity's lengthy responses last week, but additional letters from Schwab and Invesco have since been added. (U.S. companies are filing these dually with IOSCO and the SEC's PWG site.) Charles Schwab's Marie Chandoha writes, "Attached is a copy of a comment letter recently filed by Charles Schwab Investment Management, Inc., to the International Organization of Securities Commissions in response to its Consultation Report of April 27, 2012, "Money Market Fund Systemic Risk Analysis and Reform Options." In our letter, we provide our perspective on the Consultation Report. We discuss several concerns with the Report, and in particular challenge three of its basic premises: 1) that money market funds are dangerously susceptible to runs; 2) that money market funds are somehow more systemically risky than the global banking system; and 3) that there is a presumption that more regulation is needed, despite the lack of empirical evidence. We point to the SEC's 2010 reforms to Rule 2a-7 as having strengthened considerably money market funds and urge that a comprehensive analysis of the effectiveness of those reforms be undertaken prior to consideration of any further regulation. We ask the Commission to give full consideration to our comments on the IOSCO Consultation Report as it continues to consider whether additional reforms to the regulatory regime for money market funds are necessary."
Chandoha writes to IOSCO's Mohamed Ben Salem, "Schwab appreciates the work that went into the preparation of the Consultation Report, particularly in the discussion of the different regulatory schemes governing money market funds (and their equivalents) in different jurisdictions across the globe and in its Appendix B, which analyzes what happened during the 2008 financial crisis and the steps various jurisdictions have taken in response. The Report is also comprehensive in its exploration of more than 20 possible reforms, and is, for the most part, balanced in its assessment of the pros and cons of those options."
She continues, "Nevertheless, Schwab finds numerous aspects of the Report troubling. Perhaps most troubling are three of its basic premises: 1) that money market funds are dangerously susceptible to runs; 2) that they are somehow more systemically risky than the global banking system; and 3) that there is a presumption that more regulation is needed, despite the lack of empirical evidence. We believe strongly that money market funds are one of, if not the, safest investment options in the market today, with an incomparable track record of safety, security, convenience and investor satisfaction. As an investment product, they carry some risk, but the risks are clearly and simply disclosed, of short duration and managed through high-quality investments. If the regulatory goal is to eliminate all risk from the product, then the bar is set impossibly high. Rather, the focus should be on ensuring that money market funds retain sufficient liquidity to handle surges in redemption requests and maintain rigorous scrutiny over the quality of their investment portfolio. As we discuss, we believe that reforms put in place by US regulators in 2010 have accomplished that -- and the volatile markets of the summer of 2011 served as a test for those new requirements, a test that US money market funds passed with flying colors."
Chandoha adds, "Finally, we discuss in this comment letter our concerns that there are limited alternatives to money market funds, particularly for individual investors, and that the result of many of the reform ideas posed in the Consultation Report will be a rapid flight from money market funds either to banks or to unregulated or less regulated alternative products. Either way, the potential systemic risks of those outcomes are several orders of magnitude greater than any minimal risk currently posed to the global financial system by money market funds."
Invesco's Lyman Missimer writes in his comment, "We are writing to provide our views with respect to certain aspects of the Money Market Fund Systemic Risk Analysis and Reform Options Consultation Report dated 27 April 2012 (the "IOSCO Report") published by the International Organization of Securities Commissions ("IOSCO"). The IOSCO Report discusses potential reform options intended to reduce systemic risk generally and to enhance the stability of money market funds in particular. As a major sponsor of money market funds, Invesco strongly supports efforts to bolster the resiliency of these products, which for over four decades have provided a solid foundation for the preservation of capital, daily liquidity and market-based yield that investors have come to expect while also offering global portfolio credit diversification, ease of administration, efficiency in accounting and simplicity of tax reporting."
He explains, "Our interest in commenting is driven by our fiduciary responsibility to our money market fund shareholders and our concern that several of the policy options discussed in the IOSCO Report could have unintended and highly adverse consequences including: harming the orderly functioning or efficiency of credit markets by substantially reducing availability of credit to consumers, corporations, financial institutions and government borrowers; triggering a sudden, widespread shift of assets to less regulated vehicles that do not offer the protections afforded by regulated money market funds; and reducing the number of investment options available to investors."
Missimer adds, "We recognize that the goal of policymakers is to reduce further the vulnerability of the financial system, including money market funds, to systemic risk. We share this aim and have worked actively with both policymakers and our industry peers in the U.S. and Europe in recent years to enhance industry standards and practices in numerous areas, including the tri-party repurchase agreement market. Given the central importance of money market funds to short term credit markets, however, we believe it is critical for policymakers to recognize that disruption of these funds or a significant reduction in their asset base could have a severe destabilizing impact on issuers (including government issuers) and on the markets generally."
Finally, Invesco writes, "While we would support an extension to non-U.S. money market funds of the changes to Rule 2a-7 adopted in 2010, we believe that prior to proposing any additional money market regulations it is critical for policymakers to conduct a thoughtful and comprehensive analysis of the impact of the significant reforms made to date affecting money market funds and global financial system generally. Taking action prior to such an analysis would be premature and could seriously jeopardize the fragile global economic recovery. The analysis must therefore include a rigorous cost-benefit analysis balancing this and other risks against the incremental benefits that might be achieved by further reforms. We appreciate the opportunity that we have been given to comment on this important matter and look forward to continuing to work with policymakers and others in the industry to ensure that money market funds remain a useful and important investment alternative for investors seeking a product that offers safety, liquidity and yield."
