While IOSCO, or the International Organization of Securities Commissioners, doesn't have any jurisdiction in the United States, you wouldn't know it from the comment letters piling up on the SEC's President's Working Group Request for Comment web page, as mutual fund companies have taken this opportunity to yet again lambast the series of radical changes to money fund regulations that have been floated by U.S. and European regulators to date. The latest addition comes from John Hawke, Jr. of Arnold and Porter on behalf of Federated Investors. Hawke writes, "Enclosed is a copy of comments submitted by Federated Investors to the International Organization of Securities Commissions ('IOSCO') on its consultation report on Money Market Fund Systemic Risk Analysis and Reform Options. As Federated has outlined in these comments, money funds should not be labeled as any type of "shadow bank" and should not be subjected to banking-style regulations. Instead, money funds should continue to be treated as what they actually are -- highly liquid investment funds by which investor cash is pooled and invested in money market assets -- and regulated by securities regulators in a manner consistent with their actual structure and purpose. The Commission has had a highly successful record with respect to the supervision and oversight of money funds. In fact, the 2010 amendments to SEC rules governing money funds have made them even more liquid, transparent and stable than ever before. Accordingly, the enclosed comments to IOSCO urge consideration of those reforms as a model for any new standards that may be adopted for global money funds. I appreciate the opportunity to provide you with Federated's comments to IOSCO, and hope they will be helpful to the Commission."
Federated's IOSCO comment says, "Federated appreciates the effort made in the IOSCO Report to provide an assessment of the proposed reforms and Federated continues to support prudent regulation that strengthens and enhances MMFs. Federated participated in developing industry recommendations as part of the rulemaking process followed by the United States Securities and Exchange Commission (SEC) in its 2010 amendments to Rule 2a (2010 Amendments) and Federated is ready to play an equally active role in supporting additional MMF reform measures globally. In order to permit preparation of more complete and thoughtful comments on these important issues from broad cross-section of market participants and the public, we respectfully suggest a longer period be provided for public comment on the IOSCO Report."
The letter continues, "Federated, as a participant in the money markets and a sponsor of the Federated MMFs, is interested in the policy discussions in Europe, the United States and elsewhere around the globe on the status and regulation of MMFs. Adoption in 2009 of the revised "Undertakings for Collective Investment in Transferrable Securities" (UCITS), which put in place a more comprehensive framework for the regulation of investment companies within Europe, has been a significant development. The continuing work of the European Securities andnd Markets Authority (ESMA) and its predecessor, the Committee of European Securities Regulators (CESR)), to develop and implement common definitions, standards and requirements for MMFs in Europe has been a major step forward in the regulation of MMFs. Federated supports those efforts to further improve the global framework for regulation of MMFs."
Hawke explains, "In considering any further reforms, IOSCO should evaluate the effectiveness of: (1) the value of the many changes which have occurred in the global MMF industry since the liquidity crisis, including (i) the 2009 revisions to the UCITS Directive; (ii) the requirements placed upon MMFs and Short-Term MMFs by the May 2010 CESR (now ESMA) guidelines on a "Common Definition of European Money Funds" (ref. CESR/10-049) that went into effect in 2011 (CESR/ESMA Guidelines) that established a common definition of MMFs; (iii) enhanced portfolio requirements required by the Institutional Money Market Fund Association (IMMFA); and (iv) the global impact of the SEC's 2010 Amendments which are followed voluntarily by many MMFs around the world as a "best practice," (2) existing structural mandates requiring distressed constant net asset value (C-NAV) MMFs to float their NAV, and (3) existing disclosures to investors and investors' knowledge of the risks associated with investing in MMFs."
He tells IOSCO, "The implementation of reforms addressing liquidity coupled with the changes previously implemented in the global MMF industry since the 2007-2009 financial crisis, address the key risks that regulators are looking to mitigate. Federated also believes that investors are aware, probably now more than ever, that MMFs are in fact "investments" that have risk. Finally, it should be emphasized that C-NAV MMFs in the United States and UCITS C-NAV MMFs are prohibited from using amortized cost when such use fails to fairly reflect the market-based net asset value per share, and have a regulatory mandate to cease the use of amortized cost in such instances and convert to a variable net asset value (V-NAV)."
Hawke adds, "Given all of the above, IOSCO should not recommend any other radical untested reforms that would fundamentally alter and undermine the global MMF industry. In particular, imposing the "reforms" being advocated for MMFs by bank regulators, such as bank-like capital structures and regulatory frameworks, mandatory use of V-NAV, liquidity fees, and hold-back requirements on redemptions of MMF shares, would be particularly damaging to MMFs globally and all who rely upon them. To do so could risk tremendous disruption in short term markets globally, increase assets held in already "too big to fail" banks, increase borrowing costs of businesses and governments and further slow economic recovery, cause movements of liquidity balances to separately managed accounts, repurchase agreements, unregulated fund products, and trigger a host of other unintended consequences."
He states, "We note that the issues associated with further changes to MMF regulation are sufficiently complex and in need of detailed economic analysis as to both the efficacy of existing and potential further reforms and the direct and indirect effects on the economy of further changes that a majority of the Commissioners of the SEC recently have gone on record to withdraw SEC support of publication of the IOSCO report in its current form."
The letters concluding paragraphs say, "MMFs are important participants the financial markets because they efficiently intermediate investor's shareholdings with short-term funding of governments, businesses and financial institutions. MMFs have been successful by using a very simple, common sense approach, which permits investment only in short term, high quality money market instruments, and maintaining a very liquid investment portfolio sufficient to meet investor redemption requests out of normal cash flows from maturing portfolio investments."
Hawke continues, "MMFs should not be labeled as a type of "shadow bank," and should not be subjected to a banking-style capital structure and regulatory program. Instead, MMFs should continue to be treated as what they actually are -- highly liquid investment funds by which investor cash is pooled and invested in money market assets -- and regulated by securities regulators in a manner consistent with their actual structure and purpose. Rather than imposing dramatic and potentially dislocative changes on the regulation of MMFs by imposing bank-like capital structures and regulations, it would be more prudent to continue the careful fine-tuning of regulatory programs for MMFs developed by securities regulators that have included the revised UCITS Directive in 2009 and the CSER/ESMA Guidelines in 2010, as well as SEC Rule 2a-7. There remain areas for further improvement in the regulation and supervision of MMFs globally that are appropriate for consideration."
Finally, he adds, "These further enhancements to MMF regulation were adopted by the SEC in 2010 after the financial crisis, and have shown the capacity to further stabilize share values, increase investor awareness, and stave off "runs" by shareholders of MMFs. Serious consideration should be given to adopting additional standards for global MMFs similar to those adopted in 2010 for U.S. MMFs. We remain committed to avoiding any recurrence of liquidity events similar to those experienced in September 2008. We are equally committed to the continuation of MMFs as an important sector of the global financial markets. We will be happy to continue to work with the IOSCO and its member nations regulators on reforms that are consistent with both of these objectives."
