Below, we excerpt from a couple recent discussion on the role of the Financial Stability Oversight Council, or FSOC, in possible future money fund regulations, and we also quote from a commentary saying Fed action involving IOER, or interest on excess reserves, is now very unlikely. Investors' Business Daily last week featured the article, "Dodd-Frank Panel Could Rekindle Money Fund Fight" It said, "Hold the applause. Although Securities and Exchange Commission Chairwoman Mary Schapiro last week dropped her effort to tighten money fund controls, the fight might not be over. The next SEC chair could resurrect the issue. That could happen after Schapiro's term expires June 5, 2014. Or it could happen earlier if Schapiro resigns as a result of, say, the November elections."
IBD wrote, "And industry observers see a real threat that the fight could shift to a potentially deadlier battleground. The Financial Stability Oversight Council (FSOC) could try to impose the rules favored by Schapiro, or something even more draconian, says Mercer Bullard, a former SEC assistant chief counsel and founder of fund shareholder advocacy group Fund Democracy."
The piece quotes Peter Crane, president of Crane Data, "A floating NAV was kryptonite to funds. They hate it." IBD adds, "The FSOC, authorized by the 2010 Dodd-Frank law, could ask the SEC to readdress money fund reforms. Or the FSOC could designate certain fund firms, such as the biggest ones with money market funds, systemically important. That would make them subject to rules such as Schapiro -- a member of the FSOC -- favored, or tougher."
On Tuesday, a Wall Street Journal blog wrote "Money Funds Test Effectiveness of Dodd-Frank". It said, "To some observers, the whole value of the Dodd-Frank financial law will be measured by how regulators resolve the mess over money-market funds. To recap: A slew of top regulators including Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner have said money-market funds, which weren't addressed in Dodd-Frank, are a threat to financial stability. Securities and Exchange Commission Chairman Mary Schapiro, who also supported new rules for money funds, called off a vote on a proposal because she didn't have enough support among her fellow commissioners."
The blog adds, "SEC action was seen as the best solution to fixing vulnerabilities the money-fund industry, but Dodd-Frank gives a super-council of regulators, known as the Financial Stability Oversight Council, tools to jump in and the Fed could act in a limited capacity as well. If they don't use those tools, and quickly, investors shouldn't believe claims that Dodd-Frank is making the financial system safer from systemic threats, argues Jaret Seiberg, a Washington analyst with Guggenheim Partners."
In other news, Federated Investors' Debbie Cunningham writes in her latest "Month in Cash", "Treasury and repo rates have held fairly firm throughout the month, as we've had good supply in both markets. We've seen the overnight repo market holding in the mid-to-high teens, and Treasuries have been providing relatively decent returns in the three- to six-month area of the cash-yield curve. Commercial paper has remained steady as well."
On "Easing pressure for easing?," she comments, "Despite all the talk in the markets, we don't see it likely, without some sort of major market movement, that the Federal Reserve will announce any sort of new easing measures this month. We never thought another round of easing was as imminent as the headlines might have suggested during the dicey summer months, and now that economic data is starting to show some strength again (thank you!), it seems there's even less justification out there."
Cunningham adds, "Should the Fed decide to go down that path, we continue to see the limited measure of an extension and/or modification of Operation Twist, by either broadening the collateral types or widening maturities, as the likely choice. While there's always a chance of a full-scale Quantitative Easing III, that's looking more and more like a distant runner-up as conditions improve. The third option, lowering or eliminating the Interest Rate on Excess Reserves, or IOER, has fallen so far back that it's not really in the race any more. That's a good thing, though."
She says, "The ECB lowered its deposit rate in mid-July from 25 basis points to zero and reduced its lending rate from 1.0% to 0.75%, and things did not go well. The ECB had hoped European banks would have pulled their deposits and moved them over to more productive and lucrative lending, to actual businesses, and spur some growth. The banks didn't cooperate, though, and now Europe is facing negative rates, zero loan growth, and, to top it off, less profitable banks. The move even had the perverse effect of causing European government money market funds to close to new investments so as to avoid further injury to their existing investors. Bottom line: Don't look for that kind of action here."
