A Media Advisory released by the Treasury Department says, "On Tuesday, November 13, 2012, Treasury Secretary Tim Geithner will preside over an open session of the Financial Stability Oversight Council (Council). The Council will discuss, among other topics, proposed recommendations regarding money market mutual fund reform pursuant to the Council's authority under section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act." The Wall Street Journal broke the news Thursday afternoon in its story, "Money Funds' Plan Falls Flat." The FSOC meeting will be Webcast live at 2:30pm EST on Nov. 13 (click here to access). (Note too that funds will be closed Monday for Veteran's Day.)
The Journal says, "A bid by money funds to head off substantial new regulations to safeguard funds during times of financial stress is receiving a chilly reception from federal regulators. Several fund firms in the $2.6 trillion industry have backed a plan to penalize customers who try to pull cash out of the funds during a crisis. Funds would take on no new safeguards during ordinary times under the proposal, which was made at a recent meeting with Securities and Exchange Commission officials."
The article explains, "But people close to the SEC say the proposal doesn't go far enough and that it could even trigger the type of destabilizing runs on money markets seen most recently during the collapse of Lehman Brothers Holdings Inc.... Money funds are seeking to avoid sanctions from the Financial Stability Oversight Council, a board of top regulators established by the Dodd-Frank financial overhaul that potentially could bring the largest fund companies under the purview of the Federal Reserve. The council is scheduled to advance its own set of proposed money-fund rule changes on Tuesday, officials said. Meanwhile, the fund industry is seeking a deal with the SEC, seen by many in the industry as a friendlier regulator."
The Journal adds, "In September, Treasury Secretary Tim Geithner, who also serves as chairman of FSOC, sent a letter to fellow members of the council urging that it put pressure on the SEC to pass reforms on the industry. One idea in Mr. Geithner's letter that calls for "liquidity fees or temporary 'gates' on redemptions" is similar to the circuit-breaker concept. A spokesman for the Treasury Department declined to comment. Temporarily halting redemptions also mirrors a so-called "gating" idea favored by at least two Republican SEC members, Dan Gallagher and Troy Paredes. Another proposal to safeguard money markets involves "floating" their share prices, like other mutual funds. Money funds currently calculate their net asset values at $1 a share, despite small fluctuations in the values of their holdings, and much of the industry has opposed changing this system."
Geithner's Sept. 27 letter to FSOC says, "As its Chairperson, I urge the Council to use its authority under section 120 of the Dodd-Frank Act to recommend that the SEC proceed with MMF reform. To do so, the Council should issue for public comment a set of options for reform to support the recommendations in its annual reports. The Council would consider the comments and provide a final recommendation to the SEC, which, pursuant to the Dodd-Frank Act, would be required to adopt the recommended standards or explain in writing to the Council why it had failed to act. I have asked staff to begin drafting a formal recommendation immediately and am hopeful that the Council will consider that recommendation at its November meeting."
The Secretary explains, "The proposed recommendation should include the two reform alternatives put forward by Chairman Schapiro, request comment on a third option as outlined below, and seek input on other alternatives that might be as effective in addressing MMFs' structural vulnerabilities. Option one would entail floating the net asset values (NAYs) of MMFs by removing the special exemption that allows them to utilize amortized-cost accounting and rounding to maintain stable NAVs. Instead, MMFs would be required to use mark-to-market valuation to set share prices, like other mutual funds. This would allow the value of investors' shares to track more closely the values of the underlying instruments held by MMFs and eliminate the significance of share price variation in the future."
Geithner continues, "Option two would require MMFs to hold a capital buffer of adequate size (likely less than 1 percent) to absorb fluctuations in the value of their holdings that are currently addressed by rounding of the NAV. The buffer could be coupled with a "minimum balance at risk" requirement, whereby each shareholder would have a minimum account balance of at least 3 percent of that shareholder's maximum balance over the previous 30 days. Redemptions of the minimum balance would be delayed for 30 days, and amounts held back would be the first to absorb any losses by the fund in excess of its capital buffer. This would complement the capital buffer by adding loss-absorption capacity and directly counteract the first-mover advantage that exacerbates the current structure's vulnerability to runs."
Finally, Geithner's letter adds, "Option three would entail imposing capital and enhanced liquidity standards, potentially coupled with liquidity fees or temporary "gates" on redemptions that may be imposed as an alternative to a minimum balance at risk requirement. We should also be open to alternative approaches that satisfy the critical objectives of reducing the structural vulnerabilities inherent in MMFs and mitigating the risk of runs. We should use this opportunity to seek informed perspectives on the extent to which any mix of the specific reforms described above or other reforms would achieve the same level of protection for investors and the broader economy. The Council should engage with key stakeholders as part of this overall process."
