While money fund investors have yet to be heard from, money market analysts and managers continue to ponder, analyze, and comment on the Financial Stability Oversight Council's recent "Proposed Recommendations Regarding Money Market Mutual Fund Reform". Yesterday, two more opinions were published, a "Short-Term Fixed Income Markets Research Note" from J.P. Morgan Securities ("Money fund reform: Enter the FSOC") and an update from Moody's Investors Service, "Financial Stability Oversight Council Recommendations are Credit Negative for MMF managers, Positive for Investors"). J.P. Morgan's Alex Roever writes, under "Try, try again," "On Tuesday, November 13, the Financial Stability Oversight Council (FSOC) met to discuss the case for further reforms for money market funds (MMFs). After a brief meeting, the FSOC voted unanimously to release "Proposed Recommendations Regarding Money Market Fund Reform", outlining possible reforms alternatives. The FSOC is seeking public comment on its proposals over the next 60 days. Following the public comment period, the FSOC will then consider the comments and may issue a final recommendation to the SEC, which, pursuant to the Dodd-Frank Act, would be required to impose the recommended standards, or similar standards that the FSOC deems acceptable, or explain in writing to the FSOC within 90 days why it has determined not to follow the recommendation."
Roever, and fellow authors Teresa Ho and Chong Sin, explain, "Having followed the MMF reform saga for years, we have no doubt that the FSOC will, after receiving and digesting public comment, send an official recommendation to the SEC. We suspect its recommendation will look a lot like the just published alternatives. While we believe the FSOC will diligently review what the public has to say, they have been listening to the public on these issues for at least two years (since October 2010 when the SEC issued a formal request for public comment on the MMF reform whitepaper produced by FSOC's earlier incarnation, the President's Working Group on Financial Reform). They have likely heard it all before, and their accumulated understanding of the issues is reflected in these published alternatives."
They add, "We interpret the FSOC's actions as an attempt to get the SEC, in its role as the primary regulator of MMFs, to affect further reforms. These actions will increase political pressure on the three SEC commissioners that voted against the public release of these proposals, or proposals very much like these, in August. It is currently unclear whether any of the three dissenters (Republicans Troy Paredes and Daniel Gallagher, as well as Democrat Luis Aguilar) have changed their position since August. Aguilar released a statement on August 23, explaining his reasons for resisting Shapiro's proposal, including a need to better understand the impact the 2010 amendments to Rule 2a-7 have already had on the stability of MMFs. Parades and Gallagher jointly released a statement on August 29 detailing their objections against what are essentially these same reforms proposed in the FSOC release."
Finally, Roever and Co. comment, "As all of this suggests, even if the FSOC's proposal can get through the SEC, it will be months before any changes become effective.... The process is potentially lengthened this time by the SEC's 90-day response window. But even assuming the process gets through, the scale of reforms proposed in the FSOC's release will take many months to implement. For example, developing, testing and implementing the systems necessary to convert MMF from stable to variable NAV could conceivably take a year, or maybe more. As a consequence, we doubt there will be floating MMF NAV conversions in 2013. Of course, there is also the possibility that SEC commissioners continue to resist these reforms. With everything else that the Dodd-Frank Act put on the SEC's plate, we wonder if MMF reform will become a policy litmus test for commissioner candidates during Senate confirmations."
A press release announcing Moody's update, entitled, "Moody's: Financial Stability Oversight Council recommendations are credit negative for MMF managers, positive for investors, explains, "The Financial Stability Oversight Council's (FSOC) proposals, if adopted, would structurally reform US money market funds (MMFs) impacting profitability and shrinking assets under management, says Moody's Investors Service in its new sector comment, entitled "Financial Stability Oversight Council Recommendations are Credit Negative for MMF managers, Positive for Investors". The three options include (1) the introduction of a floating net asset value (NAV), (2) the use of a small capital buffer while limiting investor redemptions, and (3) a larger capital buffer without limitation on redemptions. While credit negative for MMF managers, Moody's says that MMF investors will benefit from stronger fund stability during times of stress."
Moody's continues, "These reforms are aimed at addressing the structural vulnerabilities that leave MMFs susceptible to destabilizing runs, and apply to prime, US government and tax-free MMFs, but not to US Treasury funds. Certain reforms in 2010 to Rule 2a-7 in the US, and similar reforms in Europe improved MMFs' resilience and transparency but did not resolve entirely regulator concerns about the systemic risk of runs in times of stress, says Moody's."
VP & Senior Analyst Michael Eberhardt, says, "The FSOC proposals are credit negative for MMF managers at a time when the economics of managing a MMF are already challenged by the present low yield environment. But for investors, the FSOC proposals offer safeguards beyond the SEC's 2010 reforms; further insulating investors from potential losses and reduction of the run risk in a pooled MMF."
The release adds, "Although a credit positive for investors, this safety comes at investors' expense in the case of stricter redemption limits and added costs passed on by MMFs, added Eberhardt. Limitations on investor ability to fully redeem investments will likely cause lower investment in MMF's, reducing industry AUM, while the additional infrastructure required by a floating NAV requirement will increase costs, says Moody's."
