In late November, law firm Bingham put out a brief entitled, "FSOC Turns Up the Heat on Money Market Fund Reform, which sums up the situation regarding future money fund regulations following the FSOC's release of its "Proposed Recommendations Regarding Money Market Mutual Fund Reform." The alert, written by Lea Anne Copenhefer, Roger P. Joseph and Caroline W. Cai," says, "On November 13, 2012, stating that "[r]eforms to address the structural vulnerabilities of money market mutual funds ... are essential to safeguard financial stability", the Financial Stability Oversight Council ("FSOC") voted unanimously to propose for public comment possible recommendations for money market fund reform. FSOC's vote signals a growing impatience with the status quo and in effect rejects reform measures proposed by the money market fund industry such as implementing liquidity fees and/or temporary restrictions on redemptions during times of market stress."
Bingham explains, "Three months ago, the U.S. Securities and Exchange Commission Chairman Mary Schapiro announced that the SEC was unable to move forward with the staff's money market fund reform proposal due to a lack of support from a majority of the SEC commissioners. Shortly thereafter, U.S. Treasury Secretary Timothy Geithner, who also serves as the Chairman of FSOC, urged FSOC to step in and take up money market fund reform. FSOC complied, and it did so quickly. Just 47 days after Secretary Geithner urged FSOC to act, it published for comment three recommendations to reform money market funds pursuant to its authority under Section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act."
The alert continues, "According to the FSOC release, the proposed recommendations aim to "address the activities and practices of money market funds that make them vulnerable to destabilizing runs: (i) the lack of explicit loss-absorption capacity in the event of a drop in the value of a security held by an money market fund, and (ii) the first-mover advantage that provides an incentive for investors to redeem their shares at the first indication of any perceived threat to a money market fund's value or liquidity." However, FSOC itself asks whether the recommendations would if implemented in fact achieve the desired results."
Bingham adds, "FSOC's proposed recommendations are not the latest words on the topic of money market fund reform. Pressure for reform continues to build as regulators from around the world zero in on money market funds. Five days after FSOC published its proposed recommendations, the Financial Stability Board issued a report on global shadow banking in which it identified money market funds' susceptibility to runs as a systemic risk. In particular, the Financial Stability Board endorsed the policy recommendation issued by the International Organization of Securities Commissions to move money market funds from a stable NAV to a floating NAV."
They conclude, "The pressure on money market funds and the money market fund industry is clearly mounting, and some kind of further regulatory action appears increasingly likely. Whether that action will effectively address the issues faced in 2008 is uncertain. Likewise, it remains to be seen whether regulatory action will make money market funds less attractive to investors, and thus cause the industry to shrink, with potentially negative economic repercussions. Nonetheless, the concern by global financial regulators about shadow banking helps to explain FSOC's insistence on quick action, even in the face of uncertainty as to its effects."
In other news, we noticed a startling increase in the size of the money fund industry in FSOC's "Proposed Recommendations". They write in their "Description of Money Market Funds, "MMFs are a type of mutual fund registered under the Investment Company Act of 1940 (the "Investment Company Act"). Investors in MMFs fall into two categories: (i) individual, or "retail" investors; and (ii) institutional investors, such as corporations, bank trust departments, pension funds, securities lending operations, and state and local governments, that use MMFs for a variety of cash management and investment purposes. MMFs are widely used by both retail and institutional investors for cash management purposes, although the industry has become increasingly dominated by institutional investors. MMFs marketed primarily to institutional investors account for almost two-thirds of assets today compared to about one-third of industry assets in 1996."
FSOC continues, "MMFs are a convenient and cost-effective way for investors to achieve a diversified investment in various money market instruments, such as commercial paper ("CP"), short-term state and local government debt, Treasury bills, and repurchase agreements ("repos"). This diversification, in combination with principal stability, liquidity, and short-term market yields, has made MMFs an attractive investment vehicle. MMFs provide an economically significant service by acting as intermediaries between investors who desire low-risk, liquid investments and borrowers that issue short-term funding instruments. MMFs serve an important role in the asset management industry through their investors' use of MMFs as a cash-like product in asset allocation and as a temporary investment when they choose to divest of riskier investments such as stock or long-term bond mutual funds."
The report adds, "The MMF industry had approximately $2.9 trillion in assets under management ("AUM") as of September 30, 2012, of which approximately $2.6 trillion is in funds that are registered with the SEC for sale to the public. This represents a decline from $3.8 trillion at the end of 2008. As of the end of 2011, there were 632 such funds, compared to 783 at the end of 2008." A footnote explains that the $2.9 trillion is, "Based on data filed on SEC Form N-MFP as of September 30, 2012;" and that the $2.6 trillion is from ICI's "Weekly Money Market Mutual Fund Assets" (Oct. 25, 2012)." We'll let you know once we find out what kinds of funds and which managers account for the $300 billion increase.
