Ahead of the now-extended (see our "Link of the Day") deadline for Comments on the FSOC's MMF Reform Proposals, the Investment Company Institute has released an extensive study on the impact of the SEC's 2010 Money Fund Reforms. The press release, entitled, "ICI Analysis of SEC's 2010 Money Market Fund Reforms: Tested, Working, and Have Enhanced Financial Stability," and subtitled, "Findings Relevant to Current Money Market Fund Regulatory Developments and U.S. Debt Ceiling Policy Debates," says, "Comprehensive reforms by the Securities and Exchange Commission (SEC) in 2010 to regulations governing money market funds were tested by market stresses in 2011 and are working, according to new analysis by the Investment Company Institute (ICI) in a study released today."

ICI says, "The study, "Money Market Mutual Funds, Risk, and Financial Stability in the Wake of the 2010 Reforms," further finds that those reforms ultimately enhanced financial stability -- as evidenced by the fact that the prime money market had enough liquidity to meet heavy redemptions in the summer of 2011, triggered by two major market events. At the beginning of that summer, thanks to the SEC 2010 reforms, prime money market funds were already poised to manage through the market stresses with higher liquidity and increased transparency. Those factors, coupled with diligent portfolio management, allowed funds to respond to evolving market conditions."

It continues, "The study examines the impact on money market funds of the SEC 2010 reforms, which significantly strengthened the maturity, credit risk, and liquidity requirements for money market fund holdings. The study comes as the Financial Stability Oversight Council (FSOC) considers additional changes to money market fund regulation and as Congress and the Administration engage in policy debates over the looming U.S. debt ceiling, which could be a catalyst for new stresses in the financial markets."

President & CEO Paul Schott Stevens comments, "The study confirms that money market funds of 2013 are nothing like the funds of 2008, thanks to the SEC's far-reaching amendments to money fund regulation. This is important analysis and perspective for regulators to consider as they look at additional regulations and for the public to understand, as the nation faces another debt ceiling debate in the coming weeks. Money market funds are stronger and well positioned today to deal with market issues."

ICI's release continues, "Money market funds were hit in the summer of 2011 by two financial market shocks: the standoff over the U.S. federal debt ceiling and deteriorating conditions in eurozone debt markets. The study finds that money market fund managers reacted appropriately to both events and money funds were well positioned to manage the events due to new requirements in place. Money market fund managers prepared for the likelihood that the U.S. federal government would default in 2011. Anticipating that concerns about the debt ceiling impasse might lead investors to redeem shares, both government and prime funds shortened their maturities in the weeks leading up to a key August 2011 deadline. Funds also maintained levels of liquidity well above new liquidity requirements."

It adds, "Money market funds gradually reduced their holdings to banks most exposed to the unfolding debt crisis in Europe. Money market funds also showed a careful and proactive response to the unfolding sovereign debt crisis in Europe during the 2011 market turmoil. Managers reduced their overall holdings of securities issued by banks in the eurozone from 30 percent of their assets in May 2011 to 11 percent by December 2011. In addition, the evidence shows that prime funds also reduced their exposures to other European banks that, although outside of the eurozone itself, were exposed to eurozone banks."

ICI tells us, "Evidence from 2011 shows that prime money market funds took only marginally more credit risk than did Treasury-only money market funds. ICI analyzed data on credit default swap spreads in 2011, and found that prime money market funds took on or maintained only minimal credit risk, despite small increases in such risk as the eurozone crisis progressed in the second half of 2011."

It says, "The paper concludes: "The efficacy of the SEC's new provisions was tested in 2011 by the market turmoil created by the standoff over the U.S. federal debt ceiling and deteriorating conditions in eurozone debt markets. Money market funds passed these tests. The data show that money market fund managers proved themselves careful stewards of their investors' assets, adjusting their holdings in response to changing conditions and maintaining liquidity levels above those stipulated by the 2010 requirements."

It also explains, "The ICI study rebuts a number of oft-repeated misperceptions about the role of money market funds during the 2011 financial market shocks. Specifically, the evidence supports the conclusion that money market funds' proactive measures to reduce their credit and market risk during the market difficulties in 2011 did not harm the financial system.... Outflows from prime money market funds did not cause an aggregate decline in lending by subsidiaries of foreign banks in the United States."

ICI's statement continues, "Outflows from prime money market funds did not cause collateral damage to U.S nonfinancial firms. Contrary to some reports, prime funds increased their lending to U.S. nonfinancial firms in the summer of 2011. The prime funds most exposed to eurozone banks reduced their holdings of securities issued by U.S. nonfinancial firms over the summer of 2011 by a small amount, $900 million. More than anything, however, this decline reflected the decision of U.S. nonfinancial firms to take advantage of historically low interest rates to replace short-term funding with long-term debt issuance."

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