As market participants await a potential final recommendation from the Financial Stability Oversight Council (it should be at least several more weeks), we continue to read Comments on the FSOC's "Proposed Recommendations Regarding Money Market Mutual Fund Reform". (Note: The FSOC announced recently, "On Thursday, February 28, Acting Secretary Wolin will chair the next regularly scheduled meeting of the Financial Stability Oversight Council in a closed session at Treasury.) Today, we excerpt from HSBC Global Asset Management's recent letter. It says, "HSBC Global Asset Management manages over USD 65bn in money market funds ("MMFs") and segregated money market mandates. We manage MMFs in 16 different jurisdictions and in 12 different currencies. We have a unique perspective on the MMF industry due to the breadth of markets we offer MMFs and the fact that we are the only manager who has meaningful scale in the three largest markets for MMFs (US 2a-7 market, "international" market Dublin/Luxembourg and the French domestic market). We manage both Constant Net Asset Value ("CNAV") funds and Variable Net Asset Value ("VNAV") funds, adopting the same investment policies and investment process across our range of MMFs."
HSBC's Jonathan Curry, Chris Cheetham, and Travis Barker comment in their letter, "In summary, we recommend: Liquidity reforms - MMFs should be required to maintain 10%/30% of their assets in instruments maturing overnight/within one week; MMFs should be required to manage shareholder concentration within a target range of [5-10%]; Redemption management reforms - MMFs should be empowered to impose a liquidity fee on redeeming shareholders, if deemed necessary to ensure fair treatment of redeeming and remaining investors; MMFs should be able to limit repurchases on any trading day to 10% of the shares in issue; MMFs should be permitted to meet an investor's redemption request by distributing a pro-rata share of the assets of the fund rather than by returning cash to the investor i.e. an in-specie redemption; Structural reforms - Sponsors should be prohibited from supporting their MMFs; and MMFs should be prohibited from being rated."
They add, "We fully support the enhancements made to rule 2a-7 in the US and the creation of a short-term MMF definition in Europe. Both sets of regulation have reduced the risk that investors in MMFs "run" and made them better able to operate during a period of market stress. The new MMF definitions in Europe also provide clarity for investors and therefore enhance investor protection."
HSBC continues, "In our opinion there are additional reforms to MMFs that should be made to further enhance their ability to operate normally during a period of market stress. Our reform proposals are based on achieving the following objectives: 1. Provide MMFs with a greater ability to meet redemptions; 2. Create a disincentive for investors to redeem; 3. Remove any existing ambiguity of risk ownership; 4. Reduce systemic risk created by MMF ratings."
They tells FSOC, "Additionally, it is important that any MMF reform adopted is proportional to the issue being addressed. It must be remembered that whilst the challenges that the MMF industry has had to meet over the last 5 years have been very significant, the fact remains that there has only been one systemic liquidity event in the MMF industry since they were created over 40 years ago."
HSBC says, "Any reform mechanisms adopted to address regulators' concern of systemic liquidity risk in MMFs must also maintain MMFs in a form that remains attractive to investors to buy and for providers of MMFs to produce. If these objectives are not met then investors will no longer have access to a product that provides them with a solution to manage credit risk through diversification in an efficient manner. Investors in MMFs have a legitimate need for this product and continue to require access to it. We believe our objectives are consistent with those of the regulatory community, although, the objectives of the regulatory community are not necessarily consistent across relevant regulators and appear to have morphed over time."
Finally, they conclude, "HSBC Global Asset Management remains committed to working with regulators to identify reforms that will reduce the risk of runs in money market funds. We have identified seven reform proposals that will reduce the run risk in MMFs whilst preserving the value they bring to investors and the broader economy. We remain concerned that regulators continue to focus on differentiating between CNAV and VNAV funds, the use of amortisted cost accounting and the use of NAV buffers to address their concerns of run risk. We believe these are "red herrings" that will not reduce systemic risk in the financial system created by run risk in MMFs and will leave the financial system open to risk in the future."
