The Financial Stability Oversight Council (FSOC) issued its "2013 Annual Report, which contains an update on "Reforms of Wholesale Funding Markets" and a section on "Money Market Funds." It says, "The Council took concrete steps to support the implementation of structural reforms to mitigate the vulnerability of money market mutual funds (MMFs) to runs, a recommendation made by the Council in its 2011 and 2012 annual reports. In November 2012, the Council issued Proposed Recommendations Regarding Money Market Mutual Fund Reform, under Section 120 of the Dodd-Frank Act. This action followed the decision by SEC Commissioners not to move forward with the MMF reforms as proposed by their staff in August 2012."
FSOC explains, "The Council's proposed recommendations included three alternatives for public consideration: Alternative One: Floating Net Asset Value. Require MMFs to have a floating net asset value (NAV) per share by removing the special exemption that currently allows MMFs to utilize amortized cost valuation and/or penny rounding to maintain a stable $1.00 NAV. Alternative Two: Stable NAV with NAV Buffer and Minimum Balance at Risk. Require MMFs to have a NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds' portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would be paired with a requirement that 3 percent of a shareholder's highest account value in excess of $100,000 during the previous 30 days -- a minimum balance at risk (MBR) -- be made available for redemption on a delayed basis. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, providing protection for shareholders who remain in the fund."
The proposed recommendations continue, "Alternative Three: Stable NAV with NAV Buffer and Other Recommended Measures. Require MMFs to have a risk-based buffer of 3 percent of NAV to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. The other measures include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The public comment period on the Council's proposed recommendations closed on February 15, 2013. The Council received approximately 150 comment letters on its proposed recommendations and is in the process of reviewing those comments. The SEC, by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risk that MMFs present to the economy."
FSOC explains, "If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its Section 120 process, the Council expects that it would not issue a final Section 120 recommendation to the SEC. The Council understands the SEC is currently in the process of considering further regulatory action. To inform this examination, SEC staff produced a report, requested by certain SEC Commissioners, on the causes of investor redemptions in prime MMFs during the 2008 financial crisis, on changes in certain characteristics of MMFs before and after the SEC's 2010 modifications to MMF regulation, and on the potential effect of further reform of MMFs on investor demand for MMFs and alternative investments."
They add, "The Council also recommends that the SEC consider the views expressed by commenters on the Council's proposed recommendations and by the Council as the SEC considers any regulatory action to improve loss-absorption capacity and mitigate MMFs' susceptibility to runs. The Council further recommends that its members examine the nature and impact of any structural reform of MMFs that the SEC implements to determine whether the same or similar reforms are warranted for other cash-management vehicles, including non-Rule 2a-7 MMFs. Such an examination would provide for consistency of regulation while also decreasing the possibility of the movement of assets to vehicles that are susceptible to large-scale runs or otherwise pose a threat to financial stability."
FSOC's 2013 Annual Report also comments on "Tri-Party Repo," "In its 2012 annual report, the Council highlighted the tri-party repo market's vulnerabilities and noted a lack of progress in addressing them. The vulnerabilities are as follows: Heavy reliance by market participants on intraday credit extensions from the clearing banks. Weakness in the credit and liquidity risk management practices of many market participants. Lack of a mechanism to ensure that tri-party repo investors do not conduct disorderly, uncoordinated sales of their collateral immediately following a broker-dealer's default."
Finally, it tells us, "Reliance on intraday credit is beginning to decline. Two government securities clearing banks, JPMorgan Chase (JPM) and Bank of New York Mellon (BNYM), have made operational and technological changes that reduce the intraday credit they extend. As a result of these efforts, market participants have begun to adjust their behavior in ways that reduce market demand for intraday credit. Consequently, intraday credit has declined to approximately 80 percent of market volume, down from 100 percent as of the Council's 2012 annual report. JPM and BNYM plan to implement further technology and operational changes through 2013 and 2014. These changes will improve the resiliency of tri-party settlement by making clearing bank intraday credit available only on a pre-committed basis, and by reducing the intraday credit supplied by the clearing banks to no more than 10 percent of volume by late 2014."
