Today, we continue citing the SEC's website, "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF. The latest highlighted comment is from Jonathan Curry, Global Chief Investment Officer, Liquidity, and Chris Cheetham, Global Chief Investment Officer, HSBC Global Asset Management. (Curry, also the Chairman of the London-based Institutional Money Market Funds Association, or IMMFA, gave the keynote address to Crane's European Money Fund Symposium, which began yesterday and continues through Wednesday in Dublin, Ireland.) The HSBC letter says, "We are pleased to submit HSBC Global Asset Management's public comment on the U.S. Securities and Exchange Commission's ("SEC") proposed "Rules to Implement Money Market Fund Reform and Amendments to Form PF". The SEC's thoughtful and very thorough efforts aimed at preserving the function and the value of the money market fund product while seeking practical solutions aimed at addressing "run" risk are appreciated. As an example, we are particularly encouraged that the proposal recognizes the value of liquidity fees and redemption gates as a serious reform option that would preserve the benefits of the product while providing an effective mechanism in times of stress."
It tell us, "Since 2009, HSBC has been consistent that further reforms are necessary and have continued to engage constructively in discussions about sensible reforms. Our letter provides a detailed description of HSBC's proposals for money market fund ("MMF") reform and attempts to respond directly to many of the questions raised in the Commission's consultation. HSBC appreciates the opportunity to share our perspectives on MMF reform and the SEC's willingness to consider our comments. We would be delighted to answer any questions regarding our submission and look forward to the opportunity to discuss our views on MMF reform further."
Curry and Cheatham explain, "HSBC Global Asset Management manages over USD 64bn in money market funds ("MMFs") and segregated money market mandates. We manage MMFs in 15 different jurisdictions and in 11 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."
They continue, "HSBC has consistently proposed since the 2009 global financial crisis, that further reforms were necessary for money market funds, especially to address "run" risk. We have continued to engage in discussions about sensible MMF reforms, including advocating liquidity fees as a reform proposal that can be embraced by investors, regulators and providers. In summary, we continue to 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."
HSBC's letter says, "We fully support the 2010 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 MMF definitions in Europe also provide clarity for investors and therefore enhance investor protection. 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; and, 4. Reduce systemic risk created by MMF ratings."
It adds, "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."
Finally, HSBC writes, "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."
