Below, we link to an excerpt from the Squam Lake Group's Comment Letter to the SEC on its MMF Reform Proposal. As was the case with previous requests for comment on money fund regulations, Squam Lake, a group of economists named after a lake in New Hampshire, is one of the few that doesn't like any of the options and which endorses more radical regulatory change (such as a capital buffer). They write, "The structure of money market funds (MMFs) makes them vulnerable to rapid large-scale redemptions ("runs"). Our largest concern is with prime MMFs, which invest primarily in the short-term paper of financial institutions, because they are a key source of short-term financing to large global financial institutions. As long as such financing is allowed, a run on prime MMFs can become part of a run on these financial institutions, or could instigate such a run. This, in turn, threatens the ability of these financial institutions to process payments and to extend credit to other market participants, businesses and households. Indeed, this threat led the U.S. Treasury to provide a temporary guarantee of all outstanding MMF balances after the failure of Lehman Brothers in September 2008 precipitated a run on prime MMFs.... First, we believe that the floating NAV described in Alternative One would not achieve the goal of materially decreasing the systemic risk posed by MMFs because the NAV would not reflect actual prices at which investors and the fund itself could transact in a crisis. Unless the SEC is able to create a system whereby reported NAVs reflect actual NAVs, investors will have incentives to run. At a minimum, if this alternative is adopted, MMFs should not be allowed to use amortized cost accounting for instruments maturing in 60 days or less. Second, we believe that the liquidity fees and redemption gates described in Alternative Two could actually exacerbate run incentives and could be detrimental to financial stability. As we have written previously, an appropriately sized capital buffer for prime money market funds would have a more meaningful impact on financial stability."
