A press release entitled, "Fitch: Reduced ABCP Supply Drives Decline in Money Fund Commercial Paper Holdings" tells us, U.S. money market fund (MMF) investments in commercial paper (CP) have declined at a moderate but steady rate over the past year, driven by declines in asset-backed commercial paper (ABCP) and nonbank CP, according to a Fitch Ratings report. As of end-Feb. 2014, the combined share of CP holdings among the top-10 U.S. MMFs was 20.2%, a decline from 23.9% in Feb 2013. On a dollar basis during the same period, CP holdings were approximately $137 billion compared with $160 billion a year earlier, a 14% decline." We review the Fitch report, and also quote from a new Comment Letter on the SEC's Money Fund Reform Proposal from Treasury Strategies ("Proposed Money Market Fund Regulation: A Game Theory Assessment"), below.
Fitch explains, "This shift has been partly driven by a reduction in ABCP investments. Relative to the year-earlier period, outstanding amounts of ABCP as of end-February 2014 were 22% lower. Fitch believes regulatory uncertainty surrounding bank sponsors' future liquidity support for ABCP programs appears to be contributing to the continuing shrinkage of that market. The Basel III liquidity coverage ratio (LCR), which banks must meet by 2019, is leading some sponsors of traditional multi-seller ABCP programs to re-assess the impact of liquidity support for these vehicles."
The report explains, "Steady Fall in MMF CP Holdings: Money market fund (MMF) investments in commercial paper have fallen at a moderate but steady pace over the past year, driven primarily by declines in holdings of asset-backed CP (ABCP) and nonbank CP. Data gathered from a survey of the 10 largest prime MMFs indicate that CP's relative importance in money fund portfolios declined over the last year, with its share of combined MMF assets dropping to 20.2% at Feb. 28, 2014, from 23.9% a year earlier."
It adds, "Survey Mirrors Broader Market: The Fitch Ratings prime MMF survey findings mirror broader CP market trends evident in Federal Reserve data, which point to an ongoing contraction in the total amount of ABCP outstanding. Our data show that bank-related CP issuance, still the biggest driver of overall market activity, remains relatively stable. Bank-related CP's share of MMF assets in our survey stood at 13.3% as of Feb. 28, essentially unchanged from the year before."
The new Treasury Strategies Comment says, "We submit as commentary on the proposed Reform the attached paper: "Proposed Money Market Fund Regulation: A Game Theory Assessment <b:>`_." This paper presents a game theory analysis of the SEC's June 2013 proposals for reform of Money Market Funds (the "Release"). Game theory is relevant to this policy debate as regulators, particularly FSOC, have depicted investor behavior using terminology of shareholder runs and first mover advantage -- a framework classically employed in game models of bank runs."
It continues, "The paper is responsive to various questions raised in the Release. We demonstrate that when implemented properly, the Fee/Gate alternative would effectively halt and even prevent runs from taking place. However, the alternative of moving to a fluctuating net asset value would neither halt nor prevent runs. The alternative of combining Fees/Gates with a fluctuating net asset value is found to be inferior to Fees/Gates alone because it would create an economically inferior product that would inevitably promote regulatory arbitrage without materially reducing run risk beyond the features of the Fee/Gate alternative."
Authors Tony Carfang and Cathryn Gregg write, "The paper describes these issues in detail, both with regard to framing the final rule and in stating the requisite powers and responsibilities of directors. We believe that the current policy debate inside the Commission needs to reflect this perspective on the ability of Fees/Gates to provide a robust policy solution and adequately protect investors from first mover risks."
Finally, the paper's "Abstract" explains, "This paper presents a game theory analysis of the SEC's June 2013 proposals for reform of Money Market Funds (MMFs). Game theory is relevant to this policy debate as regulators have depicted investor behavior using terminology of shareholder runs and first mover advantage -- a framework classically employed in game models of bank runs. The paper demonstrates that when implemented properly, the Fee and/or Gate alternative would effectively halt and even prevent runs from taking place. However, the alternative of moving to a fluctuating net asset value would neither halt nor prevent a run."
