ICI Comments on SEC Studies
Brian Reid, Chief Economist, of the Investment Company Institute is the first Comment letter to appear on the SEC's site on the Staff's "mini" studies. ICI's Reid writes, "The Investment Company Institute appreciates the opportunity to respond to the staff of the Division of Economic and Risk Analysis of the Securities and Exchange Commission regarding its analyses of certain data and academic literature related to money market fund reform. As required by law, the analyses demonstrate that the SEC continues to consider available data in its decision making process. Our comments are limited to the staff's analysis of "Municipal Money Market Funds Exposure to Parents of Guarantors" and its analysis of the "Demand and Supply of Safe Assets in the Economy".... Money market funds generally must limit their exposure to any one provider of guarantees or conditional demand features ("credit support provider") for portfolio securities to 10 percent of total assets; however, 25 percent of a fund's total assets may exceed the 10 percent limit under certain circumstances ("25 percent basket"). Under the SEC proposal, the 25 percent basket would be eliminated and the fund would be prohibited from acquiring any security that would result in its exposure to a credit support provider exceeding 10 percent of the fund's total assets. The SEC explained that the proposal is designed to limit the extent to which a money market fund becomes exposed to a single guarantee or demand feature provider. Based on this analysis, the staff found that although funds are exposed to guarantors above the 10 percent threshold on a regular basis, they are far less likely to be exposed to guarantors above the 15 or 20 percent thresholds. The staff concluded therefore that few funds make full use of the 25 percent basket. The analysis, however, does not appear to combine the holdings of guarantors in any one fund. Indeed, as a technical point, the 25 percent basket can be used for exposure to more than one entity.... The staff also reviewed recent evidence on the availability of domestic government securities and global "safe assets" to assist the SEC in the development of final rules regarding money market fund reform that could possibly increase the demand for these assets. Citing data from the International Monetary Fund, the staff noted that the global market for safe assets is estimated to be $74 trillion. It then concluded that given the size of the global safe assets market, the staff does not anticipate a supply problem if the SEC's final rules regarding money market funds causes an increase in demand for government securities. The global market for safe assets, however, does not represent the universe of eligible safe assets for U.S. money market funds. Rather, U.S. money market funds are generally limited to high quality U.S. dollar denominated securities of short duration (e.g., with a remaining maturity of less than 397 calendar days).... The amount of the global market for safe assets therefore is not relevant to the question of whether the supply of U.S. government securities will satisfy the demand should the SEC's final money market fund rules cause an increase in demand for these securities. A better measure of the supply of assets available to meet any increased demand for government securities would be the amount of U.S. Treasury and agency securities with maturities of less than one year and repurchase agreements backed by government securities. As of March 2014, there was about $4 trillion of outstanding U.S. Treasury and agency securities with maturities of less than one year and another $1.2 trillion in triparty repo backed by Treasury, agency, and agency mortgage backed securities."
