Just 10 letters have been posted so far in response to the SEC's "Comments on Proposed Rule: Money Market Fund Reform" website commenting on the SEC's "Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform". Today, we excerpt from three letters -- J. Charles Cardona, Jr. of The Dreyfus Corporation, Barbara G. Novick and Richard K. Hoerner of BlackRock, and Lu Ann S. Katz of Invesco. Dreyfus' letter comments, "Overall, Dreyfus welcomes the Staff's analysis of each of these various, important aspects of MMF reform, but we are concerned generally with the conclusions reached in these respective Analyses and with how these conclusions might inform final rulemaking."
It explains, "We believe the substance of the Liquidity Cost Analysis is consistent with the views Dreyfus expressed in its September l7th comment letter. We read the Liquidity Cost Analysis and interpret the average spread calculations contained therein to support a Default SLF of 1% and not 2%, as proposed. As we noted in our September 17th letter, a Default SLF that is too high poses significant hurdles for the MMF and for their respective boards. If the Default SLF is too high the fund will over-withhold on a shareholder's redemption proceeds, which might unjustly enrich the fund and non-redeeming shareholders as well as create an overly large pool of unused capital that might negatively impact fund management. This issue is compounded by statements in the Proposing Release that will place a heavy burden on MMF boards that might seek to set a SLF rate that is lower than the Default SLF."
Dreyfus continues, "[T]he Liquidity Cost Analysis reaffirms our view that, if the Commission adopts the "Fees and Gates" alternative as a stand-alone option, MMF boards must be empowered to act in the best interest of shareholders. In our September l7th letter, we supported an Objective Trigger only as a "floor" for MMFs and their boards to act upon.... Dreyfus supports boards having the flexibility to apply an SLF and define the applicable SLF rate pursuant to the board's general fiduciary standard, protected by the business judgment rule, and before any Objective Trigger is activated. We continue to support these broader powers for MMF boards to act in order to increase the effectiveness of Fees and Gates as a stand-alone option for reducing systemic risk, consistent with the Policy Goals.... A MMF board, in our view, cannot effectively protect shareholder interests without the authority to be able to impose SLFs earlier than any Objective Trigger otherwise will require."
The Cardona letter adds, "We recognize that the Government MMF Analysis is intended to help define the "Government MMF" exclusion from any proposed structural reforms that may be adopted. However, for the reasons discussed below, we caution that the focus in the Government MMF Analysis on current allocations to "Other Securities" in Government MMFs could lead to unnecessary or misdirected conclusions. In proposing the Government MMF exclusion, the Commission noted that a Government MMF invests at least 80% of its assets in U.S. Government securities. However, we read the Government MMF Analysis to (1) suggest that a constant net asset value ("CNAV"} Government MMF should not, or does not need to, have the flexibility to invest up to 20% of its assets in "Other Securities" simply because Government MMFs currently do not take full advantage of that flexibility."
He writes, "If the Commission adopts a variable net asset value ("VNAV") for Prime MMFs, the investor's decision-making process will change dramatically. MMF providers can be expected to offer products that meet investor demand as well as close products that no longer meet investor demand. So, in a dual CNAV/VNAV MMF universe, we cannot say with certainly that investor's would not consider a hybrid CNAV Government/Prime MMF for investment just because they do not consider such a fund for investment currently. The Government MMF Analysis is inadequate, in our view, because it should have focused on assessing the potential systemic risk posed by a hybrid fund.... We believe the Safe Assets Analysis has numerous shortcomings and should not be relied on by the Commission to justify adopting a VNAV structure. We believe the definition of "safe assets" put forth in the Safe Assets Analysis is inadequate. We also believe the Safe Assets Analysis relies too heavily on opinion and supposition and does not provide the requisite quantitative evidence to demonstrate that the U.S. Treasury market will not suffer substantial and long-term harm from the permanent migration of assets from Prime MMFs to Government MMFs if a VNAV for Prime MMFs is adopted."
Dreyfus concludes, "Overall, we are not persuaded that these unsubstantiated opinions justify adopting a VNAV structure for Prime MMFs on a cost-benefit basis, nor are we persuaded that the Safe Assets Analysis fairly addresses the likelihood that the global supply of safe assets in fact will provide reasonable alternatives for Prime MMF investors. Accordingly, Dreyfus cannot support an economic analysis on this issue that does not recognize the capacity constraints and performance impact (from a supply and yield perspective) on U.S. Government/Treasury MMFs that are posed by the VNAV alternative."
BlackRock's comment says, "BlackRock, Inc. ("BlackRock") is pleased to have the opportunity to review and provide comments to the Securities and Exchange Commission (the "Commission") on the four reports (the "Reports") prepared by the staff of the Division of Economic and Risk Analysis ("DERA") of the Commission released on March 25, 2014 related to money market fund reform. BlackRock previously submitted a comment letter ("Original Response Letter") to the Commission in September of 2013 on the Commission's proposal for Money Market Reform (the "Proposed Rule") and submitted a joint comment letter with a number of other asset managers in October of 2013 regarding the definition of retail money market funds. This letter addresses the DERA Reports in light of some of the comments we made in our Original Response Letter and, in some instances, addresses issues that were not originally covered by our Original Response Letter but are raised directly in the Reports."
It tells us, "We agree, that today, Government MMFs are essentially "all government"; they don't widely use "Other Securities" and when they do use these securities, they represent a very small portion of those MMFs' assets. We also agree that during the financial crisis in 2008, there were enough U.S. government securities for Government MMFs to invest in, even without having a 20% basket of "Other Securities" available to them. However, it is important to note that we believe this was due in part to the U.S. Treasury issuing additional Treasury bills under the Supplementary Financing Program. This additional influx of bills, in our opinion, aided the ability of Government MMFs to accommodate the additional flows during the 2008 financial crisis."
BlackRock's letter continues, "Importantly, we do not yet know how the final MMF rule from the Commission will change Prime MMFs, and consequently, we also don't know how clients will react to the final rule. In the event the final rule leads to significant outflows from Prime MMFs into Government MMFs, we anticipate two issues. First, in the absence of additional Treasury bill issuance, Government MMFs may be challenged to find sufficient supply of eligible securities. Second, if there is no 20% basket, there may be significant overhang of supply of commercial paper causing corporate funding problems. Given that some clients need "all Government securities", we anticipate that MMFs sponsors may offer both "traditional government MMFs" and "hybrid MMFs" which use the 20% basket. Once new rules are adopted, the Commission should review the data around Government MMFs and commercial paper again."
It adds, "The Liquidity Cost Report analyzes the spread between same day buy and sell transaction prices for Tier 1 and Tier 2 securities from January 2, 2008 through December 31, 2009. While we think a report like this could be helpful in analyzing the appropriate liquidity fee, we think the methodology used in the Liquidity Cost Report was not the appropriate methodology to measure the true cost of liquidity in MMFs.... [I]n our opinion, the security transactions recorded by TRACE were the least liquid of securities held in MMFs, and represented the smallest portfolio allocation. We also believe that the size of the trades in TRACE are much smaller than the size of the trades that MMFs typically participate in, skewing the results in the Liquidity Cost Report.... We recommend that the final rule continue to allow a 25% basket for concentration limits for Municipal MMFs."
Finally, Invesco's letter focuses on the "Safe Assets" study and the "Liquidity Cost" study. It tells us, "We believe that this discussion regarding global safe assets is not directly relevant to Government and Treasury MMFs operating in compliance with Rule 2a-7 of the 1940 Act, as amended ("Rule 2a-7"), because most of the "safe assets" are not eligible investments for these funds.... It is difficult to estimate the amount of money that might shift from Prime MMFs into Government and Treasury MMFs. Assuming that 20% of the assets under management ("AUM") in Prime MMFs migrated to Government and Treasury MMFs, the total of safe assets required would be approximately $290 billion. This amount, combined with the existing outstanding AUM for Government and Treasury MMFs (approximately $918 billion), would total $1.2 trillion. The $1.2 trillion would absorb 60% of the approximately $2 trillion total outstanding 2a-7 Government and Treasury MMFs' eligible securities. Importantly, this does not consider the other investors demanding these securities, including but not limited to, banks, insurance companies and pension funds."
It adds, "The combination of limited supply and increased demand for these securities has potential negative ramifications and could push government securities' yields down dramatically to zero (and possibly even into negative yields) in secondary markets, even when short-term interest rates begin to rise. In addition, if Government MMFs are the only stable NAV MMFs remaining, then these funds, which have traditionally been quite stable, will become far more volatile since they will be the sole MMF option for institutional cash management needs."
