Treasury Strategies published a statement entitled, "Questions for the Record," following MD Tony Carfang's earlier appearance at a Congressional hearing on, "The Impact of Regulations on Short-Term Financing," before the "Subcommittee on Capital Markets and Government Sponsored Enterprises." (See our Dec. 16 News, "Money Fund Assets Rise Again, Prime Up; Carfang Testifies on Impacts," and see the press release, "Treasury Strategies Testifies on 'The Impact of Regulations on Short-Term Financing' to the U.S. Congress.") We summarize the letter below, and we also cover Reuters' story on the OFR's Floating NAV brief.
Carfang says in the letter, "Thank you for the opportunity to supplement testimony from the hearing. In this letter, I address the specific question from Representative Rothfus regarding the recently implemented Money Market Fund (MMF) regulations and also fill in some blanks from the original hearing."
In his "Overview," he explains, "New regulations which went into effect on October 14 will NOT achieve their stated objective of preventing bailouts and maintaining market stability, since most money market assets are not subject to the rule. The entire treasury and government MMF market, Local Government Investment Pools, retail MMFs of all types, and bank short term investment funds are all exempt. Of all the investors in the marketplace and all the investment options available (tens of trillions of dollars), the rule singles out just one segment -- "non-natural persons" investing in Prime Funds and Tax Exempt Funds for draconian regulation."
Carfang continues, "Prime money funds (PMMFs) are a key source of funding for the private sector. Both banks and corporations have relied upon Prime MMF funding for decades. Tax Exempt funds (TEMMFs) are a key source of funding for municipalities, universities and hospitals.... $1.17 trillion or 73% of the market has left PMMFs. $130 billion or 50% of the market has left TEMMFs. So the rule essentially eradicated the part of the market it tried to "improve," while leaving far larger segments of the market unaddressed."
He tells us, "One especially onerous part of the regulation prohibits the use of standard accounting methods (amortized cost) for funds with non-natural persons as investors. It was this broadly accepted accounting principal which enabled funds to maintain a constant net asset value (CNAV) of $1.00 per share to investors. Because of this prohibition, the institutional Prime and Tax Exempt MMFs must now float their net asset values. Reinstating amortized cost accounting for all MMF investors, both natural persons and non-natural persons, is such an obvious and benign remedy for the deleterious $1.3 trillion market shift we have just experienced, that it should be done immediately. Amortized cost accounting is an accounting principal used by almost all banks, almost all corporations and most other investors including all Treasury MMFs and all Government MMFs for their own portfolios."
Carfang adds, "While some are calling for further study before deciding how to proceed, others ask if there are some obvious fixes to implement immediately. As stated above, immediately reinstating a constant NAV for all investors in all MMFs is an obvious and benign remedy for these threshold issues. We continue to be concerned about the implementation of multiple simultaneous regulations affecting corporate finance and investment. We do believe further study of the simultaneous impact is required, but not at the expense of delaying the action recommended above. With the regulatory-induced demise of Prime and Tax Exempt MMFs, the market has lost a $1.3 trillion shock absorber, and America's businesses and municipalities have lost a $1.3 trillion primary source of capital."
Finally, he writes, "FSOC recently applauded itself for the orderly flow of funds out of Prime Funds as the October regulations took hold. But we observe with great concern that is hardly a market test of the implications of the rule. That test comes in some unknown future stress scenario, not during a transition which was signaled two years in advance. Not until that next stress event occurs, will we be able to observe how markets react and adjust, absent the $1.3 trillion shock absorbing capacity of the MMFs that have disappeared."
In other news, Reuters writes "`Money market funds calm since rule on floating values began: government." The article explains, "Money market funds have kept an even keel since a new U.S. rule on their net asset values went into effect last October, according to federal research released on Tuesday, indicating that it may help create stability in a market that experienced large runs in the 2007-09 financial crisis." (See our Feb. 15 Link of the Day, "OFR Blog: NAVs Barely Floating.")
The article explains, "Last Oct. 14, institutional prime funds, which mostly invest in corporate debt, had to be in full compliance with the rule requiring them to float their net asset values, or NAVs. Leading up to the deadline, money raced out of prime funds into ones invested in government securities, and policymakers and some buyers grew anxious about long-term rockiness."
Reuters quotes the Office of Financial Research (ORF) report "Money Market Funds' Floating NAVs Stay in Narrow Range for Now," "Since NAVs began floating, money markets have been calm.... The extent to which floating NAVs might vary during market cycles will not be known until money market funds again come under stress.... Some industry observers worry that variation in floating NAVs might raise investors' concerns and still create runs."
The piece adds, "The rule was created to prevent runs on the funds seen during the crisis when the NAV of a large money market fund fell below $1 per share and spooked large investors into rapidly pulling money from the funds. So far, floating NAVs, which are market-based, have not varied much from an even $1, said the research office." (Note: OFR also recently updated its "Money Fund Monitor chart of money fund manager assets with Jan. 31, 2017 data.)
