We've been covering the recent flurry of discussions over potential additional money fund regulations all week. (See yesterday's "ICI's Stevens Says Reviewing Crisis and Money Markets; August Trends" and Monday's "SEC's Blass on Push for More MMF Reforms; Vanguard Liquidating PA, NJ.") But we didn't have space yesterday to discuss everything, so today we quote from several sources mentioned yesterday -- The Wall Street Journal's "Money-Market Fund Rules Likely Fall Short, Policy Makers Say," Reuters' "Money market turmoil in March shows past reforms may be insufficient," and U.S. Department of the Treasury's Deputy Secretary Justin Muzinich remarks at the 2020 U.S. Treasury Market Conference.
Muzinich explains, "Finally, going forward policymakers should also reflect on the outflows from certain types of money market mutual funds. There are three categories of money market mutual funds: government, prime, and tax exempt. All offer daily liquidity and investors view them as cash-like instruments, but prime and tax-exempt funds often invest in assets that do not have cash-like liquidity. In normal times, money funds can easily manage the flow of redemptions by keeping some assets in liquid investments. However, large-scale redemptions, perhaps sparked by concerns in other markets like commercial paper, can cause investors to perceive a 'first-mover advantage' and race to redeem before a fund's liquidity resources are overwhelmed. This can quickly spread instability from troubled funds to the rest of the money fund industry and the broader financial system."
He says, "To be sure, developments since the 2008 financial crisis reflect important progress. When the Reserve Primary Fund 'broke the buck' in 2008, a stampede of prime fund investors sought to withdraw funds quickly while their funds still priced at $1, starting a run that only abated when Treasury established a money fund guarantee program. The SEC's 2010 and 2014 reforms made critical progress on several fronts, including floating NAVs of institutional prime and tax-exempt funds (out to four decimal place) and requiring all money market mutual funds to hold at least 30% of their assets in instruments that are liquid within a week. When a fund drops below the 30% threshold, its board may decide whether to gate or impose fees on redemptions."
Muzinich continues, "However, the events of this past March show that those reforms may not be enough. For example, one might ask whether we have exchanged one psychological bright line for another. While the 2008 episode centered on 'breaking the buck', in 2020 market participants worried that a fund dipping below the 30% weekly liquid assets threshold could similarly accelerate fund redemptions."
He concludes, "Whether the bright line is stable NAV or a 30% liquidity test, we need to remember that bright lines have the potential to cause investors to redeem before the line is crossed, creating run dynamics. While policymakers were able to avert a run, it is worth asking whether there are ways to enhance the liquidity resources available to funds without using a bright line test or whether there are ways to draw a line without creating a first-mover advantage."
Yesterday's Journal piece explains, "A pair of top U.S. policy makers said Tuesday that rules to make money-market mutual funds less susceptible to runs likely need to be improved after a bout of turmoil in March that prompted the Federal Reserve to intervene. 'There's no doubt that we need to re-examine the reforms of the last time,' Securities and Exchange Commission Chairman Jay Clayton said on a virtual panel Tuesday. He was referring to a 2014 attempt by the SEC to address the causes of an exodus from money markets that contributed to the last financial crisis."
It continues, "In practice, money-market mutual funds are important enough to the plumbing of the U.S. financial system that the federal government has stepped in to backstop them twice in the past 12 years. That, some say, risks creating an implicit guarantee for a class of investment products that taxpayers shouldn't have to bail out. All told, money-market funds, including tax-exempt funds and those that invest in government securities, hold about $4.4 trillion, according to the Investment Company Institute."
The WSJ adds, "In the midst of pressure from the mutual-fund industry, the SEC declined to adopt a proposal that would have required money-market funds to hold a capital buffer to absorb day-to-day fluctuations in the value of their assets. Instead, it allowed them to charge a small redemption fee if the share of their assets that are either cash equivalents or mature within five business days falls below 30% of their overall portfolio. It also allowed them to suspend redemptions by investors while below that threshold. The result was that, in March, as in 2008, investors who were quick to redeem their shares at the first sign of market distress could expect to avoid losses, while those who waited could suffer."
Finally, the Reuters' article tells us, "Turmoil in money market mutual funds sparked by the coronavirus pandemic shows that decade-old reforms to the $4.4 trillion industry may not be enough to avert major outflows during a future crisis, Deputy U.S. Treasury Secretary Justin Muzinich said on Tuesday."
It quotes, "Peter Crane, founder of money fund research company Crane Data, said the remarks add to expectations new rules will be created for money funds, sometimes seen as rivals by more closely-regulated banks. 'Certainly from the looks of it new money fund regulations might be coming,' Crane said." (See also "NY Fed Blog Defends Liquidity Programs; Fitch: LGIPs Jump; Weekly PH," "JPMAM's Gatch on MMF Reforms," and our August Money Fund Intelligence article, "Bank Regulators Getting Jump on Future Reg Changes.")
In other news, a press release entitled, "J.P. Morgan Asset Management Partners with SAP to Enhance Morgan Money Liquidity Platform," tells us, "J.P. Morgan Asset Management ... announced a new partnership with SAP Software Solution Partner Program. Leveraging SAP's Cloud Platform, the firm's liquidity management platform, Morgan Money, is now available to SAP customers through SAP Treasury Management, a solution within the SAP Intelligent Enterprise offering customers real-time cash visibility and allowing them to improve liquidity and lower risk."
JPM's Paul Przybylski comments, "This is a significant partnership that harnesses the scale and expertise of two industry leaders in J.P. Morgan Asset Management and SAP to expand the reach and performance of our Morgan Money liquidity management platform.... The agreement will enable SAP's substantial Treasury Management customer base to directly access Morgan Money, delivering a real-time dashboard to invest, a single access point for operations, and enhanced risk management controls."
Falk Rieker of SAP America says, "Corporate treasurers are looking for a streamlined customer experience. J.P. Morgan Asset Management's SAP partnership is a great example how we enable our customers to consume innovative financial solutions and services." Finally, the release adds, "J.P Morgan Asset Management's institutional liquidity management platform, Morgan Money, is a multi-currency, open architecture trading and risk management system. The platform, launched in 2019, is designed to deliver a seamless customer experience, centered on operational efficiency, end-to-end system integration, and effective controls to allow customers to invest when, where and how they want — securely."
