Comments continue to trickle in in response to the Securities and Exchange Commission's February announcement, "SEC Requests Comment on Potential Money Market Funds Reform Options Highlighted in President's Working Group Report." The latest comment is submitted by Richard Apostolik and Mark Carey of the Global Association of Risk Professionals, or GARP. They write, "Many money market funds were stressed in March 2020 despite changes in regulations and operating procedures made during the decade following stresses in 2007-8. Government money funds performed exceptionally well during March 2020, managing record levels of inflows, but some prime and some muni money funds experienced large redemptions. Given the reoccurrence of stresses earlier this year, fund sponsors and regulators are evaluating strategies and reforms to ensure the money fund industry's resilience in the future." (See the full list of letters here.)

Their letter explains, "The aim of this document is to inform policymakers and corporate decisionmakers of the pros and cons of potential policy responses designed to promote money fund resilience. The pros and cons noted herein for each policy response focus on reasons a particular response might or might not improve money fund resilience for prime and muni money funds (hereinafter collectively referred to as 'money funds'). It should also be noted that certain of the pros and cons may represent issues to consider rather than a specific reason a policy response may or may not work. Irrespective, both should be considered to gain a greater understanding of the points being made."

It continues, "This document was developed with the active input of the asset managers associated with the GARP U.S.-based and European-based Buy Side Risk Managers Forums (collectively the 'Forums'). The Forums (and this document) do not recommend specific policy actions, but instead attempt to provide objective analysis and/or insight. Their goal is to objectively inform policymakers about possible future money fund reforms and to recognize the range of potential consequences of each policy. Participating asset managers' views differ about the best choice or combination of choices among the options analyzed herein and about the relative merits of the pros and cons for any individual option. The next section suggests some foundational and desirable characteristics of any reforms that are chosen. A guide to the remainder of the document follows, and then specific potential reforms with pros and cons."

A section on "Money Market Fund Reforms: Pros, Cons and Options," tells us, "Money funds provide many benefits to investors, the financial system, and the broader economy. Money fund investments are liquid, diversified, and, in contrast to deposits at banks or similar financial institutions, have limited vulnerability to disruption by the failure of the provider. Money funds are highly regulated and transparent. Money funds also provide accounts that allow investments in, and redemptions from, other types of mutual funds. They provide funding to many types of financial and non-financial firms and municipalities. Because they invest in standardized, short-term instruments, they can react quickly to changes in financial markets while simultaneously being a cost-effective way to fund operations, and contribute to the normal functioning of financial markets."

It goes on, "A primary goal of money fund reform following the latest period of stress is to limit (ideally eliminate) money fund instability. A secondary goal is to limit the need for ad hoc government intervention to preserve stability." But, they write, Some of the reforms discussed herein, if adopted, may cause the affected money funds to cease to exist. It is recommended that if a reform effectively leads to money fund elimination, decision-makers simply propose their outright elimination so that a clear debate about costs and benefits of elimination can occur. While elimination may remove a source of financial instability, it will, in all probability, introduce other risks because entities in the real and financial sector currently receiving funding from money funds or investing in money funds would need to find substitutes. The resulting consequences for economic activity and financial stability would be difficult to anticipate and forecast."

The GARP comment also says, "In March 2020, official sector entities and industry participants communicated and cooperated extensively and acted effectively in responding to money fund stresses. However, in the future, ad hoc cooperation might not always work so well. Official sector decision-makers are urged to use the lessons of the past two crises to establish standing arrangements for communication and cooperation with each other and with money market participants (including issuers, asset managers and investors) in preparation for the next period of stress. Such arrangements should at a minimum involve every jurisdiction with a material volume of money funds, should err on the side of being more global rather than less, and should remain nimble."

It explains, "Money funds invested in central government obligations (as opposed to prime and muni funds) performed well in March 2020. While this paper focuses on prime and muni money funds, it is suggested that in evaluating potential reforms, decision-makers think more broadly and consider all money market fund vehicles because the circumstances of the next period of stress may be different."

The posting explains, "Any successful reform proposal or combination of proposals must address both credit and liquidity shocks. Once a crisis is beyond the initial shock, credit and liquidity concerns become intertwined, but the concern that leads to initial redemption decisions by money fund investors at the beginning of a period of stress is usually only one of credit or liquidity. A proposal that addresses only credit or liquidity stress is unlikely to be effective in all future situations."

Apostolik and Carey elaborate, "The vulnerability of money funds arises primarily from two of their characteristics: Money funds are subject to large, rapid redemptions. Somewhat similar to the bank-run dynamic, if a fund investor becomes concerned that other fund investors will redeem en masse, that fund investor may immediately redeem in order to maintain access to their money and to avoid losses associated with rapid liquidation of fund assets to meet redemptions. Certain previous reforms may have also inadvertently created a first-mover advantage, contributing to this dynamic. The details of the run dynamic, such as the triggers, may differ from one episode to the next, but successful reform must address the run dynamic in general."

Finally, they add, "Money fund investors need quick access to balances. Many investors use money funds to store operating capital they may need to access quickly rather than for returns as part of a portfolio diversification strategy. This amplifies investors' alertness to threats to their ability to redeem quickly, especially features such as redemption gates and fees that might mechanically inhibit their ability to redeem (see below for more on gates and fees). Current low costs of redemption and ease of changing from one fund to another also amplify the pressure on money funds during periods of stress."

For more, see our these Crane Data News pieces: "Fermat Comments on PWG Report" (3/10/21) and "Professor Gordon's Nutty PWG Comments: Backs Buffer; Weekly Holdings" (3/3/21).

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