Investment Company Institute President & CEO Eric Pan spoke earlier this week on "Observations About the March 2020 Turmoil and Regulated Funds" at The Harvard Law School Forum on Corporate Governance. Pan says, "I would like to speak with you today about the discussions US and international policymakers are having about the March 2020 market turmoil and their work to make the financial markets more resilient in the face of a similar liquidity shock. Such work is taking place in international bodies like the Financial Stability Board (FSB) and International Organization of Securities Commissions with the active participation of US financial regulators. For those familiar with the regulatory debates following the 2007-09 global financial crisis, these discussions should give you a sense of déjà vu. Regulated funds, including money market funds and long-term open-end funds, such as bond funds, are being closely scrutinized for systemic vulnerabilities. Indeed, some commentators have gone as far as to argue that the market events of March 2020 indicate that the business models of these funds should fundamentally change because they contend that these funds are unsafe for the global financial system in the absence of a central bank liquidity backstop."
He explains, "As the association representing the regulated fund industry, ICI wholeheartedly supports smart regulatory reforms to make our funds and, more broadly, the financial system more resilient. We endorse reforms developed by assessing accurate data and information to fix identified problems. This approach should produce targeted reforms that respect the critical role regulated funds play in market-based financing, which supports economic growth. We always will question, however, any proposals that seek significant changes to regulated funds if those proposals are not based on accurate data or seek to improperly equate market-wide problems with shortcomings in fund regulation. I do have concerns that this may be happening in the current debate."
Pan comments, "Money market funds and bond mutual funds are, of course, inextricable components of the financial system. However, they did not trigger the stresses in the financial markets. This observation is important because, as regulators consider what reforms may be needed, they should prioritize examining the factors that created the stresses and, only after identifying and addressing those factors, consider necessary policy reforms for regulated funds."
Discussing "Money Market Funds," he tells us, "Last fall, the FSB began the important process of reviewing and assessing the market events of March 2020, with specific focus on money market funds as significant participants in the short-term funding markets. In December, the President's Working Group on Financial Markets issued a report discussing ten reform measures that policymakers could consider to improve the resilience of money market funds and the broader short-term funding markets. In recognition of the importance of money market funds to investors and the economy, ICI and its members have devoted significant time and effort over the years to considering how to make these funds more robust under even the most adverse market conditions -- goals we share with the SEC and other policymakers."
Pan continues, "Three principles have always guided our analysis of money market fund reform proposals: First, given the tremendous benefits that money market funds provide to investors and the economy, it is imperative to preserve this product's essential characteristics. Second, in devising a solution, we need to stay focused on the objective that policymakers are seeking to achieve. This objective is to strengthen money market funds even further against adverse market conditions and to enable them to meet extraordinarily high levels of redemption requests. Finally, any solution must be designed to promote this important policy goal while minimizing the potential for unintended negative consequences."
He elaborates, "For example, one proposal would be to introduce swing pricing to money market funds. To make swing pricing work, however, funds would have to eliminate popular features such as same-day settlement and multiple NAV strikes, reducing the utility of the product to investors without necessarily reducing the incentives for investors to redeem during times of stress. Another example is the use of capital buffers. Capital buffers would negatively impact money market fund yields, making such funds not commercially viable, while unlikely offering any substantial protection during a liquidity crisis, such as we had last March."
Pan adds, "For those who remember the debate about money market funds between 2012 and 2014, the potential policy options should evoke some strong memories. Many were considered back then and, in several cases, rejected by the SEC itself. Therefore, it should not surprise regulators that some of these options remain problematic even today."
He also comments, "On the other hand, at least one option could prove useful. Removing the tie between money market fund liquidity and fee and gate thresholds could address policymakers' concerns with the least negative impact. The run risk that regulators appropriately worry about is exacerbated by these bright lines in regulation where market participants find themselves trying to stay on one side of the line."
Finally, he tells the Forum, "ICI's analysis indicates that, as the weekly liquid assets of particular prime money market funds fell toward 30 percent, investors were increasingly likely to redeem. Investors apparently reacted to the mere possibility that funds had the legal authority to impose fees and gates rather than the probability that they would do so. Thus, the 30 percent weekly liquid asset requirement, combined with the possibility of fees and gates, created a bright line that investors sought to avoid despite the fact that these funds still had plentiful weekly liquidity."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of April 2, 2021) includes Holdings information from 49 money funds (down 20 funds from a week ago), which represent $1.605 trillion (down from $2.084 trillion) of the $4.701 trillion (34.1%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $837.6 billion (down from $1.102 trillion a week ago), or 52.2%, Repurchase Agreements (Repo) totaling $391.9 billion (down from $537.4 billion a week ago), or 24.4% and Government Agency securities totaling $196.8 billion (down from $239.5 billion), or 12.3%. Commercial Paper (CP) totaled $63.3 billion (down from $71.5 billion), or 3.9%. Certificates of Deposit (CDs) totaled $48.6 billion (down from $51.7 billion), or 3.0%. The Other category accounted for $48.0 billion or 3.0%, while VRDNs accounted for $18.9 billion, or 1.2%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $837.6 trillion (52.2% of total holdings), Federal Home Loan Bank with $104.3B (6.5%), Fixed Income Clearing Corp with $46.3B (2.9%), BNP Paribas with $42.8B (2.7%), RBC with $39.9B (2.5%), Federal Farm Credit Bank with $36.2B (2.3%), JP Morgan with $35.3B (2.2%), Federal National Mortgage Association with $34.1B (2.1%), Credit Agricole with $25.4B (1.6%) and Mitsubishi UFJ Financial Group Inc with $23.2B (1.4%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($217.8 billion), Wells Fargo Govt MM ($136.5B), Fidelity Inv MM: Govt Port ($130.9B), Morgan Stanley Inst Liq Govt ($118.9B), JPMorgan 100% US Treas MMkt ($106.0B), Dreyfus Govt Cash Mgmt ($95.5B), First American Govt Oblg ($87.3B), State Street Inst US Govt ($84.7B), JPMorgan Prime MM ($73.6B) and Morgan Stanley Inst Liq Treas Sec ($65.2B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
