The Investment Company Institute is the latest to submit a letter in response to the SEC's "Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report." Their press release, entitled, "ICI Responds to the President's Working Group Report on Potential Options for Money Market Fund Reforms," is subtitled, "Policymakers should conduct holistic review of short-term funding markets before considering reforms to further bolster money market funds' resilience." It says, "ICI President and CEO Eric J. Pan issued the following statement regarding ICI's letter to the Securities and Exchange Commission's request for comments on potential options for money market fund reforms as detailed in the President's Working Group (PWG) report." (The deadline for comment letters was Monday, April 12, so a host of letters are now listed. See all the comments here.)

Pan comments, "Policymakers seeking to address the COVID-19 market turmoil should be prudent in placing new rules on money market funds. ICI's new data and analysis challenge the narrative that money market funds caused or amplified the stress in the short-term funding markets in March 2020. As such, it is important to examine how last year's events, market structure, and the actions of all market participants, not just money market funds, led to significant strains in the short-term funding markets last March. This is a necessary step before considering any of the PWG money market fund reform options."

He elaborates, "Regarding those options, removing the tie between the 30 percent weekly liquid asset threshold and the imposition of fees and gates would further strengthen prime money market funds and improve the financial system's resiliency. As ICI's letter shows, the threat of fees and gates was a main contributor to the unusually high redemptions from some prime institutional money market funds. In contrast, the other PWG options will not achieve policymakers' goal of making the financial system more resilient in the face of a severe liquidity shock. Instead, those options will only severely weaken money market funds' key characteristics and eliminate the important benefits they provide to millions of investors and the economy -- without addressing the underlying vulnerabilities in the financial system."

Pan adds, "More than 50 million retail investors, as well as corporations, municipalities, and other institutional investors, rely on $4.9 trillion in money market funds as low-cost, efficient, and transparent cash management vehicles. Moreover, money market funds provide critical financing for governments, businesses, financial institutions, and households across the United States. ICI and its members are committed to working with US and international policymakers to further strengthen money market funds and the short-term funding markets for the benefit of investors and the economy."

ICI's letter to the SEC, "Re: Report of the President's Working Group on Financial Markets: Overview of Recent Events and Potential Reform Options for Money Market Funds (December 2020), begins, "The Investment Company Institute (ICI) appreciates the opportunity to provide its views on the President's Working Group (PWG) Report on Money Market Funds (PWG Report or Report). Today, over 50 million retail investors, as well as corporations, municipalities, and other institutional investors, rely on the $4.9 trillion money market fund industry as a low cost, efficient, transparent, cash management vehicle that offers market-based rates of return. Money market funds also are an important source of direct financing for governments (federal, state and local), businesses, and financial institutions, and of indirect financing for households. Without money market funds, governments, institutions, and individuals would need to seek more expensive, less transparent, and less efficient forms of financing."

It continues, "ICI and its members are committed to working with US and international policymakers to strengthen the money market fund industry for the benefit and further protection of investors and the performance of broader financial markets and the economy more generally. We hope our comments below will be helpful to the SEC, the PWG, international financial regulators, and others as they consider how best to advance toward this important policy goal."

The Executive Summary explains, "Money market funds did not cause the stresses in the short-term funding markets last March. US public institutional and retail prime money market funds accounted for just 19 percent of the reduction in financial and nonfinancial commercial paper outstanding during the week-ended March 18, immediately before the Federal Reserve announced its Money Market Mutual Fund Liquidity Facility (MMLF) and accompanying regulatory capital relief for dealers. Other market participants accounted for 81 percent of the decline. Therefore, money market funds should not be viewed as the main contributor to the freezing of the commercial paper market. In addition, even at the height of the liquidity crisis, money market funds, including institutional prime money market funds, still had liquidity to meet new redemptions if they had meaningful opportunity to use part of their 30 percent weekly liquid asset buffers."

It comments, "To the extent policymakers seek to mitigate the possibility of future distress in the short-term funding markets, they should prioritize the examination of the activities and behavior of all market participants. Only by doing so will policymakers make progress toward their goal of making the financial system more resilient in the face of a liquidity shock of the nature experienced in March 2020."

The comment adds, "Supported by ICI's analysis of data, the evidence demonstrates the actual role money market funds played in the liquidity events of March 2020. It is in this context that ICI is providing comments on the ten options set forth in the Report for further reform of money market funds. ICI and its members have previously analyzed and offered feedback on many of these options. Our examination of the reform options as well as other reform ideas, which we understand have been suggested in the Financial Stability Board (FSB) and International Organization of Securities Commissions (IOSCO), has led us to the same conclusion the PWG apparently reached: there is no 'silver bullet' for safeguarding money market funds against the severest market distress scenarios that are beyond the control of money market funds. The reform options should be evaluated by comparing the impact they will have on the ability of money market funds to carry out their important role in the financial system (i.e., preservation of their key characteristics) against the likely practical impact any money market reforms will have on making the overall financial system more resilient. This should be the focus and overall goal of policymakers. Any new reforms for money market funds must be measured and appropriately calibrated taking into account the costs and benefits these funds provide to investors, the economy, and the short-term funding markets."

ICI tells us, "We have divided the ten reform options into three categories: Reforms that could advance the goals of reform -- options with the most potential for addressing policymakers' concerns while preserving key characteristics of money market funds; Reforms that do not advance the goals of reform and do not preserve the key characteristics of money market funds -- options with significant drawbacks, ranging from potential detrimental impacts on money market funds, their investors, and the market to regulatory, structural, and operational barriers to implement; and Reforms that are unlikely to address policymakers' goals of reform."

Under "Reforms that could advance the goals of reform," ICI lists: "Removal of tie between money market fund liquidity and fee and gate thresholds; ... Modifications to redemption fee considerations [and] Money market fund liquidity management changes. We believe an increase in the weekly liquid asset requirement -- consistent with what most funds already maintain as a matter of conservative liquidity management -- could make money market funds more resilient."

Regarding "Reforms that do not advance the goals of reform and do not preserve the key characteristics of money market funds," ICI includes: "Swing pricing [and] Capital buffers. We oppose a reform that would require money market funds or their advisers to maintain capital against money market fund assets. The likeliest impact of a capital buffer requirement would be to impel money market fund sponsors to exit the business, depriving investors, issuers, and the economy of the benefits these funds provide.... `Sponsor support requirements; Minimum balance at risk (MBR); [and] Liquidity exchange bank membership."

On "Reforms that are unlikely to advance the goals of reform," they write: "Floating NAVs for all prime and tax-exempt money market funds ... does not reduce risk in any meaningful way.... Countercyclical weekly liquid asset requirements.... [And], reform of conditions for imposing redemption gates.... [G]ates should be limited to extraordinary circumstances that present a significant risk of a run on a fund and potential harm to shareholders, such as those contemplated under Rule 22e-3 under the Investment Company Act."

Finally, they tell the SEC, "Therefore, policymakers should focus on the core objective: to strengthen money market funds even further against adverse market conditions for the benefit of short-term funding markets and enable them to meet extraordinarily high levels of redemption requests without the need for central bank liquidity support except in the most extreme circumstances. Indeed, as we consider the future of our markets in the wake of this pandemic, and the role of money market funds within the markets, we question those who say that money market funds must be regulated so aggressively that central bank intervention would never be needed again to provide liquidity support in the face of great economic shock. Such views claim that eliminating any future possibility of central bank support would avoid moral hazard. Of course, money market funds should be responsible for robust liquidity risk management and subject to appropriate rules and regulations. But holding money market funds at fault for central bank intervention intended to calm financial markets during a time of extreme uncertainty around a global catastrophe should not be the starting point for any discussion of reforms."

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