Federated Hermes is yet another of the host of money fund managers who submitted comment letters in response to the SEC's "Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report." Federated's letter, written by Christopher Donahue and Deborah Cunnningham, tells us, "We are writing on behalf of Federated Hermes, Inc. and its subsidiaries to provide comments in response to the Report of the President's Working Group on Financial Markets, Overview of Recent Events and Potential Reform Options for Money Market Funds which was issued in December 2020. We would like to state upfront that we acknowledge and endorse the comment letter submitted by The Investment Company Institute ... with very minor differences regarding potential changes to liquid asset requirements." (Reminder: Please join us tomorrow, April 22 from 2-3pm EDT, for our "ESG & Social Money Fund Update" webinar.)
Federated continues, "The PWG MMF Report suggests that the regulation of MMFs be reevaluated in light of financial market events that occurred in the Spring of 2020 during the early part of the COVID-19 pandemic. These troubled times have taught us more about medical care, public health and virology than any of us would have liked. But the newly familiar maxims of 'first, do no harm' and 'follow the data' are important in considering further changes to MMF regulation. We support reevaluation and, if warranted by the data, further refinement of MMF regulation. More importantly, we support, where warranted by the data, improvement in market structures to make short-term markets more resilient."
They explain, "In following the data, we draw very different conclusions than those stated in the PWG MMF Report. We urge policymakers not to further harm financial markets by adopting poorly-conceived changes to MMF regulation. Rather, the U.S. Securities and Exchange Commission should instead refine certain aspects of the 2014 amendments to Rule 2a-7 under the Investment Company Act of 1940 having to do with the implementation of 'gates and fees'. The creation of an artificial requirement for MMFs to consider the imposition of 'gates and fees' linked to conformance with weekly liquid asset requirements created a very real incentive for some shareholders to redeem from prime institutional MMFs ahead of liquidity minimums being reached. The advent of a MMF dropping below the minimum weekly liquidity levels prompting investors' concerns over such a drop triggering gates and fees has become the new 'breaking the buck' event."
The comment says, "Federated Hermes has been in business since 1955 and has more than 45 years of experience managing MMFs. During that period, Federated Hermes has participated actively in the money market as it developed over the years. MMFs managed by Federated Hermes in the United States include U.S. government MMFs, municipal MMFs and prime MMFs. As of year-end 2020, slightly over two-thirds of the MMF assets managed by Federated Hermes are U.S. government securities and less than 30% consist of commercial paper and other non-government instruments. Federated Hermes also manages MMFs and other investment funds and accounts in Canada, Europe and Asia. In addition to MMFs, Federated Hermes manages accounts for institutional customers that invest in money market instruments, as well as state government-sponsored local government investment pools ('LGIPs') that invest in money market instruments. In all, Federated Hermes manages more than $400 billion in money market assets, the vast majority of which have ESG integrated into their investment process."
Federated writes, "MMFs play an important role in the capital markets by providing an efficient means for institutional and retail investors to put short-term cash balances to work at a competitive market rate, providing relatively low-cost short-term financing to creditworthy governments and businesses. MMFs provide investors with a convenient means to access professional management of highly diversified portfolios of high quality short-term instruments. MMFs are much more efficient (and for very large balances, safer) than banks at intermediating between short-term cash investors and short-term government and corporate borrowers. The utility of MMFs to both retail and institutional investors recently received the most sincere and perhaps unintended endorsements from PWG constituent agencies and their proxies in the form of enforcement actions brought by the Office of the Comptroller of the Currency (the 'OCC'), the SEC and FINRA against banks, broker-dealers and investment advisers for breaches of fiduciary duties and disclosure obligations to customers by failing to invest customer cash balances at a competitive market yield in institutional MMF share classes and failing to disclose the clear benefits of investing in institutional classes of MMFs and instead investing those balances in bank deposits."
They add, "Unlike bank deposits, which pay an administered rate, MMFs provide investors with a market rate of return. This allows a fair and competitive return to investors, rather than potentially-lower non-market rates. This puts smaller investors on par with high-net worth investors and institutions in terms of access to market-based rates of return on their cash. The benefit to investors of more than $200 billion from these higher returns from MMFs over bank deposits since 1990.... This comment letter responds to the policy considerations outlined in the PWG MMF Report and recommends regulatory changes and enhancements to improve the resilience of MMFs as well as market structure reform considerations to improve market performance in times of severe stress."
Donahue and Cunningham state, "Key points that Federated Hermes wishes to make in this comment letter are: MMFs did not cause or exacerbate the turmoil in the financial markets in the Spring of 2020. Playing a role in the markets and reacting to market stresses should not be confused with causing such market stresses; MMFs have no 'structural vulnerabilities' warranting some of the more significant policy options outlined in the PWG MMF Report, such as capital buffers or holdbacks. The SEC's MMF rule has some flaws related to the linkage of liquid asset compliance to gates and fees, and those should be corrected as discussed below; The market turmoil in the Spring of 2020 was created by a global pandemic the likes of which had not been seen for a hundred years and the response by governments around the world to stem the spread of the virus."
Other "key points" include: "The financial markets turmoil started in the equities markets weeks before it impacted the markets in U.S. treasury securities and corporate bonds, and thereafter commercial paper. The financial markets turmoil affected the bond markets and repurchase agreements several days before it affected the commercial paper markets; ... MMFs are no longer a dominant player in commercial paper markets and were not in early 2020. Commercial paper is no longer a substantial portion of MMF assets. This is evidenced by the fact the Federal Reserve Bank of Boston included a plethora of high-quality short-term assets as eligible for inclusion in its Money Market Mutual Fund Liquidity Facility on March 18, 2020; Commercial paper issued by the industries most disrupted by the COVID-19 pandemic (travel, hospitality, entertainment and in-person retail) are not a significant part of the investment portfolios of MMFs. MMFs did not and could not have caused or materially exacerbated turmoil in the commercial paper markets in the Spring of 2020."
They also list: "The very short duration of MMF portfolios as measured by weighted average maturity ('WAM') and weighted average life ('WAL'), particularly as compared to those of banks, evidences the fact that MMFs are not engaged in any significant 'maturity transformation' but instead provide cost-effective professionally-managed diversified portfolios of high-quality, short-term securities, which would not be achievable in a separately managed account for most investors; The Federal Reserve did not bail out MMFs. It extended fully collateralized credit for a short period of time and as part of a much broader emergency finance program to provide liquidity to credit markets. The Federal Reserve has earned over $185 million in interest, fees and other revenues from its Money Market Mutual Fund Liquidity Facility, with zero incurred or expected losses to the Federal Reserve."
In addition, Federated makes the point: "MMFs are a useful and efficient capital markets and investment management tool for intermediating between investors of liquid assets and short-term borrowers, and not a threat to the financial system, as documented by the latest round of enforcement actions brought by PWG members and their proxies against banks, broker-dealers and investment advisers for alleged breach of fiduciary duties and disclosure obligations to customers for failing to invest client cash balances in low-fee institutional MMFs and failure to disclose how much better those are than bank sweep deposits.... Market structure reforms should be the focus of any reasonable regulatory response, including finding ways to encourage banks and dealers to serve as market makers in times of extraordinary liquidity demand like that caused by the government's response to the pandemic."
Regarding the "2007-2009 Financial Crisis," they explain, "The PWG MMF Report describes the events involving the Reserve Primary Fund breaking the buck in September 2008 in isolation, which in and of itself leads to the perpetuation of a false narrative. The Financial Crisis started in mid-2007, not September 2008. The U.S. and global economy and financial system were in free fall for many months before September 2008.... Unless one adopts a non-linear view of time, MMFs certainly did not cause the Financial Crisis. The Financial Crisis caused Lehman to fail. Lehman's failure caused the Reserve Primary Fund to 'break a buck.' Not the other way around."
Finally, Federated Hermes adds, "Here is the reality: the COVID-19 pandemic and government reaction to the same drove all of this. The market disruptions in March and April of 2020 were exacerbated by the chaotic and uncoordinated response of governments around the world, including the U.S., to the global pandemic. The disruptions were not 'caused' by 'structural vulnerabilities' of money market funds. The complaint, for example, of maturity transformation when asserting the structural vulnerability of money market funds -- when compared to banks -- is like comparing an ice cube to an iceberg; they're both frozen water but are not really the same."
