BlackRock Tells SEC Look Holistically
We continue to read through and excerpt from the 46 comment letters to the SEC in response to their "Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report." Below, we quote from BlackRock's letter, written by Thomas Callahan and Kate Fulton. They tell us, "The disruption to the markets in March of 2020 as a result of COVID-19 highlighted weaknesses in money market funds and the surrounding short-term market ecosystem. We believe this affords regulators and market participants the opportunity to revisit and improve the resilience of MMFs and the short-term markets. As noted in our recent ViewPoint 'Lessons from COVID-19: U.S. Short-Term Money Markets,' we recommend that policymakers look holistically at short-term markets to identify areas for improvement rather than look at MMFs in isolation. We outline three areas for improvement in commercial paper market structure, banks' role as intermediaries, and MMFs." BlackRock explains, "First, in the current commercial paper ('CP') market structure, market participants must frequently ask the bank from whom they purchased the CP to bid that paper back in the secondary market when they want to sell it. Typically, banks are unwilling to bid CP from issuers where they are not a named dealer on the issuer's program. This 'single source of liquidity' model failed during the COVID-19 Crisis and will fail again in the next liquidity crisis if fundamental changes to the CP market structure are not implemented, especially in light of current bank regulations. We recommend that the SEC convene a group of banks, issuers, MMFs and other market participants to study potential CP market reforms. Ideas we recommend for consideration include: (i) standardization in the CP market and (ii) an all-to-all platform in primary and secondary trading to deepen the pool of liquidity providers.... We recommend policymakers provide guidance on what provisions of the banking regulations might be relaxed in a future market liquidity crisis to provide additional liquidity to the market.... In order to incentivize banks to bid CP in times of market stress, we recommend the highest rated CP be treated as a high-quality liquid asset ('HQLA') for purposes of a bank's liquidity coverage ratio ('LCR')." The comment also states, "[W]e recommend a detailed review of MMFs to identify possible improvements to these products. We note that government MMFs performed well and we do not recommend any further reforms of these funds. Given the recent experience with the potential for triggering the implementation of liquidity fees and redemption gates creating uncertainty among investors in non-government MMFs, we recommend decoupling the potential imposition of liquidity fees and redemption gates from the 30% weekly liquid asset ('WLA') threshold. In addition, ... we recommend that the SEC provide clear guidance on whether a non-government MMF can waiver or modify the 30% WLA requirement during periods of market stress and provide parameters for such waiver or modification. Additionally, to further enhance the resiliency of Prime MMFs, we recommend adjusting the portfolio requirements of these MMFs, prohibiting the purchase of CP that does not have 'strong capacity for repayment' and eliminating the 5% illiquid bucket. Separately, mutual fund boards should have the ability to implement liquidity fees and redemption gates at any time that they deem it to be in the best interests of a MMF. Finally, we note that improvements made in bank regulation and CP market structure would be beneficial to all purchasers of CP generally, including MMFs." Callahan and Fulton add, "With the context of our overall views on how short-term markets can be strengthened laid out above, we categorize the President's Working Group's proposed reforms to MMFs into three categories: those that BlackRock supports, those that might be beneficial for investors and MMFs but require additional analysis, and those that would make Prime and Municipal MMFs unattractive to investors, and expensive or operationally difficult to implement. We note that the third category is likely to lead to the end of these non-government MMFs and recommend considering an outright ban on these products rather than pursuing complex implementation plans if these reforms are considered." (See the full letter for more details.)
