Over the past month-and-a-half, we've quoted from most of the 50 letters written in response to the SEC's "Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report". Today, we finish the job and quote from the handful of late entrants, including missives from the Committee on Capital Markets Regulation, The Carfang Group and Attorney Stephen Keen. See here for the list of comment letters and see these Crane Data News stories for our highlights: "More Handicapping: Cohen on Reform Timeline; SSGA; FT on Cash Glut" (5/25/21), "Crane and Dechert'‚Äčs Cohen: Handicapping Money Fund Reform Webinar" (5/24/21), "May MFI: ICI Defends MMFs; SEC, PWG Report Comments" (5/7/21), "Dear SEC: Rest of Top 20 Weigh In; SSGA, Invesco, T. Rowe, Western" (4/29/21), "Dreyfus, Wells, Northern on PWG and Reforms: Treasuries, Runs, Float" (4/28/21), "Federated Hermes Blasts PWG: MMFs Didn't Cause, No Structural Issues" (4/21/21), "Schwab, Vanguard SEC Comments Support Floating NAV for Prime Retail" (4/19/21), "ICI Comments to SEC on Reforms: No Silver Bullet, MMFs Didn't Cause" (4/14/21), "BlackRock Tells SEC Look Holistically" (4/22/21), "Fidelity: Preserve and Protect MMFs" (4/15/21), "JPMAM Urges Incremental Change (4/14/21). (See also the replay of our "Handicapping Money Fund Reforms" webinar for more.)

The CCMR letter tells us, "This report by the Committee on Capital Markets Regulation examines the role of money market funds in the March 2020 COVID crisis and sets forth reforms that would enhance the liquidity of MMFs that primarily invest in short-term private debt securities ('prime MMFs'). The Committee's recommendations are intended to significantly reduce the likelihood that government intervention to support prime MMFs will be necessary in a future crisis."

It continues, "We evaluate policy reforms to prime MMFs that would enhance their resiliency and reduce the likelihood of future government support. We begin by evaluating whether prime MMFs should be abolished. We find that doing so would not eliminate the contagion risk associated with uninsured wholesale short-term funding of which prime MMFs represent only a very small share. Prohibiting prime MMFs would also have unclear effects on financial stability as institutional investors could shift their assets to less-regulated alternatives. Abolishing prime MMFs could also have unintended consequences, including increasing funding costs for issuers of short-term debt and reducing returns for investors in prime MMFs. We therefore do not support abolishing prime MMFs."

The letter explains, "We then set forth recommendations for enhancing the resiliency of prime MMFs. The 2020 crisis demonstrated that prime MMFs' liquidity buffers did not function as intended. Investors in prime MMFs treated the 30 percent minimum as a floor, because breaching that minimum provided MMF boards with the authority to restrict or apply a fee to withdrawals. The SEC can therefore reduce the incentive of investors to withdraw by simply eliminating liquidity fees and gates thereby allowing prime MMFs to use their liquidity buffers to meet investor withdrawals. We further recommend that the SEC enhance the quality of prime MMFs' liquidity buffers to promote investor confidence in the ability of prime MMFs to withstand market stress. One way that the SEC could do so is by requiring that prime MMFs hold 25-50% of their weekly liquidity buffer in short-term U.S. government securities, including U.S. government agency securities."

The CCMR writes, "Next, we examine proposals to impose capital buffers on prime MMFs. We find that capital requirements would substantially increase the cost of operating prime MMFs, which would likely prevent sponsors from offering such funds. Even if sponsors continued to offer prime MMFs with capital requirements, it is not clear that capital buffers against losses would meaningfully reduce the incentive of investors to withdraw in a crisis. We therefore do not support capital buffers for prime MMFs."

They add, "Finally, we consider swing pricing proposals for prime MMFs. Swing pricing authorizes prime MMFs to impose additional fees on redeeming investors, typically after a certain withdrawal threshold based on total AUM is met (e.g., such as 10% of total AUM are withdrawn from a fund). We find that swing pricing would be impractical to implement for prime MMFs as doing so would prevent same-day settlement -- a key feature for institutional investors in prime MMFs. Swing pricing would also be ineffective at reducing the incentive of investors to withdraw in a crisis. We therefore do not support swing pricing for prime MMFs."

The Carfang Group's comment letter, tells us, "The Carfang Group appreciates the opportunity to offer comments in response to the Commission's release of the December 2020 President's Working Group on Financial Markets, Overview of Recent Events and Potential Reform Options for Money Market Funds. We applaud all efforts to enhance the U.S. capital markets, already the broadest, deepest and most liquid in the world. We especially encourage policies that facilitate the efficient flow of working capital to corporations and municipalities, the engines of economic growth, job creation and infrastructure funding. Efficient flow of capital between investors and issuers is paramount."

It continues, "The Carfang Group strongly encourages the Commission, and more broadly, all financial regulators, to avoid premature rule making until (1) the totality of the multi-trillion-dollar capital flows during the March 2020 crisis are examined, (2) the roles that all market participants and regulators played are understood, and (3) the efficacy of the trillions of dollars of government support across the financial markets and institutions is evaluated.... Some of the failures, shortcomings and omissions of the PWG Report have been documented.... Those papers and others demonstrate why the report should not be relied upon as the basis of yet another round of regulation of Prime Money Market Funds (PMMFs) at this time."

In a section entitled, "Crisis-Related Market Turmoil in Perspective," Carfang writes, "PMMF redemptions represented only 6% of the money in motion during the March 2020 crisis.... Since the implementation of the 2014 regulations, PMMFs' role had already been significantly diminished to just 5% of the liquidity market.... PMMF liquidation of just 3% of the outstanding commercial paper (CP) in March 2020 was not a crisis accelerant.... PMMFs, once again, weathered this crisis as the most resilient non-government backed asset class.... All short-term asset classes, public and private sector alike, received trillions of dollars in financial support and/or regulatory forbearance during the crisis."

The comment concludes, "The scope of the PWG Report is far too narrow to provide a useful framework for enacting new regulations on PMMFs.... Before rushing into premature decisions, regulators need to understand (1) the totality of the multi-trillion-dollar capital flows during that period, (2) the roles that all market participants and regulators played, and (3) the efficacy of the trillions of dollars of government support across the financial markets and institutions."

Finally, veteran money fund attorney Stephen Keen's comment letter, begins, "I am writing to comment on the process for developing proposals for the further reform of money market fund regulations. Although my questions and comments are prompted by the Report of the President's Working Group on Financial Markets Overview of Recent Events and Potential Reform Options for Money Market Funds, issued December 22, 2020, I do not wish to comment on any of the reforms considered in the Report. Rather, I would like to remind the Securities and Exchange Commission of the importance of conducting careful fact finding and analysis as to the behavior of money market funds and their shareholders during March 2020 before developing any reform proposals."

It continues, "Although none of the current commissioners were at the Commission during the adoption of the major reforms to Rule 2a-7 in 2014, the current Acting Director of the Division of Investment Management, Sarah ten Siethoff, was and should be able to confirm my observations. In my view, the Division of Risk, Strategy, and Financial Innovation's Money Market Fund Study: Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher (Experience through the Financial Crisis, Efficacy of 2010 Reforms, and Potential Economic Effects of Future Reforms), issued November 30, 2012 (the '2012 MMF Study'), was a key step in the reform process. Frankly, the actions prior to the 2012 MMF Study, including the previous PWG report, the MMF roundtable and the Financial Stability Oversight Council recommendations, struck me as a waste of time due to their superficial analysis of the failure of the Reserve Primary Fund and its aftermath."

Keen explains, "The gist of my recommendation is that IM and DERA should do more analysis of this data and use the Commission's examination authority to fill any holes in the information. Although I have suggested some specific questions for the Commission's staff to consider, the Prime MMF Report illustrates the importance of testing assumptions against the data. For example, conventional wisdom was that MMFs managed by banks and investment banks would be less likely to suffer redemptions because investors would believe they have more resources with which to support their MMFs. Yet the Prime MMFs Report finds 'funds with advisers owned by the largest U.S. banks designated as global systemically important banks accounted for 56% of the outflows in the third week of March even though these funds managed only around 28% of net assets in publicly offered prime institutional MMFs.' This could suggest that requiring advisers to provide fund support may not be effective in preventing large scale redemptions."

In a section on "Questions for Further Analysis," he asks, "Were there earlier indications that the cash flows of Supported Funds were more volatile than other prime or tax-exempt funds? ... Did the portfolio composition of the Supported Fund that reported a market-based NAV below $0.9975 differ significantly from other tax-exempt MMFs? ... [W]ere there particular CP issuers that the MMFs chose not to roll over? ... this would be consistent with a reaction to general market conditions.... Who were the market participants who 'reported concerns that the imposition of a fee or gate by one fund, as well as the perception that a fee or gate would be imposed by one fund, could spark widespread redemptions from other funds, leading to further stresses in the underlying markets?' Did these participants redeem from MMFs and was this the primary reason?"

Keen also writes, "The Report states that one tax-exempt MMF nevertheless reported a market-based NAV of less than $0.9975 and required sponsor support. But this should not have been due to a drop in the price of its seven-day VRDNs. I expect it more likely that the fund (a) had already realized losses from earlier sales of portfolios securities, (b) sold longer-term portfolio holdings in response to redemptions in March and (c) redemptions during March increased the significance of these realized losses. In all events, it would be helpful for DERA to include such details in its analysis.... In summary, I cannot find a structural problem with tax-exempt MMFs."

The letter concludes, "I urge the Commission to learn from its experience during the proposal and adoption of the amendments to Rule 2a-7 in 2014. The Chairwoman's recalcitrance in authorizing the 2012 MMF Study and request for the Financial Stability Oversight Council to intercede served only to delay consideration and adoption of the eventual reforms. I do not know why the Commission chose to give MMFs with fluctuating NAVs or tax-exempt MMFs the power to impose a liquidity fee or temporarily suspend redemptions, but if it was to placate the Treasury Secretary and Chairman of the Federal Reserve Board, the choice was counterproductive.... Finally, any reforms to Rule 2a-7 will be irrelevant if the Commission and other authorities continue to allow issuers of stable-dollar cryptocurrencies to pay interest on their currencies without registering as investment companies or obtaining bank charters."

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