We've been quoting from comment letters in response to the FSB's "Policy proposals to enhance money market fund resilience: Consultation Report" over the past week, following the August 16 deadline for feedback and the posting of letters. Today, we quote from Vanguard's response. Ricardo Delfin, Principal and Global Head of Regulatory and Public Policy, writes, "Vanguard respectfully submits its comments to the Financial Stability Board (FSB) in response to its consultative report with policy proposals to enhance money market fund resilience (Consultation Report). Vanguard has managed money market mutual funds (MMFs) since 1981. On behalf of our shareholders, who currently invest approximately $349 billion in our MMFs, we are deeply committed to working with U.S. and global financial regulatory authorities and standard-setting bodies to strengthen the money market industry for the benefit and further protection of investors. To accomplish this, we believe a combination of fund structural reforms and market structure reforms is necessary, as discussed in our responses to the Consultation Report." The comment explains, "MMFs are an important choice for retail investors' cash management and principal preservation needs. In March 2020, the economic shock of the COVID-19 pandemic led to an unprecedented flight to liquidity and safety by investors and other market participants. Government MMFs had significant inflows as investors sought the principal preservation, stability, and safety that they offer.... Institutional prime MMFs, however, suffered significant outflows necessitating additional government support of prime funds and the underlying commercial paper (CP) markets in which they invest. Given the different dynamics between these funds and their underlying assets, we agree with regulators' desire to focus on reforming prime MMFs. We also believe underlying market structure reforms are essential to strengthening the short-term funding markets." Vanguard tells the FSB, "Based on the significant redemptions experienced by prime MMFs during the COVID crisis, we recommend that additional reforms focus on risks inherent in prime MMFs and related vulnerabilities in the short-term funding markets. As explained in greater detail in the questions that follow, we recommend the following MMF structural reforms: floating the NAV for all (retail and institutional) prime MMFs, eliminating fees/gates to reduce the incentive for investors to run, and imposing higher liquidity requirements. In combination with these prime MMF structural reforms, we recommend market structure reforms that focus on improving the underlying fixed income market functioning in a crisis.... Given the repeated issues in prime MMFs deriving from their stable NAV (in 2008) and gates and fees (in 2020) -- and exacerbated by market structure weaknesses -- we believe that fund policy reforms should focus directly on the structural weaknesses of these funds, as well as broader market structure weaknesses. As described above, Vanguard supports a simple approach to prime MMF reforms -- floating the NAV of both institutional and retail prime MMFs, eliminating gates and fees, imposing higher liquidity requirements, and implementing a combination of U.S. Treasury and other fixed income market structure reforms designed to improve market functioning in a crisis." They add, "We believe this approach directly addresses the nature of the problems, and is far superior to other reform options, such as capital buffers, minimum balance at risk (MBR), or swing pricing -- all of which would create a host of new challenges and unintended consequences. It would be a mistake to impose bank-like policy measures, such as capital requirements and MBR, on mutual funds. Instead, we urge regulators to focus on addressing these core structural weaknesses and improving the underlying market functioning in a crisis. Imposing capital, MBR, or swing pricing requirements does not address that fundamental challenge."
