Fidelity to FSB: Narrowly Construct
Today, we quote from another comment letter in response to the Financial Stability Board's "Policy proposals to enhance money market fund resilience: Consultation Report". The world's largest manager of money market funds writes, "Fidelity Investments appreciates the opportunity to provide comments to the Financial Stability Board on its consultation report on Policy Proposals to Enhance Money Market Fund Resilience published on June 30, 2021. Fidelity has long served as a leading provider of money market funds and has extensive experience managing funds in both normal and stressed market conditions. Fidelity first began managing and offering money market funds in 1974. `Fidelity remains the largest provider of money market funds with approximately $894 billion in assets under management as of July 31, 2021, representing approximately 18 percent of the U.S. money market fund industry." Chief Legal Officer Cynthia Lo Bessette explains, "Based on our history of managing and distributing a broad array of money market funds held by millions of fund investors, we believe we are uniquely qualified to provide insights into the events of March 2020 and to offer views on the various reform measures described in the FSB Report. Fidelity previously provided comments to the U.S. Securities and Exchange Commission on the reform options outlined in the President's Working Group Report, many of which are reiterated in the FSB's Report. We applaud the work of the FSB and the PWG as productive steps in considering potential reform measures, however, we caution that any reform measures should be narrowly constructed to address the events of 2020, carefully considered to ensure they preserve the availability of money market funds and do not impose harmful unintended consequences on investors or the global economy. As we learned in 2020 in the U.S., fees and gates were not only ineffective at deterring redemptions but accelerated the timing of redemptions given institutional investors' prioritization of access to their capital above all else." She comments, "As detailed below in our responses to selected questions in the FSB Report, we believe that: Regulators should proceed cautiously and carefully when considering further structural reforms to U.S. money market funds, which are already subject to extensive regulation, testing, oversight, and reporting requirements. Any reforms that regulators determine to implement for U.S. money market funds should be narrowly tailored to address the vulnerabilities exposed in March 2020, which were focused on liquidity pressures in institutional prime money market funds. By contrast, U.S. government and retail prime funds, which did not experience similar vulnerabilities and have performed well during periods of volatility, including March 2020, should be excluded entirely from further rounds of reform." The letter adds, "To address the structural vulnerabilities experienced by U.S. institutional prime funds resulting from liquidity pressures, we recommend that regulators consider eliminating the strict tie between current liquidity thresholds and the imposition of fees and gates, in combination with requiring a higher percentage of Weekly Liquid Assets for those funds. We do not believe that these reforms are necessary for any other U.S. money market funds. In the event that these reforms are considered for retail prime funds, which we disagree with, we urge that any new Weekly Liquid Asset percentages be calibrated appropriately by fund type. The reform options that do not solve for liquidity related vulnerabilities in U.S. institutional prime funds, which include swing pricing, minimum balance at risk, removal of the stable net asset value, capital buffers, and variants thereof, should be rejected for the numerous reasons we detail below. We note that swing pricing, in particular, has garnered additional attention lately among policymakers and academics. In addition to the substantial operational challenges with implementing it in the United States, swing pricing is based on flawed assumptions about the motivations that drive investors to redeem from money market funds, negating further consideration as a reform option. Even if those assumptions were correct, as we demonstrate below, swing pricing is unlikely to move the NAV of a U.S. money market fund sufficiently to impact redemption behavior."
