Thursday, June 21, 2012

At Senate Hearings, SEC Chair Schapiro Says Commission Will Provide Data on Voluntary Sponsor Support of Money Market Funds

At the request of Senators Richard Shelby (R-AL) and Patrick Toomey (R-PA), SEC Chair Mary Schapiro said that the Commission will provide background SEC staff data on the 300 occasions that sponsors of money market funds have come to the SEC seeking authorization to provide voluntary support to their funds. Forms of sponsor support can include providing a capital support agreement for the fund and sponsor-purchased letters of credit for the fund. Chairman Schapiro also told the Senate Banking Committee that the SEC has carefully analyzed the 2010 money market fund regulatory reforms effected by the SEC and that the reforms have been helpful and extremely positive. The liquidity reforms have been the most beneficial, she added.

Senator Toomey noted that sponsor support can be defined in a way that there was not a real danger to the fund. It is his sense that many of the 300 instances of sponsor support were not terribly disturbing. He also noted that some of the 300 instances may have been de minimis support. Senator Toomey asked how many of the 300 instances of sponsor support came after the SEC adopted the 2010 regulatory reforms. There were three such post-2010 reform instances, replied Chairman Schapiro.

Searching for a common definition of sponsor support, Senator Toomey noted that in recent remarks Fed Governor Daniel Tarullo noted that sponsors voluntarily supported their money market funds more than 100 times between 1989 and 2003. He queried if everyone is using the same definition of what constitutes voluntary sponsor support. Chairman Schapiro said that the SEC looks at instances when the money market fund sponsors come to the Commission seeking authorization to make a contribution to their funds. Responding to another query from Senator Toomey, the SEC Chair said that a credit agreement constitutes sponsor support of a fund even if it is not used.

Responding to questioning from Banking Committee Chair Tim Johnson (D-SD), Chairman Schapiro said that the transparency initiative in this area has been very important to the SEC. The Commission now has a more granular window into the exposures of money market funds, most of whom reduced their exposure to European banks, but some did not. The risks that funds are taking are not prohibited by SEC regulations, added the Chair, but the Commission needs to have a handle on fund exposures.

Addressing senatorial concerns over the cost-benefit analysis of any future regulation of money market funds, Chairman Schapiro said that regulatory reforms will generally have associated costs and pledged that the SEC will carefully analyze them. She added that any costs are quite likely to be far outweighed by the benefit of preventing a devastating run and consequent damage to investor confidence and the freezing up of short-term credit markets.

Senator Shelby asked if the SEC worked with the Federal Reserve Board in adopting the 2010 regulatory reforms. While Chairman Schapiro was not sure of the extent of SEC-Fed cooperation in the 2010 reforms, she assured the Senator that the SEC and Fed staff are working together on the issues around money market funds and will work together on future regulatory reform.

Senator Shelby queried if money market funds are shadow banks. Noting that she is not a big fan of the phrase shadow banking, Chairman Schapiro said that this is not about shadow banking. It is about the importance of money market funds to the US economy and to investors and that such funds are and will be well-managed. In response to Senator Shelby’s question of whether the Fed should be the primary regulator of money market funds, Chairman Schapiro said that money market funds are investment products that are appropriately regulated by the SEC.

Senator Jack Reed (D-RI) noted that, if the SEC does not adopt additional reforms for money market funds, the Financial Stability Oversight Council is authorized by the Dodd-Frank Act to pick out systemically important funds and place them under enhanced regulation. Chairman Schapiro noted that the risk of designating some funds as systemically important and subjecting them to enhanced regulation, and not other funds, is that contagion could spread the risk among many funds.

Senator Reed and Senator Mark Warner (D-VA) suggested the stress testing of money market funds. Chairman Schapiro acknowledged that stress testing is an interesting idea, and the SEC 2010 reforms provide for stress testing of money market fund portfolios, but that what is needed are regulations requiring a floating NAV or capital buffer.

To Senator Warner’s question of whether a capital buffer would be for a Lehman-style collapse, Chairman Schapiro said that a capital buffer for a scenario of that magnitude would be prohibitively expensive. She envisions a smaller capital buffer, coupled with other reforms, such as limited restrictions on fees or redemptions. The capital buffer would not necessarily be big enough to absorb losses from all credit events, she explained, but would absorb the relatively small mark-to-market losses that occur in a fund’s portfolio day-to-day, including when a fund is under stress.