With the full backing of the Financial Stability Oversight Council, SEC Chair Mary Schapiro reaffirmed at the FSOC open meeting the need for additional reform of money market fund regulation. While substantial progress was made in the 2010 reforms effected by the SEC, noted Chairman Schapiro, money market funds remain vulnerable to runs. FSOC Chair and Treasury Secretary Tim Geithner said that money market reform is of broad importance to the Council as a whole. Money market reform is also supported by Fed Chair Ben Bernanke, who noted that, in 2008, runs on money market funds were an important source of instability. At that time, he said, the problem was addressed through a lending program at the Fed and an insurance fund at Treasury. Neither of these two mechanisms is currently available, he cautioned. While recognizing that the 2010 SEC reforms were useful, the Fed Chair said that more needs to be done and he supports SEC efforts at rulemaking.
In its annual report, FSOC supported the SEC’s efforts and recommended that the Commission publish structural reform options for public comment and ultimately adopt reforms that address money market funds susceptibility to runs.
According to Chairman Schapiro, there are two remaining issues that need to be addressed that were not addressed by the 2010 reforms, she said. First, there is currently no mechanism to absorb sudden loss in the value of a portfolio security of a money market fund without threatening the stable net asset value (NAV). Second, investors remain incentivized to redeem their money market fund holdings at the first sight of a problem so they can get out at a full dollar, noted the SEC Chair, leaving other investors behind to bear all the losses.
The Chair pointed out that the SEC staff has been working with other FSOC agencies and meeting with industry and market participant and investor groups to understand their issues and analyze approaches to reform.
Chairman Schapiro recommended two alternative reforms, both of which were endorsed in the FSOC annual report. The first approach is a mandatory floating NAV to simply reflect a money market fund’s actual market value on a daily basis. The second approach is a tailored capital buffer to absorb losses, possibly combined with a redemption restriction to reduce the incentive to exit the fund.
The impact of cascading failures of money market funds on the broader economy compels the need to confront these issues, emphasized Chairman Schapiro, adding that it is very important to get these approaches out there in the public domain in a concrete way so that the SEC can receive informed and meaningful feedback to guide the agency’s ultimate decision.