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.