Treasury
Secretary Tim Geithner has urged the Financial Stability Oversight Council to
use its authority under section 120 of the Dodd-Frank Act to recommend that the
SEC proceed with money market fund reform. To do so, he said in a letter
to FSOC, the Council should issue for public comment a set of options for
reform to support the recommendations in its annual reports. The Council
would consider the comments and provide a final recommendation to the SEC,
which, pursuant to the Dodd-Frank Act, would be required to adopt the
recommended standards or explain in writing to the Council why it had failed to
act. The Secretary has asked staff to begin drafting a formal
recommendation immediately and is hopeful that the Council will consider that
recommendation at its November meeting.
The
proposed recommendation should include the two reform alternatives put forward
by Chairman Schapiro, request comment on a third option, and seek input on
other alternatives that might be as effective in addressing structural
vulnerabilities.
Option
one would entail floating the net asset values
(NAVs) of the funds by removing the special exemption that allows them to
utilize amortized-cost accounting and rounding to maintain stable NAVs.
Instead, they would be required to use mark-to-market valuation to set
share prices, like other mutual funds. This would allow the value of
investors’ shares to track more closely the values of the underlying instruments
held by money market funds and eliminate the significance of share price
variation in the future.
Option
two would require them to hold a capital buffer of adequate size (likely less
than 1 percent) to absorb fluctuations in the value of their holdings that are
currently addressed by rounding of the NAV. The buffer could be coupled
with a “minimum balance at risk” requirement, whereby each shareholder would
have a minimum account balance of at least 3 percent of that shareholder’s
maximum balance over the previous 30 days. Redemptions of the minimum
balance would be delayed for 30 days, and amounts held back would be the first
to absorb any losses by the fund in excess of its capital buffer. This
would complement the capital buffer by adding loss-absorption capacity and
directly counteract the first-mover advantage that exacerbates the current
structure’s vulnerability to runs.
Option
three would entail imposing capital and enhanced liquidity standards, coupled
with liquidity fees or temporary gates on redemptions.