Additional Reform Ideas Could Destroy Money Market Funds
Following on its January 2010 rule changes, the Securities Exchange Commission (SEC) has been considering a range of additional reforms for money market funds proposed by the President’s Working Group on Financial Markets in an October 2010 report. The report’s proposals included some measures that would change the fundamental characteristics of money market funds.
The concepts under consideration at the SEC met with widespread opposition from businesses of all sizes, state and local governments, individual investors, as well as Members of Congress from both parties. These proposals also failed to receive support from a majority of SEC commissioners, a development that prompted the Financial Stability Oversight Council (FSOC) to release its proposal for new rules for money market funds in November of 2012. Since the FSOC’s proposal largely mirrors the ideas under consideration earlier at the SEC, it poses new risks to MMFs.
A Bad Idea: Eliminating the Stable NAV
Some proposals would force these funds to abandon the stable $1.00 net asset value (NAV) in favor of a floating NAV. Floating the NAV would undermine the convenience and simplicity of money market funds by confronting investors with new tax, accounting, and legal hurdles. The consequences would damage financing for all sectors of the U.S. economy.
- Threatens Low-Cost Cash Management Without the ability to operate at a stable NAV, money market funds could not provide businesses, governments, and individuals the convenient, low-cost cash management services they seek. In many states, laws require state and local entities to invest cash only in accounts or products offering a stable value. Many non-profit institutions and businesses face similar requirements, either by regulation or investment policy.
- Forces Investors Toward Lower Yield, Higher Risk Requiring money market funds to adopt a floating NAV would force many state agencies, cities, counties, public authorities, public universities, nonprofits, and businesses to shift to bank products that have historically paid lower yields or to other cash products that are less regulated and less secure.
- Forces Investors Out of Money Market Funds In surveys, public statements, and letters to regulators, investors of all types have endorsed the current structure of money market funds and have said they would be unable or unwilling to use a floating NAV money market fund. For example, a survey of corporate money market fund users by consultants Treasury Strategies Inc. found that 77 percent said they would move cash out of these funds if their NAV was changed from stable to floating.
- Disrupts Availability of Short Term Credit The flight of investors in the face of floating NAV or other changes that undermine the character of money market funds would reduce funds’ ability to buy commercial paper and municipal debt, thus disrupting for some time the supply of short-term credit that American corporations and state and local governments need.
- Increases Risk to the American Financial System Few immediate substitutes are available to fill the financing gap that would be created by the rapid shrinkage of money market funds. Even if banks could raise the new capital needed to meet corporate and municipal demand, the lending market would be less efficient and costs would rise.
The primary effect of requiring money market funds to float their NAVs would be a major restructuring and reordering of the short-term credit markets—creating turmoil which would not reduce, and very likely would increase, risks to the financial system.