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Comment Letter Overview
ICI’s Response to “Money Market Fund Reform Options”
On January 10, 2011, ICI filed a comment letter with the Securities and Exchange Commission addressing the reform options outlined in the President’s Working Group on Financial Markets (PWG) Report on “Money Market Fund Reform Options.”
This page provides an overview of ICI’s letter. Companion fact sheets summarize ICI’s proposed private emergency liquidity facility for “prime” money market funds (LF), ICI’s opposition to floating net asset values, and ICI’s examination of other options considered by the PWG.
The President’s Working Group Report
In October 2010, the President’s Working Group issued a report discussing the advantages and disadvantages of several possible options to make money market funds even more secure under the most severe market conditions. The Report responds to a recommendation in a June 2009 Treasury Department paper on financial regulatory reform.
The Report affirms that money market funds serve as an effective cash management tool for investors, and as an indispensable source of short-term financing for the U.S. economy. ICI commends the PWG for the thoughtful and cautious approach taken in the Report. It is telling that the Report, which was 16 months in preparation, does not specifically endorse any particular course of action. This outcome underscores the reality that there is no simple answer to the question of how to make money market funds even more resilient in the face of the most severe market conditions.
ICI’s Guiding Principles in Analyzing Money Market Reform Measures
Given the tremendous benefits money market funds provide to investors and the economy, it is imperative to preserve this product’s essential characteristics.
In devising a solution, we need to stay focused on the objective policymakers are seeking to achieve: to strengthen money market funds even further against adverse market conditions and enable them to meet extraordinarily high levels of redemption requests.
Any solution must be designed to promote this important policy goal while minimizing the potential for unintended negative consequences.
No “Silver Bullet”
There is no “silver bullet” for safeguarding money market funds against the severest market distress. Each option has its drawbacks, ranging from potential detrimental impacts on money market funds, issuers, and investors, to complicated regulatory, structural, and operational hurdles.
The Most Promising Reform: A Private Emergency Liquidity Facility
The option of a private emergency liquidity facility for prime money market funds has the most promise for addressing policymakers’ concerns with the least negative impact.
Over the past year and a half, ICI has worked to develop a model for such a facility. Our proposed liquidity facility (LF) is an industry-sponsored solution intended to serve as a liquidity backstop for prime money market funds during times of unusual market stress. It would be formed as a state-chartered bank or trust company and capitalized through a combination of initial contributions from prime fund sponsors and ongoing commitment fees from member funds. In the third year, the liquidity facility would begin to issue time deposits to third parties to further build its balance sheet. Our proposal contemplates that all prime money market funds would be required to participate in the LF.
The LF would be a member of the Federal Reserve, subject to regulation by state banking authorities and the Fed, and, like other banks, eligible to access the Fed’s discount window.
During times of unusual market stress, the LF would buy high-quality, short-term securities from prime money market funds at amortized cost. In so doing, the LF would (1) enable funds to meet redemptions while maintaining a stable $1.00 net asset value (NAV)—even when markets are frozen—and (2) protect the broader money market by allowing funds to avoid the need to sell portfolio instruments into a challenging market. Also, the very existence of such a liquidity backstop could provide reassurance to investors and thereby limit the risk that liquidity concerns in a single fund might spur increased redemptions in all prime money market funds during a future market crisis.
Importantly, the LF is not intended to provide credit support for distressed securities held by money market funds. Rather, it is intended to meet liquidity needs brought on by market stresses through the acquisition of high-quality instruments. Further, the LF would provide a liquidity backstop only after a substantial portion of a fund’s minimum legally mandated liquidity positions are utilized.
Floating Funds’ NAV Would Disrupt Credit Markets Without Reducing Risk
ICI’s comment letter reiterated our strong opposition to proposals that would directly or indirectly require money market funds to abandon their stable $1.00 per-share price in favor of a floating net asset value (NAV). ICI, its members, issuers of money market instruments, and money market fund investors—in business, government, and nonprofits—have repeatedly opposed such proposals.
We are highly skeptical that forcing these funds to float their value would reduce risks in any meaningful way. Instead, there is compelling evidence that a substantial portion of money market fund investors either would be unable or unwilling to use a floating NAV money market fund. Requiring money market funds to float their NAVs would risk precipitating a vast outflow of assets from money market funds to other products. This in turn would force a major restructuring of the short-term credit markets. This restructuring would not reduce, and very likely would increase, systemic risk.
Other Options Presented by the PWG
The other options presented by the PWG would not solve the problem at hand, would increase rather than decrease systemic risk, would adversely impact the market, or would result in some combination of the foregoing. In many cases, transitioning to a new approach in and of itself would have systemic risk implications.
While we are unable to support any of those approaches, we propose one additional measure: consideration of new SEC rules mandating that broker-dealers and other intermediaries disclose to money market funds information about underlying investors in the funds to facilitate compliance with “know your investor” requirements. Greater transparency around investors owning shares in money market funds through intermediaries would mitigate risk by improving the funds’ ability to manage liquidity needs.
For more information on regulatory developments on the reform of money market funds, please visit ICI's Money Market Funds Resource Center.