CCMC – The Future of Money Market Mutual Fund Regulation
AT A CENTER FOR CAPITAL MARKETS COMPETITIVENESS EVENT, participants discussed the future of money market mutual fund (MMMF) regulation.
The Future of Money Market Mutual Fund Regulation
In the first panel, Ken Troske, Senior Associate Dean and Professor of Economics at the University of Kentucky, presented his research on the performance of MMMFs since the reforms in 2012 to Rule 2a-7 of the Investment Company Act, which tightened credit quality and liquidity constraints, mandated stress tests, and required detailed monthly disclosures. Using data from Securities and Exchange Commission (SEC) Forms N-Q and N-MFP, Troske’s study found that assets in prime funds had shorter weighted average maturities (WAM), which created greater liquidity and more resilience to redemption fluctuations. He added that Prime MMMF portfolios decreased their risk by shifting from higher risk assets, such as commercial paper (CP), to lower risk assets, such as Treasuries.
The study also addressed concerns about the “slow-motion run” in 2011, caused by the Euro crisis, the US debt ceiling debate and the subsequent credit-rating downgrade. Troske’s data showed large amounts of redemptions across all MMMFs, not just those exposed to the Euro Zone, and noted that cash flows remained “relatively” stable as inflows helped mitigate outflows. There was also no evidence of a negative impact on CP markets by MMMF markets, he said. Troske stated that redemptions vary greatly from large prime MMMFs to retail MMMFs, making it “extremely difficult” to adopt an effective one-size-fits-all rule. He also stressed that MMMFs have been “remarkably” stable in their 40 year history and only two funds have ever “broken the buck.” In closing, he warned that additional reforms to MMMFs could alter the structure of the MMMF industry and lead to a host of unintended consequences. (To view the full report, please click here)
Next, Dennis Beresford, Ernst & Young Executive Professor of Accounting at the University of Georgia, presented research on amortized cost accounting practices for MMMFs. He explained that Rule 2a-7 was first introduced in 1983 and sought to establish accounting standards that all funds could follow. Since then, he said questions have been raised about using market value or cost in asset accounting, but noted that after 25 years of discussion, there is still no clear answer.
During the second panel, panelists discussed the future of MMMF reform. Harvey Pitt, CEO of Kalorama Partners, expressed disappointment that the SEC recently “punted” the issue of reform to the Financial Stability Oversight Council (FSOC) when Chairman Mary Schapiro could not garner enough support for her proposed reforms. He explained that the vote was halted due to a lack of analysis on the reforms and the MMMF market. Pitt added that the decision not to issue Schapiro’s reforms for public comment did not reflect an “unwillingness to act,” but rather a “decision not to act.” In closing, Pitt said he fears that the decision to pass this issue off to the FSOC was detrimental to the reputation of the SEC.
Paul Stevens, President and CEO of the Investment Company Institute, noted that the extensive commentary denouncing the ideas currently being proposed by the SEC and Treasury has been available since the President’s Working Group on Financial Markets reviewed the issue in 2009. He said the current business model of MMMFs must remain intact and additional reform must not be so burdensome as to drive providers out of the market. John E. Baumgardner, Partner at Sullivan and Cromwell, agreed with the other panelists and said the SEC is best positioned to be the regulatory body for MMMFs, strongly advocating against the FSOC’s current actions on the issue.
The final panel focused on the impact new reforms would have on end users of MMMFs. Ken Fischbach, Director of Capital Markets at Sallie Mae, said he views MMMFs as a “low risk, highly efficient, and sufficiently transparent” means of managing assets. He opposed the idea of a floating net asset value (NAV) on MMMFs, because it would “effectively create a new instrument” with risks that his company could not accommodate. He added that redemption restrictions would be detrimental to his business and decrease liquidity.
Michael Hadley, Partner at Davis & Harman LLP, said his law firm currently uses MMMFs for cash management and payouts of 401(K) plans for its employees, but stated that contemplated reforms to the current structure would complicate management of the funds and increase costs. David H. Lillard, Treasurer at the Tennessee Department of Treasury, explained that he relies on MMMFs for cash management and to operate local government investment pools (LGIP). He stated that any redemption restrictions would restrict liquidity and harm tightly run municipal budgets. He also voiced concern about a floating NAV, saying that it would eliminate LGIPs from the market because they are not allowed to invest in instruments with floating rates. The panel concluded that new reforms would require onerous overhauls of accounting and IT systems and would damage their business.
In her keynote speech, Nancy Prior, the President of Money Markets at Fidelity Investments, emphasized that MMMFs provide a great value to investors by offering a stable NAV, market-based yield, and ready liquidity. She dispelled the myth that MMMFs can be seen as shadow banks, noting their high level of transparency, strict liquidity standards, and the lack of leverage, credit-default swaps, or foreign currency dealings in their holdings. She also noted that her firm takes its fiduciary responsibility very seriously and strives to keep their investors fully informed of the lack of a government guarantee and possible price fluctuations. In closing, Prior noted that the reforms passed by the SEC in 2010 have greatly improved the soundness and safety of MMMFs and further reform may jeopardize their value and efficiency.
To view the event’s agenda, please click here.
AT A CENTER FOR CAPITAL MARKETS COMPETITIVENESS EVENT, participants discussed the future of money market mutual fund (MMMF) regulation.
The Future of Money Market Mutual Fund Regulation
In the first panel, Ken Troske, Senior Associate Dean and Professor of Economics at the University of Kentucky, presented his research on the performance of MMMFs since the reforms in 2012 to Rule 2a-7 of the Investment Company Act, which tightened credit quality and liquidity constraints, mandated stress tests, and required detailed monthly disclosures. Using data from Securities and Exchange Commission (SEC) Forms N-Q and N-MFP, Troske’s study found that assets in prime funds had shorter weighted average maturities (WAM), which created greater liquidity and more resilience to redemption fluctuations. He added that Prime MMMF portfolios decreased their risk by shifting from higher risk assets, such as commercial paper (CP), to lower risk assets, such as Treasuries.
The study also addressed concerns about the “slow-motion run” in 2011, caused by the Euro crisis, the US debt ceiling debate and the subsequent credit-rating downgrade. Troske’s data showed large amounts of redemptions across all MMMFs, not just those exposed to the Euro Zone, and noted that cash flows remained “relatively” stable as inflows helped mitigate outflows. There was also no evidence of a negative impact on CP markets by MMMF markets, he said. Troske stated that redemptions vary greatly from large prime MMMFs to retail MMMFs, making it “extremely difficult” to adopt an effective one-size-fits-all rule. He also stressed that MMMFs have been “remarkably” stable in their 40 year history and only two funds have ever “broken the buck.” In closing, he warned that additional reforms to MMMFs could alter the structure of the MMMF industry and lead to a host of unintended consequences. (To view the full report, please click here)
Next, Dennis Beresford, Ernst & Young Executive Professor of Accounting at the University of Georgia, presented research on amortized cost accounting practices for MMMFs. He explained that Rule 2a-7 was first introduced in 1983 and sought to establish accounting standards that all funds could follow. Since then, he said questions have been raised about using market value or cost in asset accounting, but noted that after 25 years of discussion, there is still no clear answer.
During the second panel, panelists discussed the future of MMMF reform. Harvey Pitt, CEO of Kalorama Partners, expressed disappointment that the SEC recently “punted” the issue of reform to the Financial Stability Oversight Council (FSOC) when Chairman Mary Schapiro could not garner enough support for her proposed reforms. He explained that the vote was halted due to a lack of analysis on the reforms and the MMMF market. Pitt added that the decision not to issue Schapiro’s reforms for public comment did not reflect an “unwillingness to act,” but rather a “decision not to act.” In closing, Pitt said he fears that the decision to pass this issue off to the FSOC was detrimental to the reputation of the SEC.
Paul Stevens, President and CEO of the Investment Company Institute, noted that the extensive commentary denouncing the ideas currently being proposed by the SEC and Treasury has been available since the President’s Working Group on Financial Markets reviewed the issue in 2009. He said the current business model of MMMFs must remain intact and additional reform must not be so burdensome as to drive providers out of the market. John E. Baumgardner, Partner at Sullivan and Cromwell, agreed with the other panelists and said the SEC is best positioned to be the regulatory body for MMMFs, strongly advocating against the FSOC’s current actions on the issue.
The final panel focused on the impact new reforms would have on end users of MMMFs. Ken Fischbach, Director of Capital Markets at Sallie Mae, said he views MMMFs as a “low risk, highly efficient, and sufficiently transparent” means of managing assets. He opposed the idea of a floating net asset value (NAV) on MMMFs, because it would “effectively create a new instrument” with risks that his company could not accommodate. He added that redemption restrictions would be detrimental to his business and decrease liquidity.
Michael Hadley, Partner at Davis & Harman LLP, said his law firm currently uses MMMFs for cash management and payouts of 401(K) plans for its employees, but stated that contemplated reforms to the current structure would complicate management of the funds and increase costs. David H. Lillard, Treasurer at the Tennessee Department of Treasury, explained that he relies on MMMFs for cash management and to operate local government investment pools (LGIP). He stated that any redemption restrictions would restrict liquidity and harm tightly run municipal budgets. He also voiced concern about a floating NAV, saying that it would eliminate LGIPs from the market because they are not allowed to invest in instruments with floating rates. The panel concluded that new reforms would require onerous overhauls of accounting and IT systems and would damage their business.
In her keynote speech, Nancy Prior, the President of Money Markets at Fidelity Investments, emphasized that MMMFs provide a great value to investors by offering a stable NAV, market-based yield, and ready liquidity. She dispelled the myth that MMMFs can be seen as shadow banks, noting their high level of transparency, strict liquidity standards, and the lack of leverage, credit-default swaps, or foreign currency dealings in their holdings. She also noted that her firm takes its fiduciary responsibility very seriously and strives to keep their investors fully informed of the lack of a government guarantee and possible price fluctuations. In closing, Prior noted that the reforms passed by the SEC in 2010 have greatly improved the soundness and safety of MMMFs and further reform may jeopardize their value and efficiency.
To view the event’s agenda, please click here.