In October 2010, the President’s Working Group on Financial Markets released its report, Money Market Fund Reform Options, which sets forth options for additional money market reform to be considered by the Financial Stability Oversight Council. The Council is charged with identifying and pursuing those options that are most likely to reduce money market funds’ susceptibility to runs, with the primary goal of mitigating systemic risk and containing the effect an individual money market fund can have on other money market funds or the broad financial system.
In accordance with the report, the SEC issued a request for comments on the options, which include: (1) requiring floating NAVs; (2) establishing private emergency liquidity facilities for money market funds (the facility described in the report would not assist funds that take on excessive capital risks or have isolated credit losses); (3) requiring mandatory redemptions-in-kind for large redemptions by institutional investors; (4) implementing an insurance program for money market funds; (5) creating a two-tier system of money market funds with enhanced protection, and more stringent requirements, for stable NAV funds; (6) creating a two-tier system of money market funds with stable NAV funds reserved for retail investors; and (7) regulating stable NAV money market funds as special purpose banks.
On January 11, 2011, the ICI issued a comment letter on the proposed options. The ICI letter discusses each option in detail, noting the potential issues and detrimental effects each could have on money market funds, investors and the market, including that certain of the proposed options could increase, rather than decrease, systemic risk. The ICI letter states that while each option has drawbacks, a private emergency liquidity facility for prime money market funds has the most promise for achieving the policymakers’ objective with the least negative impact. The ICI letter then addresses the concerns enumerated in the report regarding a private emergency liquidity facility.
In particular, the proposed model liquidity facility described in the ICI letter would require all prime money market funds, or, alternatively, all prime money market funds that continue to use amortized cost pricing, to participate in the liquidity facility. The liquidity facility would be a state-chartered bank or trust company funded by initial contributions from prime money market fund sponsors and ongoing commitment fees from member funds, as well as additional capacity eventually being gained from the issuance of time deposits to third parties. The liquidity facility would be structured to enable participating money market funds to meet redemptions while maintaining a stable NAV during times of unusual market stress by purchasing such funds’ high-quality, short-term assets. To protect against money market funds attempting to sell low-yielding securities to the liquidity facility, the funds would be required to present their entire portfolio to the facility for review and to pay an access fee. The liquidity facility would further limit the prime money market funds that may participate to those demonstrating a liquidity need and excluding those that have already broken the dollar. The ICI letter states that the liquidity facility would help protect the broad money market by allowing prime money market funds to sell portfolio holdings in a challenging market environment and could also provide reassurance to investors.
In addition to reviewing the seven options proposed in the report, the ICI letter proposes an additional reform for consideration. The letter recommends that the SEC consider a rule that would require intermediaries, upon the request of a money market fund, to provide information about underlying fund investors to facilitate the fund’s compliance with the “know your investor” requirements.