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. The SEC is charged with soliciting public comments, including supporting documentation, on the options.
The report describes five features of money market funds, their sponsors and their investors that make the funds susceptible to runs, including: (1) maturity transformation with limited liquidity resources; (2) net asset values (NAVs) rounding to $1.00; (3) portfolios exposed to credit and interest rate risks; (4) discretionary sponsor capital support; and (5) investors’ low risk tolerance and risk-free expectations. The report acknowledges that the SEC’s recent money market reforms addressed some of these features, but discusses the need for additional reform to address systemic risk and the funds’ structural vulnerabilities.
The report sets forth the benefits and drawbacks of seven options aimed at reducing money market funds’ susceptibility to runs. The options include measures both within and beyond the SEC’s current regulatory authority. These options include: (a) requiring floating NAVs; (b) 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); (c) requiring mandatory redemptions-in-kind for large redemptions by institutional investors; (d) implementing an insurance program for money market funds; (e) creating a two-tier system of money market funds, with enhanced protection and more stringent requirements for stable NAV funds; (f) creating a two-tier system of money market funds with stable NAV funds reserved for retail investors; and (g) regulating stable NAV money market funds as special purpose banks.
The report acknowledges that further regulation of money market funds may motivate investors to invest their money with unregulated counterparties that may pose even greater systemic risk than money market funds. The report also notes the significance of money market funds in the U.S. financial system and suggests that any changes be considered carefully.