In October, the President’s Working Group on Financial Markets released its report entitled “Money Market Fund Reform Options” (the “Report”). The Report does not make any specific reform recommendations, but instead requests that the newly-formed Financial Stability Oversight Council (the “Council”) consider the various reform options included in the Report and that the SEC move forward with plans to strengthen the money market fund (“MMF”) regulatory framework. The Report’s Executive Summary further requests that the Council pursue those options that it deems would be “most likely to materially reduce MMFs’ susceptibility to runs.” According to the Report, the SEC will publish a notice and request for comment in the near future.
The Report begins by providing an introduction to MMFs, describing the nature of MMFs and the products that compete with them. The Report discusses various features of MMFs that make them susceptible to runs, including the fact that share prices of MMFs are rounded to the nearest cent and are generally valued at $1.00. The Report argues that this fosters an expectation that MMF share prices will not fluctuate, increasing an investor’s incentive to redeem its shares when there is a perceived risk that prices will fluctuate. The report goes on to discuss the experiences of MMFs during the recent financial crisis, including the responses of funds and investors when the Reserve Primary Fund “broke the buck.” Next, the Report presents the SEC’s MMF rule changes, stating that the changes were designed primarily to meet the SEC’s obligations to protect investors and should mitigate, but not eliminate, systemic risks by reducing MMFs’ susceptibility to runs (i.e., large redemptions). The report also argues that further reforms are needed to address MMFs’ structural vulnerability to large redemptions.
Finally, the Report discusses seven policy options that may help to reduce the risk of runs on MMFs. These options include floating net asset values (“NAV”) for MMFs (which may reduce the likelihood of investors believing that MMFs are risk-free investments); private emergency liquidity facilities for MMFs (noting some of the regulatory problems with this approach); mandatory redemptions in kind (requiring MMFs to distribute large redemptions by institutional investors in kind, rather than in cash); insurance for MMFs (requiring some form of insurance for MMF shareholders to mitigate systemic risks posed by MMFs); a two-tier system of MMFs, with enhanced regulatory restrictions on MMFs that seek to maintain a stable $1.00 NAV (with floating NAV MMFs having somewhat less stringent operational restrictions); a two-tier system with stable NAV MMFs reserved for retail investors; and regulating stable NAV MMFs as special purpose banks, thereby subjecting them to banking oversight and regulation. The Report concedes that while the SEC requested comment on some of these options in connection with its MMF reform proposal, other proposals go beyond the SEC’s regulatory authority and would require legislative or other government agency action.