Yesterday, the President's Working Group on Financial Markets (PWG) released a report describing a number of proposed money market fund (MMF) reforms. The report is a response to a 2009 request by the U.S. Treasury for the PWG to prepare a study on changes needed to address the susceptibility of MMFs to mass redemptions, an occurrence many cite as a significant contributor to the financial crisis in 2008. Treasury previously stated that existing rule amendments, adopted by the U.S. Securities and Exchange Commission (SEC) during the crisis, should increase investor protection and lessen the risk of runs. Those amendments implemented three categories of changes designed to make MMFs more resilient: (1) risk-limiting restrictions on MMF portfolios through the introduction of new liquidity requirements and additional credit-quality; (2) the authorization of MMFs with net asset values (NAV) below $1.00 to suspend redemptions and liquidate portfolios to limit negative effects on other funds; and (3) more stringent limitations on repurchase agreements backed by private debt instruments instead of government securities.
However, Treasury and the PWG agreed last year that the SEC’s rule changes alone are insufficient to avert future runs on MMFs of the magnitude witnessed in 2008. In addition to recommending several areas for review, Treasury commissioned the PWG to evaluate ways to avoid possible adverse negative effects of further regulatory changes, such as the removal of assets from MMFs to less regulated or unregulated vehicles. Together with the SEC’s changes to MMF regulation, the PWG considers the following policies to be promising options, either applied alone or in combination, to mitigate systemic risks posed by vulnerabilities intrinsic to MMFs:
- Floating net asset value (NAV);
- Private emergency liquidity facilities for MMFs;
- Mandatory redemptions in kind;
- Insurance for MMFs;
- A two-tier system of MMFs with enhanced protection for stable NAV funds;
- A two-tier system of MMFs with stable NAV MMFs reserved for retail investors;
- Regulating stable NAV MMFs as special purpose banks; and
- Enhanced constraints on unregulated MMF substitutes.
The PWG is now seeking an evaluation of its policy proposals by the Financial Stability Oversight Council (FSOC) and action by the FSOC consistent with the continued need to enhance MMF stability. In support of the FSOC’s efforts, the SEC will solicit opinions through the issuance of a notice and request for public comment to be published in the near future.