CCH Financial Reform News Center

Fed to Allow Money Market Funds as Reverse Repo Counterparties

This story appeared in Jim Hamilton's World of Securities Regulation.

The Federal Reserve Bank of New York has announced that it will expand the set of counterparties it uses for reverse repo transactions to include money market mutual funds. Previously, only entities designated as primary dealers could engage in such transactions with the Fed. The purpose of this change is to ensure the availability of enough counterparties to engage in reverse repo transactions when the Fed begins to withdraw economic stimulus. In October of 2009, the Fed issued an operating policy statement in which it noted that reverse repos were one tool it may use to withdraw economic stimulus. The Fed even conducted tests with prospective counterparties to determine the feasibility of using reverse repos in this manner. The Fed now appears ready to move forward with its preparations to remove accommodative monetary policy, subject to the caution that doing so amounts to "prudent advance planning" and is not intended to imply the timing of any change in monetary policy.

SEC Amends Money Market Fund Rules

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The SEC has amended the rules for money market funds and SEC Chair Mary Schapiro said the new rules are only the beginning. The SEC is continuing to consider more fundamental changes to the structure of money market funds, including a floating net asset value, real time disclosure of shadow net asset values and a private liquidity facility for money market funds to use in times of market stress.

The amendments to the money market fund rules were developed as a result of the financial crisis of 2008 when the Reserve Primary Fund "broke the buck." The SEC conducted a full-scale review of the money market fund regulatory regime and drafted rules to improve liquidity, increase credit quality and shorten maturity limits.

SEC Strengthens Money Market Regulations

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The SEC adopted new rules designed to significantly strengthen the regulatory requirements governing money market funds. The new rules are intended to increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds by tightening the maturity and credit quality standards and imposing new liquidity requirements. The Commission acted after a review of the money market regulatory scheme prompted by the Reserve Primary Fund's "breaking the buck" in September 2008. A money market fund "breaks the buck" when its net asset value falls below $1.00 per share, meaning investors in that fund will lose money.

Money Market Funds Guarantee Program Expires

This story appeared in Bank Digest.

The Guarantee Program for Money Market Funds expired on Sept. 18, 2009. The program was designed by the Treasury to stabilize markets after a large money market fund’s announcement that its net asset value had fallen below $1 per share (“broke the buck”) in the wake of the failure of Lehman Brothers in September of 2008. The program was initially established for a three-month period that could be extended up through Sept. 18, 2009. Treasury Secretary Tim Geithner noted, “The Guarantee Program for Money Market Funds served its purpose of adding stability to the money market mutual fund industry during market disruptions last fall and ultimately delivered a healthy return to taxpayers.”

TG-293 at http://www.ustreas.gov/press/releases/tg293.htm

Status Report on Financial Stabilization Efforts Released

By Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter, CCH Bank Compliance Guideand Bank Digest.

The Treasury Department has issued a “status report“ summarizing the Obama administration's financial system stabilization efforts to date and describing planned steps toward ending the current support programs. According to the report, some of the programs already are winding down, with the Money Market Mutual Fund Guarantee Program scheduled to end on Sept. 18, 2009, and the Debt Guarantee Program component of the Temporary Liquidity Guarantee Program (TLGP) scheduled to end on Oct. 31, 2009. Market condition improvements mean that there is no plan to extend either of these programs, although an emergency facility may be put in place to allow banks to issue guaranteed debt for an additional six months.

Fed Extends Length of Liquidity Programs, Reduces Size of Others

This story appeared in Bank Digest.

The Federal Reserve Board has announced extensions of and modifications to a number of its liquidity programs. The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) all have been extended through Feb. 1, 2010, as have been the temporary reciprocal currency arrangements (swap lines) between the Fed and other central banks. However, the Fed also has reduced the size of the Term Auction Facility and the TSLF, due to improving financial conditions and reduced need for the services. TAF auctions will have reduced offerings and TSLF auctions either will be suspended or reduced in size and frequency.

SEC Approves Money Market Fund Proposals, Seeks Feedback on Floating NAV

This story appeared in SEC Today.

The SEC voted unanimously yesterday to issue proposed amendments to Investment Company Act Rule 2a-7 that would enhance the regulation of money market funds. The Commission also agreed to solicit feedback on several questions regarding the funds, including whether they should, like other types of mutual funds, effect transactions at the market-based net asset value rather than maintaining a stable $1 net asset value. Chair Mary Schapiro noted that a floating NAV might better protect investors from runs on money market funds, but asked for feedback on whether the efficiency of the $1 NAV is more beneficial to investors.

New White Paper Provides In-Depth Analysis of Financial Reform Proposal

Jim Hamilton, J.D., LL. M., CCH Principal Analyst, has authored an extensive white paper entitled, “The Obama Administration’s Proposal to Reform the U.S. Financial Regulatory System.”

From the Introduction -

“The Obama Administration has proposed to Congress the most sweeping and fundamental regulatory reform of the U.S. financial and securities markets since the New Deal. The proposal’s goals are to regulate systemic risk, enhance transparency and disclosure, delink executive compensation from excessive risk, improve investor protection, and prevent regulatory arbitrage. The Administration has set forth detailed recommendations on the regulation of hedge funds and over-the-counter derivatives, including credit default swaps, as well as draft legislation on a new resolution authority to unwind failing securities and commodities firms. The Administration also recommends major corporate governance reforms, such as shareholder advisory votes on compensation and enhanced compensation committees.”

 Download the White Paper.

Temporary Guarantee Program for Money Market Funds Extended

This story appeared in Bank Digest

The Treasury Department has announced an extension of its temporary Money Market Funds Guarantee Program through Sept. 18, 2009, in order to support ongoing stability in financial markets. The Program was scheduled to end on April 30, 2009. The Treasury also provided an Extension Notice which provides the procedures for participating funds to follow to ensure continued participation in the Program as well as instructions for making the Program extension participation payments.

Senate Hearings Chart Way Forward on Financial Regulatory Reform

In the first of what promises to be a series of hearings on financial regulatory reform, the Senate Banking Committee heard from former Fed Chair Paul Volcker, a top adviser to President Obama on financial regulation. Committee Chair Christopher Dodd first outlined some essential elements that will drive the reform. The first order of business will be to erect a new financial regulatory regime in order to restore investor confidence in the securities markets. As part of this legislative effort, the committee will execute an ambitious schedule of meetings, briefings, and hearings to understand the strengths and weaknesses of the current regulatory system. The committee’s inquiry and deliberations, assured Dodd, will be guided not by pre-conceived notions, but by core principles that must be reflected in any comprehensive reform effort.