Dodd-Frank News Center

Support Issued for Money Market Mutual Fund Reform

This story appeared in Bank Digest.

The presidents of the 12 Federal Reserve Banks have submitted a joint letter responding to the Financial Stability Oversight Council's proposal on money market mutual fund reform. In November 2012 the FSOC proposed three rules that would impose structural reforms intended to mitigate the risks posed by these funds to the financial system. According to the FSOC, the proposals would reduce the risk of runs and significant problems spreading through the financial system. The 12 FRBank presidents support the council's efforts to address the structural vulnerabilities of money market mutual funds. They also agree with the council's determination that money market mutual fund activities and practices could create or increase the risk of liquidity and credit problems spreading through the financial system.

“Money market mutual funds have no explicit capacity to absorb losses in the event of a decrease in the value of assets held within the fund's portfolio,” said the presidents in a joint letter to the FSOC. “This structure gives rise to a risk of destabilizing money market mutual fund runs by creating a first mover advantage.”

GAO Examines Dodd-Frank Implementation

By Serena Lynn, Editor, the CCH Federal Banking Law Reporter and Bank Digest. 

The Government Accountability Office has issued a report on the status of Dodd-Frank Act regulatory reforms. To assess these efforts, the GAO examined the overall status of financial regulatory reforms arising from the act, challenges affecting implementation and areas that pose continued risk. Overall, the GAO identified 236 provisions of the act requiring rulemakings across nine areas. According to the GAO, as of December 2012, regulators had issued final rules for about 48 percent of these provisions; however, the GAO found that in some cases the dates by which affected entities had to comply with the rules had yet to be reached. Of the remaining provisions, regulators had proposed rules for about 29 percent, and rulemakings had not occurred for about 23 percent.

FSOC Issues FAQs on MMF Reform

This story appeared in Bank Digest.

Following its proposed recommendations to reform the money market mutual fund (MMF) industry, the FSOC has issued a set of frequently asked questions about MMFs. The FAQs address: what are MMFs; the need for reform; why the FSOC got involved; and future action following release of the recommendations.

FSOC Proposes Money Market Reform

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest, and Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter, CCH Bank Compliance Guide, Bank Digest; co-author, Dodd-Frank Wall Street Reform and Consumer Protection Act—Law, Explanation and Analysis.

The Financial Stability Oversight Council has released a set of recommendations that would impose structural reforms intended to mitigate the risks posed by money market mutual funds to the financial system. According to the FSOC, the proposals would reduce the risk of runs and significant problems spreading through the financial system. The council noted that a proposal is necessary in the absence of Securities and Exchange Commission action. The three proposals would require money market funds to have:

Money Market Funds Analyzed

By Serena Lynn, Editor, the CCH Federal Banking Law Reporter and Bank Digest

 

A recent New York Federal Reserve Bank staff report outlines a proposal for strengthening money market funds. According to a blog post by N.Y. FRBank Senior Financial Economist Marco Cipriani, Officer Michael Holscher, Assistant Vice President Antoine Martin and Senior Economist Patrick McCabe, the intent of the proposal is “to reduce, and possibly eliminate, the incentive for investors to run from a troubled fund, while retaining the defining features of money market funds that make them popular financial products.” According to the authors, the proposal is similar to one requested in a letter Treasury Secretary Tim Geithner recently sent to the Financial Stability Oversight Council.

 

Among other things, the N.Y. FRBank proposal would allow money market funds to maintain a stable $1 net asset value and to provide investors with liquidity on demand; however, a small fraction of an investor’s balance—minimum balance at risk—would be available for redemption only with a delay. The proposal would require the minimum balance at risk to be large enough, and the delay long enough, to ensure that redeeming investors share any costs of their redemptions and any imminent portfolio losses with nonredeeming investors, according to the post.

Money Market Fund Reform Urged

This story appeared in Bank Digest.

Treasury Secretary Tim Geithner has sent a letter to the members of the Financial Stability Oversight Council regarding recent developments in the effort to reform the money market fund industry and address the threats those funds can pose to the stability of the financial system. He urged the council to use its authority under Section 120 of the Dodd-Frank Act to recommend that the Securities and Exchange Commission proceed with money market fund reform.

According to Geithner, without further reform “our financial system will remain vulnerable to runs and instability, which are harmful for retail and institutional investors, businesses that need a reliable source of funding, the MMF industry, and the financial system as a whole.” He asserted that four years after the instability of the money market fund industry contributed to the worst financial crisis since the Great Depression, “with the failure of the SEC to act, the Council should now move forward with the tools provided by Congress.”

SEC Chair Hints at Delay on New Structural Money Market Mutual Fund Reforms

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter and Author of Jim Hamilton's World of Securities Regulation.

SEC Chairman Mary L. Schapiro has issued a statement noting that significant money market mutual fund reforms are unlikely in the near term. The basis for the Chairman’s statement was her being informed that three Commissioners would not support a staff proposal for additional reforms. Said Chairman Schapiro, “I…consider the structural reform of money markets one of the pieces of unfinished business from the financial crisis.” The Chairman also observed that the staff proposal would have provided the Commission an opportunity to receive public comments on these reforms.

President’s Working Group Proposed Reform of Money Market Fund Regulation Would Require SEC Rulemaking and Legislation

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

A report by the President’s Working Group on Financial Markets detailing reforms for money market funds will be considered by the Financial Stability Oversight Council, with the assistance of the SEC. The Commission, which would lay an integral role in implementing the reforms, will soon solicit public comment on the proposed reforms. Some of the proposed reforms could be adopted by the SEC under its existing authorities, while others would require legislation. The reform options address the vulnerabilities of money market funds that contributed to the financial crisis in 2008. Following the crisis, the Treasury Department directed the PWG to report on options for mitigating the systemic risk associated with money market funds and reducing their susceptibility to runs.

President's Working Group Publishes Report on Money Market Funds

This story appeared in Bank Digest.

The President's Working Group on Financial Markets has announced the release of a report detailing a number of options for reforms related to money market funds. The options are intended to address the vulnerabilities of money market funds that contributed to the financial crisis in 2008. Among the options described are: using a floating net asset value, rather than a stable net asset value; creating a private emergency liquidity facility; requiring that large redemptions be in kind rather than as cash; establishing fund insurance; and creating different types or tiers of money market funds.

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.