Risk & Compliance

Treasurers, Fidelity Oppose More Money Market Regs

New money market fund regulations being debated by the SEC could cause corporate treasurers to pull more than $700 billion from the sector, says on...
Vincent RyanMarch 5, 2012

While Federal Reserve chairman Ben Bernanke and Securities and Exchange Commission chair Mary Schapiro warn of the still-present danger of a run on money-market funds (MMFs), fund sponsors and some treasurers are lining up to protest more regulation.

Last week Fidelity Investments and others said the SEC has done enough to stabilize the money fund industry and that more government tinkering would cause institutional investors to flee MMFs in droves, eventually disrupting the funding of commercial paper and U.S. government debt.

ICD, a provider of MMF trading and risk-management tools, published a survey of treasurers last week that showed many investors would cut the cash they invest in MMFs if the proposed reforms are enacted. The net estimated reduction of money fund holdings by survey respondents was 41%, ICD says.

Applying that figure across all U.S. institutional MMFs, new regulations could drain MMF funds of 27% of their asset base — $714 billion of the current $2.6 trillion total. When that reduction is spread across the various instruments money funds typically hold, ICD estimates a $110 billion reduction in commercial-paper financing for corporates and financial institutions, and a $103 billion hit to funding for U.S. government agencies. (ICD says money funds accounted for 37% of all investments in U.S. government-agency paper and 38% of all commercial-paper assets, as of January 2012.)

MMFs — short-term, liquid investment vehicles — came under fire in the wake of the collapse of the Primary Reserve Fund in 2008. That fund’s net asset value dropped below $1 per share, forcing the U.S. Treasury to step in and insure the holdings of all MMFs to prevent market panic.

In 2010 the SEC’s so-called 2a-7 rules established new standards for a fund’s portfolio liquidity, weighted average maturity, and asset quality. They also required funds to disclose their holdings on their websites.

Fidelity says the 2a-7 regulations have already achieved what is needed to prevent MMFs from being forced to sell securities in times of market stress and thus spread market contagion. “Money market funds now hold investment portfolios with lower risk and greater transparency, characteristics that reduce the incentive of shareholders to redeem,” wrote Scott Goebel, Fidelity’s general counsel, in the letter to SEC commissioners.

Among the proposals the SEC is considering are requiring funds to adopt a “floating” net asset value, meaning a fund’s NAV would rise and fall daily, forcing MMFs to accumulate a capital reserve to cushion against losses, and forcing investors that want to redeem shares to wait 30 days to get back 3% to 5% of their principal.

The 120 ICD clients polled reacted most negatively to the redemption holdback proposal: 88% were against it. “Limited liquidity through a mandatory freeze on a portion of the investors’ principal would in fact be diametrically opposed to the current mandates [security of principal and liquidity] for corporate operating cash,” said ICD in the report accompanying the survey. In its letter, Fidelity pointed out that that the 2a-7 regulations allow MMF boards to suspend redemptions in a fund, “thereby facilitating orderly liquidations” and making any new rules on redemptions unnecessary.

A floating NAV garnered 80% opposition from the survey respondents, as companies said it would impose an accounting burden on them.

Bolstering its argument that further regulation is unnecessary, Fidelity says the liquidity of money markets “far exceeds” the amount that investors redeemed in 2008 and in a mini-crisis last year when the U.S. debt-ceiling debate and the eurozone crisis caused investors to pull $172 billion out of MMFs.

SEC chair Schapiro says the 2a-7 regulations were a “critical first step” in structural reform of the money-market industry, but that additional steps are needed to bolster their resiliency.

Data from consulting firm Treasury Strategies shows that as of January 2012, U.S. companies held 23% of their corporate cash in MMFS.

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