SEC Grinding Forward on MMF Regulation

The Securities and Exchange Commission has announced:

the panelists and final agenda for the Money Market Funds and Systemic Risk Roundtable to be held May 10.

The roundtable will address:

  • The potential for money market funds to pose a systemic risk to broader financial markets – what makes money market funds vulnerable to runs and how should the role of money market funds be viewed through the prism of systemic risk analysis.
  • Possible options for further regulatory reform and their implications, including floating NAV, bank regulation, and options that reflect a hybrid of these regulatory approaches: a private liquidity bank; mandatory reserve or capital requirements; and liquidity fees.

The agenda and list of panelists can be found on the SEC website.

The roundtable discussion will begin at 2 p.m. and be available by webcast on the SEC website. The webcast also will be archived for later viewing.

I am very pleased to see Paul Volcker on the list of participants. It was his discussion of the issue and plan for regulation that got me interested in the subject, which I subsequently addressed in an article.

The sessions won’t be particularly long, but will serve as a basis for further discussion:

2:20-3:05 p.m. Discussion — Potential for Money Market Funds to Pose a Systemic Risk to Broader Markets

  • What makes money market funds vulnerable to runs?
  • How should the role of money market funds in the short-term funding market be viewed through the prism of systemic risk analysis?

3:20-5:00 p.m. Discussion — Regulatory Options and their Implications

  • Floating NAV vs. Bank regulation
  • Hybrid approaches to regulation: Private liquidity bank
  • Hybrid approaches to regulation: Mandatory reserve/capital requirements
  • Hybrid approaches to regulation: Liquidity fees

On this general topic, the Chicago Fed notes:

Firms face increasing pressure to weigh the value proposition MMFs offer over the intermediate term. Budget projections factor MMF waivers well into next year. While MMF fee waivers have been subsidized by higher asset management fee revenues a second abrupt market decline could cause further strain.

MMFs have reduced their holdings of CP in favor of repos and government debt. At the same time, CP issuers seek to lock in longer term funding rates due to Basel III higher liquidity standards. Net result is a more limited, concentrated pool of eligible CP debt offerings for MMFs. MMFs are a major funding source for bank issued CP, comprising 40% of all CP issuances.

Update, 2011-5-11: The stable NAV is the focus of criticism:

Federal Deposit Insurance Corp. Chairman Sheila Bair called money-market mutual funds “destabilizing” to the financial system and said investors would be served just as well if share prices floated.

“Money-market funds are maintaining a fiction of a stable” net-asset value, as shown by the September 2008 failure of the $62.5 billion Reserve Primary Fund, Bair said yesterday at a round-table meeting of fund-company executives and regulators arranged by the U.S. Securities and Exchange Commission in Washington. “That is skewing investment dollars into a structure that is highly unstable in a crisis.”

Former Federal Reserve Chairman Paul A. Volcker called a floating share price the “simplest” solution to the risk posed by money funds, which trade at a constant $1 a share.

This may be because it’s the only possible measure that can be introduced that won’t cost anybody any money!

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