Commissioner Daniel M. Gallagher and Commissioner Troy A. Paredes of the SEC collaborated on an astonishingly ignorant Statement on the Regulation of Money Market Funds:
Our decision not to support the Chairman’s proposal, based on the data and analysis currently available to us, has also been informed by our concern that neither of the Chairman’s restructuring alternatives would in fact achieve the goal of stemming a run on money market funds, particularly during a period of widespread financial crisis such as the nation experienced in 2008. The Reserve Primary Fund did not “break the buck” in a vacuum, but rather in the midst of a financial crisis of historic proportions.
Since the Commission adopted Rule 2a-7, the principal rule that governs money market funds, the Commission on multiple occasions has reviewed the efficacy of the rule and has adopted amendments to make improvements. Most recently, in 2010, the Commission adopted changes to Rule 2a-7 that have improved the liquidity and transparency of money market funds and decreased the credit risk of their portfolios with the objective of making such funds more resilient.
Reserve Primary broke the buck because it held some paper that defaulted. Any commercial paper can default. The changes to Rule 2a-7 – that I mocked at the time for their substitution of box-ticking for capital – may well have decreased the credit risk of MMF portfolios, but it cannot have eliminated credit risk.
Second, the necessary analysis has not been conducted to demonstrate that a floating NAV or capital buffer coupled with a holdback restriction would be effective in a crisis. Indeed, both alternatives disregard the predominant incentive of investors in a crisis to flee risk and move to safety. Reason indicates that such behavior — the “flight to quality” — is likely to overwhelm the buffer proposed by the Chairman and swamp the effect of a holdback. As for the floating NAV proposal, even if there is no stable $1.00 NAV — i.e., even if, by definition, there is no “buck” to break — investors will still have an incentive to flee from risk during a crisis period such as 2008, because investors who redeem sooner rather than later during a period of financial distress will get out at a higher valuation. Thus, if neither the floating NAV proposal nor the capital-buffer-with-holdback proposal will solve the money market fund run problem, then neither proposal will foreclose the possibility that policymakers might once again face the prospect of supporting the commercial paper market in response to a widespread financial crisis.
The holdback provision means that investors who redeem their holdings – possibly with a threshold, so the holdback would apply only to accounts with more than $X invested – have a much reduced incentive to run, because the holdback will be at risk. Logic does not appear to be a strong point of Messrs. Gallagher & Paredes, both of whom have legal, rather than investing backgrounds.
Their profound ignorance of the simplest principles of portfolio management lead them to support gating as an alternative:
We have urged that the Chairman take a different way forward for strengthening the resiliency of money market funds. This approach would (i) empower money market fund boards to impose “gates” on redemptions; (ii) mandate enhanced disclosure about the risks of investing in money market funds; and (iii) conduct a searching inquiry into, and a critical analysis of, the issues raised by the questions we pose below.
In particular, it would be useful to receive comment on a proposal that would permit money market fund boards, as they deem appropriate and consistent with their fiduciary obligations to investors and without having to seek an exemptive order from the Commission, to “gate” redemptions to stave off a run and to allow the fund manager time to mitigate the concerns of investors who otherwise may be inclined to redeem. The Commission’s 2010 amendments allowed boards to unilaterally suspend redemptions if the fund is put into liquidation. At that time, the Commission received input recommending that the Commission allow boards to impose a gate when they deemed appropriate, consistent with the boards’ fiduciary duties to the fund’s shareholders.
Discretionary gating directly responds, we believe, to run risk, both as to an individual fund and across multiple funds, as well as to the potential disparate treatment between retail and institutional investors.
If your redemption can be blocked by the fund in toto, then you cannot rely on converting your holdings to cash on a moment’s notice, an idea which I am sure Assiduous Readers will agree is the whole point of MMFs. I consider the holdback option to be inferior to enforced holding of permanent capital, but even with the holdback at least you get almost all your money back when wanted and you put a cap on your losses to boot.
Sorry folks! The Project That Would Not Die staggered out from its crypt tonight and ate all my time. So the preferred share market action tables will be delayed a bit.
Update:
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1349 % | 2,401.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1349 % | 3,591.7 |
| Floater | 3.03 % | 3.06 % | 58,435 | 19.51 | 3 | 0.1349 % | 2,592.5 |
| OpRet | 4.78 % | 3.19 % | 27,106 | 0.81 | 5 | -0.0308 % | 2,541.0 |
| SplitShare | 5.48 % | 4.85 % | 68,985 | 4.64 | 3 | 0.0533 % | 2,799.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0308 % | 2,323.5 |
| Perpetual-Premium | 5.29 % | 3.06 % | 93,341 | 0.49 | 28 | 0.1223 % | 2,278.2 |
| Perpetual-Discount | 4.95 % | 4.98 % | 99,455 | 15.45 | 3 | 0.0417 % | 2,525.8 |
| FixedReset | 5.00 % | 3.04 % | 170,832 | 3.93 | 71 | 0.0604 % | 2,427.1 |
| Deemed-Retractible | 4.94 % | 3.36 % | 120,395 | 0.73 | 46 | 0.0977 % | 2,366.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| BAM.PR.C | Floater | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-08-28 Maturity Price : 17.00 Evaluated at bid price : 17.00 Bid-YTW : 3.12 % |
| IAG.PR.F | Deemed-Retractible | 1.01 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.11 Bid-YTW : 5.26 % |
| BAM.PR.B | Floater | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-08-28 Maturity Price : 17.68 Evaluated at bid price : 17.68 Bid-YTW : 2.99 % |
| IAG.PR.E | Deemed-Retractible | 1.23 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-12-31 Maturity Price : 26.00 Evaluated at bid price : 26.32 Bid-YTW : 5.01 % |
| VNR.PR.A | FixedReset | 1.68 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-10-15 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 3.72 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.K | Deemed-Retractible | 352,800 | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-11-25 Maturity Price : 26.00 Evaluated at bid price : 26.35 Bid-YTW : -0.30 % |
| ENB.PR.N | FixedReset | 195,361 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-08-28 Maturity Price : 23.21 Evaluated at bid price : 25.34 Bid-YTW : 3.84 % |
| BNS.PR.Z | FixedReset | 71,900 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.27 Bid-YTW : 3.00 % |
| BNS.PR.L | Deemed-Retractible | 67,102 | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-26 Maturity Price : 25.50 Evaluated at bid price : 25.97 Bid-YTW : 3.47 % |
| CU.PR.E | Perpetual-Premium | 60,250 | YTW SCENARIO Maturity Type : Call Maturity Date : 2021-09-01 Maturity Price : 25.00 Evaluated at bid price : 25.91 Bid-YTW : 4.43 % |
| TD.PR.O | Deemed-Retractible | 59,389 | YTW SCENARIO Maturity Type : Call Maturity Date : 2012-10-31 Maturity Price : 25.50 Evaluated at bid price : 25.91 Bid-YTW : -2.30 % |
| There were 18 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.C | Floater | Quote: 17.00 – 17.40 Spot Rate : 0.4000 Average : 0.2929 YTW SCENARIO |
| FTS.PR.E | OpRet | Quote: 26.70 – 27.00 Spot Rate : 0.3000 Average : 0.2085 YTW SCENARIO |
| IAG.PR.F | Deemed-Retractible | Quote: 26.11 – 26.48 Spot Rate : 0.3700 Average : 0.2837 YTW SCENARIO |
| GWO.PR.I | Deemed-Retractible | Quote: 24.20 – 24.44 Spot Rate : 0.2400 Average : 0.1616 YTW SCENARIO |
| IAG.PR.A | Deemed-Retractible | Quote: 24.00 – 24.25 Spot Rate : 0.2500 Average : 0.1789 YTW SCENARIO |
| TD.PR.P | Deemed-Retractible | Quote: 26.40 – 26.55 Spot Rate : 0.1500 Average : 0.0895 YTW SCENARIO |