Statement by the Systemic Risk Council on Money Market Fund Reform

  • July 19, 2012

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Sheila Bair, former chair of the FDIC and current chair of the Systemic Risk Council (SRC)* issued the following statement on the Council's behalf:

“The Systemic Risk Council today calls for prompt and decisive action to curb systemic risks posed by money market mutual funds. When the Reserve Primary Fund “broke the buck” in 2008, extraordinary actions were required of governments worldwide to back-stop and calm investors in the money market fund (MMF) industry.  The risk that emergency government support may again be needed to stem large outflows from money market funds remains a serious challenge for U.S. and other markets. The Council believes such circumstances have been allowed to linger for too long and strongly support proposals recommended by SEC Chairman Mary Schapiro below.  In the event the SEC fails to act promptly on these measures, we believe that the Financial Stability Oversight Council (FSOC) should use its powers under the Dodd-Frank law to move forward with reforms to protect taxpayers against the risk of a need for bailouts in the future.

Two options have been presented by Chairman Schapiro. The first is to replace the current Stable NAV model with a Floating NAV model. As recognized in the recent SEC study and President's Working Group Report (Report), the existence of a stable NAV has been a source of investors' attraction to money market funds for decades. While investors and savers view MMFs as equivalent to the safety of bank savings accounts, this stable value conceals the fact that significant investment and liquidity risk potentially exists in these instruments.  The second option is to impose Capital Buffer and Holdback Requirements. The capital buffer of between .5% and 1% of fund assets would be available in times of stress and volatility to protect against market and interest rate fluctuations. This would be combined with establishing reasonable holdback requirements where the MMF sponsor could retain a certain percentage of any redemption requests—in times of market stress and liquidity challenges—where capital buffers may be insufficient to meet liquidity demands.  

As noted in the working group Report, the Systemic Risk Council recognizes that these reforms represent a fundamental change in the MMF business model and thus it would be appropriate to provide for an adequate transition time for the industry to make the appropriate adjustments. We would also note that some fund sponsors have already started making a transition to a floating NAV.

We applaud Chairman Schapiro for her leadership, and urge the Commission to approve her proposals for public comment. However, if the SEC fails to move forward, we believe the FSOC should use the full range of authorities given it under Dodd-Frank to effectuate these reforms.  These authorities include recommending and directing the SEC to move forward with them.”

*Systemic Risk Council: The independent, non-partisan Systemic Risk Council was formed by the CFA Institute and the Pew Charitable Trusts to monitor and encourage regulatory reform of U.S. capital markets focused on systemic risk.  The statements, documents and recommendations of the private sector, volunteer Council do not necessarily represent the views of the supporting organizations.

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