FSOC - White Paper - Proposed Recommendations Regarding Money Market Mutual Fund Reform - November 2012
Following the financial crisis of 2008, the Department of the Treasury released a roadmap for financial reform in June 2009, which called for, among other things, that the SEC address money market mutual fund (MMF) reform. In 2010 the SEC implemented several reforms to 2010 reforms,but noted that they served as a “first step” in addressing MMF reform, and that, they alone, would not have prevented the type of money market "run" as experienced in the crisis.
Internationally, on October 9, 2012, the International Organization of Securities Commissions (“IOSCO”) issued policy recommendations for reforming MMFs that mirrored recommendations by the G-20 and the Financial Stability Board. However, in August 2012, SEC Chair Mary Schapiro announced that the commission would not support money market reform efforts. The following month, September 2012, she sent a request to the FSOC requesting that it take action to address money market reform.
The FSOC released the recommendations in November 2012, and set a deadline for public comment as January 18, 2013. The council subsequently extended the comment date to February 15, 2013. Comments can be viewed HERE.
Summary of alternatives for consideration:
- Alternative One: Floating Net Asset Value. Require MMFs to have a floating net asset value (“NAV”) per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV. The value of MMFs’ shares would not be fixed at $1.00 and would reflect the actual market value of the underlying portfolio holdings, consistent with the requirements that apply to all other mutual funds.
- Alternative Two: Stable NAV with NAV Buffer and “Minimum Balance at Risk.” Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would have an appropriate transition period and could be raised through various methods. The NAV buffer would be paired with a requirement that 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days — a minimum balance at risk (MBR) — be made available for redemption on a delayed basis. Most redemptions would be unaffected by this requirement, but redemptions of an investor’s MBR itself would be delayed for 30 days. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, creating a disincentive to redeem and providing protection for shareholders who remain in the fund. These requirements would not apply to Treasury MMFs, and the MBR requirement would not apply to investors with account balances below $100,000.
- Alternative Three: Stable NAV with NAV Buffer and Other Measures. Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The NAV buffer would have an appropriate transition period and could be raised through various methods. To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further reduce the vulnerabilities of MMFs, the Council could include these measures in its final recommendation and would reduce the size of the NAV buffer required under this alternative accordingly.