Alert November 02, 2010

President’s Working Group Reports on Money Market Fund Reform Options

The President’s Working Group on Financial Markets (“PWG”) released a report outlining possible options for operational and regulatory money market fund reform (the “Report”).  The Report discusses a number of alternatives for addressing the phenomenon of mass redemptions of money market funds (“MMFs”) and the systemic risks posed by substantial MMF redemptions, but offers no recommendations, instead urging that the Financial Stability Oversight Council (“FSOC”) created by the Dodd-Frank Wall Street Reform and Consumer Protection Act consider the alternatives and take appropriate steps.  The Report responds to a June 2009 request from the U.S. Treasury Department in its white paper Financial Regulatory Reform: A New Foundation, that PWG prepare a report analyzing fundamental changes to address systemic risks associated with MMFs.  In January 2010, the SEC amended rules governing MMFs in an effort to bolster MMFs’ resiliency and ability to withstand mass redemptions (as discussed in the March 5, 2010 Alert).  The Report recognizes that those amendments are designed to make MMFs more resilient by, for example, increasing liquidity requirements, but opines that additional measures should be taken to address certain other features of MMFs that contribute to their susceptibility to mass redemption activity.

The Report analyzes and sets forth a number of “further reforms that, individually or in combination, might mitigate systemic risk by completing the SEC’s changes to MMF regulation.”  (The Report does not address any options that have not already been discussed over the past two years.)  Certain of the potential reforms discussed could be adopted by the SEC under existing authority, while others would require coordinated action with other regulators and potentially, legislative activity.  In all, the report discusses the following eight policy options, and outlines potential advantages and disadvantages of each option:

  • requiring MMFs to have floating net asset values;
  • establishing private emergency liquidity facilities for MMFs;
  • requiring mandatory redemptions in kind for large redemptions from MMFs;
  • requiring insurance for MMFs;
  • establishing a two-tier system of MMFs with enhanced protection for stable NAV MMFs;
  • establishing a two-tier system of MMFs with stable NAV MMFs reserved for retail investors only;
  • regulating stable NAV MMFs as special purpose banks; and
  • enhanced constraints on unregulated MMF substitutes.

As noted above, the Report offers no recommendations, instead urging that FSOC consider the options and take appropriate steps.  The Report notes that the SEC, as the primary regulator of MMFs, will be issuing a notice and request for comment regarding further MMF reform.  Following a comment period, there will be a series of meetings with various stakeholders, interested persons, experts and regulators.