Adam Ashcraft of the Federal Reserve Bank of New York, has made the case for greater regulation of money market mutual funds during a panel discussion on shadow banking at the 2012 American Securitization Forum Annual Meeting.
Ashcraft, senior vice president and head of structured products at the Federal Reserve Bank of New York said: "The issue obviously is that the money market industry broadly has benefitted from government intervention in 2008 and the Federal Reserve itself created a lot of programs," Ashcraft said. "While they performed better last year while under stress, it's hard to dismiss the support of the Federal Reserve and the European Central Bank [for more regulation.]"
He did not have much support.
Regulation of money market mutual funds has been a topic of discussion since the Lehman Brothers collapse in 2008. An April report by the Federal Reserve Bank of New York pointed out that the tri-party repo task force created in response to money market fund risk has been unsuccessful in resolving the problem of money market fund investors not being able to liquidate collateral when broker-dealers go bankrupt.
One proposal is to create a liquidity facility for money market funds to use in times of crisis. This is not supported by regulators: it would mean money market fund access to the Federal Reserve’s discount window, meaning potential liabilities for government and taxpayers.
Another idea is to allow the net asset value of money market mutual funds to float, preventing investors from developing a false sense of security in the asset almost always valued at one dollar.
Jane Heinrichs, senior associate counsel at the Investment Company Institute, said a floating rate would drive investors out of the business and hurt liquidity as a result.
“This credit is necessary for the fundamental economy and incremental regulation is likely to increase that cost in some way,” Stewart Cutler, managing director at Barclays Capital said. “Corporations are very concerned about what they are going to do with their cash if they can’t put it in a money funds and I think municipalities and individual share that concern.”
JP Morgan managing director Debbie Toennies expects companies to have a difficult time issuing asset backed commercial paper (ABCP) because money market funds are the largest investors in ABCP.
“Depending if money funds go down, the big question to ABCP issuers is where does it go, and if it goes to banks then they lose an investor, Toennies said. “You’re seeing shrinkage in the amount of investor interest in the product and then we have to think about ABCP conduits financing the broader economy.”
The US Securities and Exchange Commission (SEC) adopted rule 2a-7 of the Investment Company Act to implement restrictions on the quality and liquidity of money market funds last year.
Cutler said this has resulted in tremendous transparency and enhanced the structural integrity of money market funds.
“These amendments were tested last summer when you had the ongoing European debt crisis as well as our own crises and historic downgrade of the US government,” Heinrichs said.
“Money market funds had no problem accommodating these things in large part to the liquidity requirements under the new rule 2a7.”
None of the proposals being considered by regulators address the tri-party repo risk problem pointed out by Ashcraft. Industry professionals seem to be happy with rule 2a7.
“These aren’t the same money market funds,” said Heinrichs.