No Further Regulation Needed in US MMFs, According to ICD

Institutional Cash Distributors, (ICD), an independent institutional money market fund (MMF) portal and risk management provider, has published a report that investigates the causes leading up to the 2008 credit crisis and the run on money market funds (MMFs). The report argues that the 2008 run on funds could have been prevented, and delivers new safeguards that will help prevent a new crisis.

The report, ‘Money Market Fund Reform Option 9’, contends that significant corrective reforms made to Rule 2a-7 by the US Securities and Exchange Commission (SEC) in 2010 are already in place and working. Moreover, the synthesis of the new fund data made available from these 2010 reforms, combined with new industry exposure analytics applications developed by ICD, have resulted in a comprehensive, end-to-end MMF investing process that the market place is widely adopting. This is Option 9.

Option 9 is predicated on four key premises that were not present in 2008:

  1. With analytics in place, the Reserve Primary Fund would have been a smaller, lower risk fund because the market incentives to incur greater risk for higher yield would not have existed.
  2. MMF portfolios would have been significantly better diversified since greater transparency into the funds and exposure analytics tools enable corporate treasurers to establish and monitor new investment guidelines.
  3. Institutional investors would not have been forced to ‘panic sell’ out of lower-risk MMFs if they had improved visibility into underlying holdings.
  4. The MMFs and short-term marketplace would have been more liquid.

Individually these factors would have minimised the 2008 run on MMFs. Collectively, as put forward by Option 9, these factors should have eliminated it.

“MMFs are a vital component in the global economy with US$2.65 trillion in assets under management, with a majority of the short term state and local government debt, a large part of the outstanding short-term Treasury and federal agency securities and approximately 40% of outstanding commercial paper,” said Tory Hazard, ICD’s chief operating officer (COO)/chief financial officer (CFO). “Of all the reform options on the table, only Option 9 significantly reduces risk to runs on money market funds without decreasing money market fund demand.”

Cal ISO CFO/treasurer Ryan Seghesio, said: “I was with Oracle when the financial crisis unfolded in 2008. The problem for all money fund investors was the lack of fund holdings transparency. Fund holdings, if at all available, were either dated or in such disparate formats that it was impossible to use or aggregate. When news of Lehman Brothers and other headline risk company difficulties escalated, we sold out of prime money market fund positions. With full transparency of fund holdings now available, there is no need to ‘panic-sell’ funds that do not hold risky securities.”


Related reading