SEC Faces Criticism of Proposed MMF Reforms

Securities and Exchange Commission (SEC) chairman, Mary Schapiro, has defended proposed reforms of the money market funds (MMF) industry at a Senate Committee hearing in the US on 21 June, against concerns that further regulation will have unintended adverse effects.

“Every morning when I pick up the newspaper and read about an earthquake in Japan or problems in European financial institutions, the first question I ask our staff is what is MMF exposure to these incidents and to these institutions?” Schapiro said in her testimony. She added that MMFs are vulnerable to massive sudden withdrawals by shareholders, who have an incentive to redeem shares ahead of others when a loss appears imminent.

Many in the sector are concerned about the implications of the proposed SEC MMF reforms, as evidenced in an imminent
AFP survey.

The SEC proposes that the MMF industry should either switch to a floating price for its funds, currently fixed at US$1 per share, or that they accumulate capital and prevent customers from withdrawing all of their funds at the same time. 

The proposals result largely from the September 2008 collapse of the US$62.5bn Reserve Primary Fund, which ‘broke the buck’ when it received nearly US$40bn in redemption demands in a period of just two days. This in turn triggered a broader run and forced other MMFs to sharply reduce their holdings of commercial paper. Schapiro also observed that on more than 300 occasions since MMFs launched in the 1970s, fund sponsors have had to step in with their own funds to shore up the US$1 valuation.

However, Schapiro received a lukewarm and sometimes hostile reception from lawmakers on Capitol Hill to her proposals to reform the US$2.7 trillion industry. Many senators believe that regulations introduced in 2010 imposing tighter limits on which securities MMFs may hold, liquidity minimums, average maturity limits and new disclosure requirements, have already done much to reduce the risk. They argue that additional rules could result in corporations and governments losing a crucial tool for cash management, and both government agencies and businesses might find short-term credit more expensive.

“In my view, you’re portraying an industry that’s extremely vulnerable, that has all these risks of runs and I really find that extraordinary in light of the actual history,” said Senator Patrick Toomey, a Pennsylvania Republican, in response to Schapiro’s comments. “We’ve had another round of real stress, an ongoing recession, the European credit crisis, a downgrade of the US government, considerable redemption pressure and not a single problem in this industry.”


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