J.P. Morgan Securities' weekly "Short-Term Fixed Income" publication, written by Alex Roever and Cie-Jai Brown, commented on the recent Treasury "white paper", "As was widely expected, this week the White House unveiled its framework for a regulatory overhaul of the financial markets in a white paper, which included proposals targeted at money market funds. The report exhorts the SEC to strengthen the regulatory framework around money market funds and specifically mentions five areas of concentration: * require MMFs to maintain substantial liquidity buffers; * reduce the maximum weighted average maturity of MMF assets; * tighten the credit concentration limits applicable to MMFs; * improve the credit risk analysis and management of MMFs; and, * empower MMF boards of directors to suspend redemptions in extraordinary circumstances to protect the interests of fund shareholders."
J.P.Morgan Securities says, "Readers of the ICI Money Market Working Group report will recognize each of these as coming from the report's 24 recommendations. Also of interest, there is no mention in the white paper of a continuation of the money market fund insurance program that was initiated last fall. It was another ICI suggestion that that program be allowed to lapse. Where the administration may be breaking away from the ICI is on the topic of systemic risk. Specifically, the President's Working Group on Financial Markets (PWG) is preparing a report for release by September 15 considering more controversial changes such as whether money funds should move away from the stable NAV model or whether money funds should have access to 'reliable emergency liquidity facilities from private sources'."
The "Short-Term Fixed-Income" piece continues, "Since last fall, both the AMLF and the MMIFF have served the function of public liquidity facilities benefiting money funds, and there has been some speculation that they might ultimately be replaced by some broader form of access to the Discount Window. While this might still be possible, the phrasing in the white paper might suggest otherwise. What might constitute a 'private source' is open to conjecture, and is complicated by the fact that in the wake of the Lehman Brothers failure the scale of the need was so large, it was probably too large for any private source. Unfortunately there's not more elaboration on these points, and as far as the PWG is concerned there probably won't be until September. However, proposals regarding money fund regulation, like those proposed by the ICI and the white paper, will be discussed at an SEC hearing on June 24, after which it will likely publish proposed rules for public comment. It is not clear at this point whether more controversial issues like the variable NAV proposal will be addressed at the hearing."
Finally, Roever and Brown says, "The NAV question aside, if the SEC amends Rule 2a-7 along the lines of the ICI proposals, the result will shorten the maturity of securities purchased by funds, causing issuers to have to roll their debt with marginally greater frequency. The shorter maturity restrictions and tighter credit guidelines are likely to compress fund yields, making it more difficult for higher-cost funds to continue to compete, leading to greater consolidation among money fund providers. Fewer funds means there will be less investor diversity for issuers, ironically leading to greater systemic risk, and making it more difficult and expensive for some issuers to access the money markets."
