Money market mutual funds and cash investors will be paying close attention to the slew of news scheduled for this week. The major events include Wednesday's SEC Open Meeting (10am in Washington) to "consider a recommendation to adopt new rules, rule amendments, and a new form under the Investment Company Act of 1940 governing money market funds," as well as earnings calls from BlackRock (Wednesday at 9am) and Federated (Friday 9am). (Federated will also host its quarterly money market update call Thursday at 4pm, entitled, "The Fed's Low-Rate Stance: Prospects for Relief," and Barclays Capital will host a "Short-Term Market Update" call on Tuesday.) Finally, the Federal Reserve meets on Tuesday and Wednesday (and may weaken its "extended period" language), and the Fed's commercial paper support programs, the AMLF and CPFF, expire at the end of this week.
J.P. Morgan Securities' Alex Roever and Cie-Jae Brown write in their latest "Short-Term Fixed Income, "For most of the past year and a half the US government and the Fed (along with many foreign governments and central banks) have gone to heroic lengths to counteract the economically devastating consequences of the financial crisis. These efforts have proven remarkably successful in stabilizing the markets, so the anxiety investors have about changes is understandable, as is their sensitivity to the tone of the proposed changes. This is particularly true in short-term fixed income, where so much of the product is sourced from banks and financials."
They continue, "[R]egulators are pushing investors (including banks) to hold more of their portfolios in liquid assets while simultaneously pressuring issuers to shift more of their funding in long-term liabilities.... [T]he proposed Financial Crisis Responsibility Fee (a.k.a. 'the bank tax'), as currently envisioned, taxes most types of bank liabilities, including repo and commercial paper.... That said, we think there is a pretty good chance that the formula gets amended to exclude Treasury and probably Agency repo."
JPM says of this week's meeting, "The SEC will meet on Wednesday to consider its recommended changes to Rule 2a-7, which governs the money market mutual fund industry. Ahead of this meeting, SEC chairman Mary L. Schapiro discussed pending reforms in her January 14 testimony before the Financial Crisis Inquiry Commission. Coupled with her January 20 speech appropriately titled 'Embracing the Change,' we can glean some insights into next week's meeting. We expect the proposals to tighten the credit quality and maturity requirements for money market funds will be approved as well as proposed liquidity standards for money market funds that would mandate that these funds meet both daily and weekly liquidity requirements."
Finally, Roever and Brown say, "However, we do not expect the SEC to adopt a ruling regarding the establishment of a floating NAV for money funds. As outlined in the recent speeches mentioned above, the SEC is working with the Federal Reserve Board and President's Working Group on Financial Markets (PWG) on structural changes to further reduce the possibility of a run on money market funds. They may provide more insight into these structural changes during Wednesday's meeting, including floating NAV and private sources of liquidity. But, the SEC will likely provide some implementation period for its 2a-7 amendments before seeking to make larger, structural changes."
