The Investment Company Institute recently sent a letter to Barney Frank, Christopher Dodd, and members of the committees involved in reconciling the Restoring American Financial Stability Act of 2010, as well as to Treasury Secretary Tim Geithner. The letter, signed by a number of mutual fund companies, says, "We are writing you to express our concerns regarding a specific provision contained in the Restoring American Financial Stability Act of 2010, H.R. 4173, as passed by the Senate on May 20, 2010, which would result in significant unintended consequences for the capital markets. The provision would likely curtail the desire of market participants to invest in repurchase agreements ('repos'), particularly those backed by U.S. government collateral."
It continues, "The concerning language provides that a person who is party to a qualified financial contract (e.g., a repo) with a covered financial company may not exercise any contractual right that such person has to terminate, liquidate, or net such contract following the appointment of the FDIC as receiver for the covered financial company until after 5:00 p.m. on the third business day following the date of such appointment. [See H.R. 4173, Section 210(c)(10)(B)(i)(I)]"
The ICI letter explains, "If this provision becomes law, market participants may have to reconsider their use of repo. Such an automatic delay in payment of a money market investment can create liquidity and stability issues. Because investors cannot know in advance which financial institutions might be determined to be a covered financial company under the Act, investors may be reluctant to engage in repo transactions with any financial institution. In addition, the three day stay may result in repo transactions secured by government collateral ('government repo') to no longer be eligible investments for government money market funds. Today, the repo market provides $2.5 trillion in financing for government collateral."
It adds, "A significant reduction in money market fund participation in the government repo market would drastically reduce a critical and efficient source of funding for Treasuries and other government securities -- resulting in increased funding costs to the U.S. government. Indeed, the repo market is a critical component of the short term capital markets that provides daily funding for U.S. government securities as well as a safe and liquid investment for investors."
Finally, the letter says, "For the reasons noted above, we believe these outcomes are easily avoided by reducing the enforcement delay to no more than one business day, which is consistent with the treatment of financial contracts in a resolution by the Federal Deposit Insurance Corporation of an insured depository institution. A one-day delay does not materially impair a fund's right to liquidate collateral, as it generally takes a full day to provide the required notifications and prepare to sell the collateral following an event of insolvency. We recognize the significant challenges involved in crafting sweeping reform legislation and look forward to continuing to work with Congress to resolve the issues outlined above." (Word is that the one-day change has been accepted by the Committees crafting the compromise bill.)
See Crane Data's June 9 News article, "NB's Tank on Further Steps; Moody's on Financial Reform and Repos." Crane Data wrote, "Moody's published 'U.S. Financial Regulatory Reform Would Make Repo with Broker/Dealers Less Attractive for Money Market Funds,' which says, "On 20 May, the U.S. Senate passed the 'Restoring American Financial Stability Act of 2010,' which would give the FDIC expanded liquidation powers to delay or 'stay' collateral in connection with repurchase (or repo) agreements when liquidating 'covered financial companies'." See too The Washington Post's "Scott Brown's key vote gives Massachusetts firms clout in financial overhaul", which says, "State Street ... has a powerful advocate: Sen. Scott Brown (R-Mass.), whose vote the Democrats need to pass the financial overhaul bill."
