Sunday's Financial Times contains a story quoting ICI's Paul Stevens on the future of money funds. (It's unclear whether this is a new interview or is based on previous comments.) The FT article, entitled, "Future of money funds in question," says, "Money market funds are big business for fund managers in the US. More to the point, they are an intrinsic part of the funding model for municipalities and corporations, as became clear when money markets seized up in the financial crisis. But their future is in doubt as regulators consider whether they should be allowed to continue to operate as they have in the past."
It continues, Paul Stevens, president and chief executive of the Investment Company Institute, says his organisation has been lobbying for some time against some of the ideas put forward that threaten to destroy the basic model of money market funds -- in particular the stable net asset value of $1 per share. He is concerned that loose talk about the 'shadow banking system' suggests there is something sinister about shadow banks, 'and they should be regulated like banks to make sure they pose no risks.'"
FT explains, This is illogical, given that it was the non-shadow banks that posed big risks, says Mr Stevens. Moreover, it suggests money market funds are not regulated, which is not the case. Indeed, 'regulation has been substantially increased since 2008,' with rules laying down explicit liquidity standards and shortened maturity requirements, among other things. He acknowledges the extent to which money market funds required support from their parent groups during the crisis to prevent them 'breaking the buck', as having to let the price fall below $1 per share is known."
The article says, "Mr Stevens says money market funds ran into problems 'because the banks stopped trusting each other', which suggests the problem lies as much in the banking system as with the shadow banks.... Whether the money would stay put if some of the reforms under consideration are implemented is a big question."
It adds, "Reform options are discussed in a report by the President's Working Group on Financial Markets, published in October. They include moving to floating rather than stable net asset values; private emergency liquidity facilities; insurance; regulating funds as special purpose banks; and a two-tier system which either offers enhanced protection for stable NAV funds, or restricts access to such funds to retail investors, on the basis that the 2008 run on funds was mainly due to redemptions by institutional investors."
Finally, the piece says Stevens "remains optimistic about the eventual outcome. It quotes him, "As long as issuers have a need to finance themselves on a short-term basis, the market will respond. The question is whether the vehicle will be permitted to survive. I think the answer will be yes, but we will go through a period where we are still considering what needs to be done to address some of the risks."
