The Vanguard Group is the latest organization to comment on the President's Working Group Report on Money Market Fund Reform (Release No. IC-29497; File No. 4-619). Chairman and CEO William McNabb writes, "We appreciate the opportunity to provide our comments to the Securities and Exchange Commission on the alternatives for money market fund reform set forth in the President's Working Group Report on Money Market Fund Reform.... On behalf of our shareholders, who currently invest approximately $194 billion in our money market funds, we are deeply committed to working with the financial regulatory authorities to strengthen the money market industry's ability to withstand the stresses of the next financial crisis." (See all the recent Comment Letters here.)
The comment explains, "We appreciate the balanced and thoughtful discussion of the various money market fund reform alternatives set forth in the PWG Report. We believe the report appropriately underscores the complexity involved in further reducing money market funds' potential susceptibility to runs, and demonstrates the very real danger that the potential 'cure' is worse than the 'disease.' It is important, therefore, that any reforms pursued by the Financial Stability Oversight Council carefully consider the consequences that such reforms may impose on the economy, financial markets, borrowers and investors. Careful and deliberate consideration of the downstream effects of any additional money market fund reform will help ensure that any changes will be positive and enduring, and will bolster rather than destroy a valuable cash management product for millions of investors and a much-needed source of financing for government, financial and corporate borrowers."
It continues, "At the outset, we believe it is important to note that, for money market funds, the 2008 financial crisis was a liquidity crisis, not a credit crisis. During the Fall of 2008, many institutional money market funds experienced large-scale redemptions and other money market funds saw reduced liquidity (i.e., the inability to find willing buyers and sellers for portfolio securities) for the securities of otherwise credit-worthy issuers.... The 2008 crisis revealed a weakness in the then-prevailing money market fund regulation, which did not explicitly require liquidity thresholds for money market funds. As detailed below, recent changes in money market fund regulation (which imposed new minimum liquidity levels for all money market funds) have greatly increased the funds' liquidity and ability to satisfy large redemption requests. The result of these initiatives is to make money market funds self-provisioned for liquidity, reducing the likelihood that a future systemic market disruption would threaten the liquidity of these funds and require government support."
McNabb adds, "In addition, as more particularly discussed below, we believe the money market fund industry has developed a blueprint for a private liquidity facility to further support money market funds in need of additional liquidity if market-wide illiquidity conditions were to recur. Proposals for a floating NAV do nothing to make money market funds more robust in the face of adverse liquidity conditions. They merely change accounting mechanics and make investment in and management of money market funds more complex."
He continues, "As acknowledged in the PWG Report, the Commission's recent amendments to Rule 2a-7 and certain other rules that govern money market funds under the Investment Company Act of 19402 have made money market funds more resilient to credit and liquidity pressures, and will help reduce the likelihood of runs. We believe the amendments to Rule 2a-7 and related money market fund rules, which we strongly supported, significantly improve a fund's ability to withstand unusually high redemption activity.... We believe the Commission's new money market fund rules appropriately allow money market funds to continue to finance the short-term needs of private and public borrowers while mitigating the risk that money market fund liquidity pressures would produce severe market-wide illiquidity."
The letter says, "As we have previously stated, we do not believe that the market-wide illiquidity that occurred in the 2008 market crisis resulted from money market fund activity, but rather from banking entities' unwillingness to accept each others' credit risk. Nonetheless, we understand that the PWG, Council and Commission believe more should be done to further mitigate the potential structural vulnerabilities of money market funds to runs. Of the possible reforms outlined in the PWG Report, Vanguard believes that the creation of a private emergency liquidity facility for prime money market funds is the best alternative that directly addresses the liquidity issue and, therefore, would be the most effective and appropriate option to address the potential for a run. We believe the implementation of a private emergency liquidity facility will most effectively complement revised Rule 2a-7, further strengthening the solid regulatory framework that has protected investors in money market funds for approximately 40 years."
It explains, "Vanguard supports the creation of a private liquidity facility for several reasons. A private liquidity facility could provide the necessary liquidity to satisfy shareholder redemptions, which under extremely rare market conditions, could cause a fund to use its 30% liquidity reserves, and prevent the liquidity pressures experienced by one fund from spreading to another. Quite simply, it's a solution that addresses the potential problem. A liquidity facility capitalized by money market funds and their sponsors would satisfy the PWG's request that money market funds internalize the cost of liquidity and would not put taxpayer dollars at risk. This solution also has the advantage of retaining the stable NAV, which in turn, retains the funds' appeal to investors seeking cash management options, which in turn, provides issuers like corporations, financial institutions, and governments with a reliable, low cost option for short term financing.
Finally, Vanguard writes, "The creation of a private liquidity facility would not require bank-like capital requirements to be maintained by funds or their sponsors, which the PWG Report very clearly recognized involved significant challenges. Importantly, the creation of a private liquidity facility would not cause dislocations in the financial markets, and would preserve money market funds as a source of relatively low-cost, short-term financing. Our support for the private liquidity facility is premised on the following conditions: 1. The money market fund industry is permitted to maintain the stable NAV; 2. Funds and their sponsors are not required to maintain bank-like capital requirements; 3. Participation in the liquidity facility is mandatory for all prime money market funds; 4. Cost of participation in the liquidity facility must be reasonable given prevailing market conditions; and 5. The liquidity facility is permitted to be capitalized over a reasonable time period. Based on these conditions, we strongly support the Investment Company Institute's proposal for a private liquidity facility, and urge the Council to give the proposal very careful consideration. We believe the ICI's work performed to date on this liquidity facility, in consultation with members of the PWG, has been significant and should serve as the blueprint for the ultimate liquidity facility that is adopted by the industry. Undoubtedly, much more work needs to be done before the liquidity facility becomes a reality; however, Vanguard is committed to working with the ICI and financial market regulators to pursue this option."
