A host of responses were filed just ahead of last night's deadline for Comment on the President's Working Group Report on Money Market Fund Reform. (See a listing of the comment letters here.) As expected, many are fund managers and the vast majority have stated their opposition to a floating NAV for money market funds. Support also appears strong for the "private liquidity facility" option. Below, we excerpt from the Investment Company Institute's 58-page response, which for the first time provides public details on its "liquidity exchange facility" (LF) concept.
ICI's press release says, "A new, private facility to provide a liquidity backstop for prime money market funds is the most promising solution to bolster the resilience of these funds in times of severe market stress, the Investment Company Institute (ICI) said in a letter submitted today to the Securities and Exchange Commission. The letter responds to an SEC request for comments on the options for money market fund reform outlined in the President's Working Group on Financial Markets (PWG) Report on Money Market Fund Reform Options (Report)."
President and CEO Paul Schott Stevens comments, "We commend all the members of the PWG for their thoughtful and thorough work on the Report, which affirms the crucial role money market funds play for investors and the U.S. economy. A liquidity facility would build on the important reforms, including higher liquidity requirements, put in place by the SEC in 2010. The blueprint for a liquidity facility reflects the strong support of ICI and many of its members. We believe this approach, an option first suggested by the Treasury Department in mid-2009, holds the most promise for further strengthening money market funds in times of severe market stress, with the least negative impact."
The ICI's letter explains, "The Investment Company Institute is pleased to provide its views on the October 2010 Report of the President's Working Group on Financial Markets on Money Market Fund Reform Options. The Report affirms that money market funds -- which seek to offer investors stability of principal, liquidity, and a market-based rate of return, all at a reasonable cost -- serve as an effective cash management tool for investors, and as an indispensable source of short-term financing for the U.S. economy. ICI and its members are committed to working with policymakers to bolster money market funds' resilience to severe market stress so as to assure their continued ability to serve these purposes. We hope our comments below will be helpful to the constituent members of FSOC as they consider how best to advance toward this important policy goal."
It continues, "As indicated in the SEC Release, the Report responds to a recommendation in a June 2009 Treasury Department paper on financial regulatory reform. The Treasury paper recommended that the PWG prepare a report assessing whether more fundamental changes were necessary to supplement anticipated SEC money market fund reforms. Notably, the Treasury paper urged caution in this effort. In particular, it recommended that the PWG carefully consider ways to mitigate any potential adverse effects of a stronger regulatory framework for money market funds, such as investor flight from these funds into unregulated or less regulated money market investment vehicles. Consistent with the Treasury recommendation, the Report reflects a thoughtful and cautious approach, which we commend. The Report identifies several possible reform measures and discusses in a very balanced fashion potential advantages and disadvantages of each one. It is telling that -- notwithstanding its sixteen-month incubation period -- the Report does not specifically endorse any particular course of action."
The comment adds, "ICI and its members have devoted significant attention to a specific option advanced in the Treasury paper. The paper called for exploring measures to require money market funds 'to obtain access to reliable emergency liquidity facilities from private sources.' Over the past 18 months, we have made substantial progress on developing a framework for such a facility, including how it could be structured, capitalized, governed, and operated. As discussed in detail later in this letter, we strongly endorse a liquidity facility for 'prime' money market funds as the means to provide further stability to money market funds."
ICI explains, "Over the past year and a half, ICI has worked to develop a model for an emergency liquidity facility for prime money market funds. Our proposed liquidity exchange facility ('LF') is an industry-sponsored solution intended to serve as a liquidity backstop for prime money market funds during times of unusual market stress. It would be formed as a state-chartered bank or trust company and capitalized through a combination of initial contributions from prime fund sponsors and ongoing commitment fees from member funds. The LF would gain additional capacity from the issuance of time deposits to third parties as well as access to the Federal Reserve discount window in the normal course. All prime money market funds would be required to participate in the LF."
They continue, "During times of unusual market stress, the LF would buy high-quality, short-term securities from prime money market funds at amortized cost. In so doing, the LF would (1) enable funds to meet redemptions while maintaining a stable $1.00 NAV -- even when markets are frozen -- and (2) help protect the broader money market by allowing funds to avoid the need to sell portfolio instruments into a challenging market. Also, the very existence of such a liquidity backstop could provide reassurance to investors and thereby limit the risk that liquidity concerns in a single fund might spur increased redemptions in all prime money market funds. Importantly, the LF is not intended to provide credit support; rather, it is intended to meet liquidity needs brought on by market stresses through the acquisition of high-quality instruments. Further, the LF would provide a liquidity backstop only after a substantial portion of a fund's legally mandated liquidity positions ... are utilized."
For other coverage, see Bloomberg's "Money Funds Push $24 Billion Backstop as Clash Looms Over Potential Rules" and The Wall Street Journal's "Industry Eyes Bank as Prop for Money Funds". Look for more comment excerpts and discussion in coming days.
