Later this morning the Financial Crisis Inquiry Commission will release its report on "the causes of the financial and economic crisis" (at 10am), which we believe will discuss problems in the money markets and in money market funds. Until then, we excerpt from some of the smaller fund company Comment Letters on the President's Working Group Report on Money Market Fund Reform. Our apologies to those we didn't get a chance to highlight, but below we cite some passages in the USAA and Thrivent letters.
Matthew Freund, Senior Vice President, Investment Portfolio Management, USAA Investment Management Company writes, "The essential characteristics of MMFs, including liquidity and a stable NAV, must be preserved in any further structural changes or regulatory efforts. It is these essential characteristics combined with the rigorous securities laws and rules that have allowed MMFs to remain not only a commercially successful product and vital part of retail investors' portfolios, but also a necessary component of financing within the capital markets."
He continues, "To the extent MMFs require further changes to address their susceptibility to systemic liquidity events, USAA echoes the views of industry participants and the Investment Company Institute (ICI) in urging that any structural changes to MMFs, intended to address systemic events, preserve the essential characteristics of MMFs through appropriate prudential measures, within the parameters of a stable NAV. USAA generally agrees with the ICI's proposed creation, structure and function of an industry funded back-up liquidity facility. For the reasons set forth below, USAA proposes that any mandatory liquidity facility initial capitalization and ongoing commitment fees (the fees) be variable so that those MMFs that pose the greater potential 'systemic risk,' as borne out in the most recent financial turmoil, pay proportionally higher fees than those MMFs that pose significantly less systemic risk."
USAA explains, "The fees should be tied to the risks posed by the participating MMF in a manner similar to the standards applied in underwriting an insurance risk. Therefore, in considering a mandatory liquidity facility for MMFs, the Financial Stability Oversight Commission and the Securities and Exchange Commission (Commission) should ensure that the fees are tailored to the risks presented historically by similarly situated MMFs. For example, retail MMFs that have historically been less susceptible to liquidity crises would have a lower risk profile and therefore a lower required fee for participation in the liquidity facility."
Russell W. Swansen, President, Thrivent Mutual Funds comments on the crisis, "Historically, short-term market liquidity was provided by active participation of the dealer community and the depth of buyers and sellers active within the short-term debt market. The secondary market functions well only when there are sufficient buyers and sellers of similar sizes. Over the years, however, some participants have become so large that there are fewer buyers remaining in the market that can absorb their positions. At the same time, the dealer community has become increasingly reluctant to inventory such billion dollar positions. Thus, as a fund grows larger, the secondary market for its positions becomes thinner, and its portfolio becomes less liquid."
He adds, "As a fund grows larger, it often also outstrips its adviser's ability to provide financial support to the fund, either by purchasing distressed securities or investing directly in the fund to provide liquidity to meet redemptions. This is a dangerous cycle, because as a fund becomes larger, it achieves economies of scale that reduce expenses and increase potential yield, which in tum drives further asset growth. However, as assets continue to grow in a large fund, its potential impact on the financial market increases while at the same time its liquidity -- and often the ability of the adviser or its affiliates to support the fund -- is decreasing."
