After a 3-month hiatus, a couple of new comment letters have appeared on the Securities & Exchange Commission's President's Working Group Report on Money Market Fund Reform (Request for Comment) page. The most recent is a letter from Bill Spivey, President of Keystone ELF Inc. on a proposed "Liquidity Bridging Facility." Spivey writes, "It has been over three (3) years since the events of September 2008 altered the perceptions and operations of the Money Market Mutual Fund Industry. Change came in 2010 when the Securities and Exchange Commission set forth amendments to the 2a-7 regulations. The Industry generally has embraced these changes. Additional reforms proposed by the SEC and others, however, have created significant uncertainty for the Industry, uncertainty that the Industry would like to put behind it. That uncertainty generally is reflected in what appears to be a regulatory tug-of-war between those in favor of eliminating all risk to investors in money market funds, notwithstanding the historic performance and stability of the Industry as compared to the banking industry, and those in favor of allowing funds to manage their risks."
He explains, "We are asking the SEC that as it considers additional reforms for money market funds that it adopt rules that give money market funds, their investment advisers and sponsors significant latitude in how they may support and manage those funds. At Keystone, we do not believe that all risks can be eliminated from money market funds. As we recently have seen with U.S. Treasuries, there are no securities unaffected by the perceptions of risk. We also do not believe that all risks should be eliminated from money market funds. Although money market funds are intended primarily for the safeguarding of principal, most investors seek some return on their investments, even if that return is small, and without some risk, investors would receive no returns. Moreover, we do not believe that there is or should be a single panacea or one-size fits all solution for the entire Money Market Fund community. If additional reforms are viewed as necessary, the best proposal for additional support to the Industry is to allow a variety of options and let the market decide which one provides greater security relative to return."
Spivey continues, "Apart from the unsupported discussion to end the stable net asset value structure, there are several options still under consideration. On April 29, 2011 a comment letter was submitted jointly by Fidelity, Charles Schwab and Wells Fargo provided details supporting their NAV Buffer option, which is currently viewed as the most likely and supported option by the regulatory agencies. BlackRock also provided an excellent overview of the potential solutions in their August 2011 Viewpoint series, which included the infamous "rainbow" slide. These options discussed the NAV Buffer, a Special Purpose Entity proposal by BlackRock, and Subordinated Class Shares by the Squam Lake Group, but did not include further discussion of a private emergency liquidity facility ("ELF"). The intent of this letter is to discuss a different form of ELF."
He writes, "Support for the ELF option is reflected in many of the President's Working Group on Financial Markets - Money Market Reform Options response letters. The Industry acknowledges the great amount of time and effort spent by the Investment Company Institute to propose their ELF model in the form of a liquidity-exchange bank, but in its proposed form, the Federal Reserve denied direct access to the Discount Window. In light of the rejection of the ICI model, I believe there is another model for an ELF that could be supported by the Industry."
Spivey adds, "On April 14, 2011, I submitted a response letter to the PWG Report. It stated my support for some form of ELF, but not necessarily the ICI model. My experience with a Local Government Investment Pool ("LGIP"), which was affected by exposure to The Reserve Fund and the litigation that followed, led me to begin creating an alternative ELF model that Keystone refers to as a Liquidity Bridging Facility. The LBF would be structured as a conglomeration of participating MMF's. For lack of a better term, it is an external reserve. As an external source of support, it will increase accountability and decrease moral hazard for access to additional funds through established replenishment procedures. The LBF will provide cash for securities maturing within 12 months."
He says, "Administration would be provided by Keystone ELF Inc. Keystone would be the provider, administrator and facilitator of the LBF. Oversight responsibilities would be given to a Board of Trustees made up of participating Industry representatives to provide governance, insight and support. The Initial Capitalization would be gathered by private investors and other sources at an estimated level $800M to $1.6B. These numbers assume a 20% - 40% Industry participation rate. Discussions have already occurred with these sources and before further progress is made, interest for this model must be validated. On-going Capitalization comes from a monthly Commitment Fee expense to accumulate over time. This fee consists of a "Reserve" Pool (for lack of a better name) and an administrative portion for operations and expenses. The fee will be tiered according to market conditions. 83-97% of the commitment fee will be solely dedicated to the Reserve Pool, depending on market condition. In case of a "draw-down" event, overnight liquidity can be achieved. Also, it would be our intent to provide participating MMF's with the ability to test access to the LBF periodically."
Finally, Spivey writes, "We have listed the main attributes of the LBF that Keystone seeks to provide the Industry. In relation to the SEC, there is increasing pressure to move forward with additional options for liquidity in the near future. When the issue of determining the option or options available to the Industry is discussed, we respectfully request that the Liquidity Bridging Facility proposal by Keystone be included in those discussions. All MMF's are not alike. Options for additional support should be considered and granted to the Industry so that the market can decide the best option for their needs. Keystone would like the LBF model to be included in the proposals and would like to discuss the regulatory issues in presenting our model with your agency in the near future."
