On Friday morning, U.S. Securities and Exchange Commission Chairman Mary L. Schapiro gives "Remarks at the Practising Law Institute's SEC Speaks," which contain a section on "Money Market Funds." The SEC's Schapiro says, "Despite the breadth of Dodd-Frank, there are other gaps in the regulatory system that threaten investors that we are working to address. One high-profile area of interest is money market funds. As you know, when the Reserve Primary Fund broke the buck in 2008, it set off a run so serious that the federal government was forced to step in and guarantee the multi-trillion dollar industry."
She continues, "It was a shock that reverberated across the market and compelled us to take action. And so, two years ago, we adopted regulations making the mix of investments these funds can hold more liquid and less risky. But, at the time, I said we needed to do more. That is because money market funds remain susceptible to runs and to a sudden deterioration in quality of holdings. We need to move forward with some concrete ideas to address these structural risks."
Schapiro explains, "We've spent lots of time and outreach reviewing many possible approaches. There are two serious options we are considering for addressing the core structural weakness: first, float the net asset value; and second, impose capital requirements, combined with limitations or fees on redemptions. It's hard to miss the hue and cry being raised by the industry against either of these approaches. But the fact is investors have been given a false sense of security by money market fund sponsor support and the one-time Treasury guarantee. Funds remain vulnerable to the reality that a single money market fund breaking of the buck could trigger a broad and destabilizing run."
She adds, "Should that happen, the government will not have the tools it had in 2008. Then, Treasury used the Exchange Stabilization Fund to stop the run. But Congress eliminated that option when it passed TARP legislation. Today, the money-market fund industry and, by extension, the short-term credit market, is working without a net."
Finally, Schapiro says, "To the extent that there's a deadline, it's the pressure that we should feel from living on borrowed time. We've been incredibly deliberate about this. The President's Working Group report on reform options was issued in October 2010. We've had extensive public comment. And we held a roundtable with the Financial Stability Oversight Council on money market funds and systemic risk last May."
See other coverage of the speech, including: WSJ's "SEC Chairman Amplifies Call for Money-Market Revamp" and The Washington Post's "Money-market funds 'vulnerable'".
