A press release sent out yesterday entitled, "U.S. Chamber Report Examines Stability, Transparency of Money Market Mutual Funds; Analysis Shows 2010 SEC Reforms Are Working," says, "The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (CCMC) released a white paper entitled, "Money Market Funds Since the 2010 Regulatory Reforms: More Transparency, Increased Liquidity, and Lower Credit Risk" at an event in Washington today. The paper analyzes how money market mutual funds (MMMFs) performed leading up to the 2008 financial crisis and after the implementation of additional regulations in 2010, including the EuroZone crisis which followed a year later."
The release explains, "Authors Dr. David W. Blackwell, Professor of Finance at the University of Kentucky, Dr. Kenneth R. Troske, Professor of Economics at the University of Kentucky, and Dr. Drew B. Winters, Chair in Finance at Texas Tech University, analyzed the changes made to regulations of MMMFs in 2010 and found that: MMMFs are now more liquid and better able to handle a significant change in redemptions; Dramatically increased transparency and disclosure frequency allows investors to now obtain timely, accurate data on the risk of any fund in which they invest; Overall, there is no evidence that the CP market experienced a "freeze" despite substantial redemptions in 2011; Funds experienced net-inflows during the Summer of 2011, as both institutional and retail investors sought the liquidity and resilience of MMMFs; Based on existing research, there is no evidence that any retail investor was affected by a run on MMMFs; [and] The variance in monthly redemptions means a 'one-size-fits-all' rule limiting redemptions will be extremely difficult to adopt."
David Hirschmann, president and CEO, of CCMC comments, "Regulators are basing their assumptions largely on what happened in 2008, but it is imperative that any further MMMF reforms be informed by the effects of the 2010 reforms. For more than a year, the Chamber has asked regulators to define the specific remaining problems that they hope to solve before proposing additional reforms. Instead, they have repeatedly floated solutions that would dramatically reduce a vital source of short-term funding for businesses, cities and states. Regulators should adopt a 'first do no harm' approach to further reforms."
The 46-page paper's Executive Summary says, "Since the 2008 financial crisis, there has been a vigorous debate among academics, policymakers, and money market participants surrounding the role of money market funds (MMFs) during the crisis. In response to large redemptions from MMFs during the crisis, the government intervened with the guarantee of MMF shares by the Department of the Treasury. In the wake of the financial crisis, under the apparent presumption that Reserve Primary's "breaking the buck" precipitated a run on MMFs, the Securities and Exchange Commission (SEC) implemented an overhaul of MMF regulation through changes to Rule 2a-7 of the Investment Company Act that were adopted on January 27, 2010. The major changes to Rule 2a-7 tightened credit quality and liquidity constraints and mandated that MMFs conduct stress tests to determine whether net asset value (NAV) could be maintained in response to hypothetical risks. In addition, the SEC required new reporting standards with detailed monthly disclosures for MMFs."
It adds, "Despite little specific evidence about the efficacy of the 2010 reforms, regulators such as SEC Chairman Mary Schapiro, Secretary of the Treasury Timothy Geithner, and Federal Reserve System Chairman Ben Bernanke continue to call for additional regulation of MMFs, largely based on what happened in 2008. The debate about further MMF reform needs to be informed by the impact of the 2010 reforms. This report starts to fill that gap by presenting some analysis of MMF data on liquidity, credit risk, redemption patterns, and net cash flows from 2008 to 2012, focusing in particular on what has happened in the industry since the 2010 reforms. We also examine whether redemptions from MMFs since the reforms have had any impact on the supply of funds in the commercial paper (CP) market. We used MMF data filed with the SEC to examine changes in liquidity, credit risk, redemptions, and net cash flow and CP data available from the Federal Reserve System to examine the impact of the MMF market on the CP market. Finally, we examine the issues in light of the post-2008 academic literature on MMFs."
