J.P Morgan Securities' Alex Roever writes in his most recent "Short Duration Strategy Weekly" a piece entitled, "MMF Reform: Drumbeats growing louder, faster." He says, "In the forest of financial reform, the money market drum beats have grown louder and more frequent. The pace of headlines on money market fund reforms have surged in the past week, prompted both by the Senate Confirmation Hearings for Mary Jo White, nominee to head the SEC, as well as the completely coincidental timing of a major annual money fund conference (MMX Money Market Expo). Another conference scheduled for next week, the 2013 Mutual Funds and Investment Management Conference, also promises to be a source of more MMF reform headlines)."
JPM's Roever, along with Teresa Ho and Chong Sin write, "In her confirmation hearing, Mary Jo White did not wade into the muck of money fund reform, but did forcefully argue that the SEC -- and not the FSOC – should be the author of new MMF rules. In expressing this sentiment, White seems aligned with recent comments by SEC Commissioners Daniel Gallagher, Luis Aguilar, and Troy Parades. The Senate Banking Committee will vote on White’s confirmation. Assuming that the vote passes, the nomination will also have to be voted on by the full Senate. So far, no date has been set for the full Senate vote."
The weekly continues, "Speaking at MMX, Parades made further observations on MMF regulations which we summarize and paraphrase here, based on our own notes. Parades stated that the SEC is where the experience and expertise are with respect to money fund regulation. He characterized the relationship between the FSOC and the SEC as a study in political science, in that the SEC is by design a bipartisan regulatory agency, a structure with checks and balances that is conducive to debate and compromise."
It continues, "In contrast, the FSOC is a committee composed of the heads of the various regulatory commissions, who are not bound to support the position of the agency they head, but instead are free to support their own personal views. By its construction, the FSOC is potentially a more partisan entity with the ability undermine the work of individual agencies. Parades suggests that if the SEC reaches a decision based on a thoughtful, deliberative approach given careful consideration of costs and benefits, then it should be comfortable reflecting that in its rulemaking, even if there's FSOC opposition to that decision. If the SEC only ratifies the wishes of the FSOC, one may wonder if the SEC has really done its job."
Roever adds, "Although press reports suggest the SEC staff is close to completing a new rules draft for the Commission's consideration, Parades declined to set out a time frame for future reforms, but noted that MMF reform has a very high profile at the Commission. He also withheld comment on the potential content of forthcoming proposals, but he did allow that given the nature of the SEC rulemaking process, final rules often differ from what is initially proposed, influenced by public comment and the practicalities of implementing certain policies."
JPM's update tells us, "As to the efficacy of variable NAV funds, Parades says "it depends on what we are trying to solve for." If the problem is to keep funds from breaking the buck, eliminating the $1 CNAV and replacing it with a VNAV has a certain logic. But, if the goal is to try to limit runs related to systemic risk, it may not be the best solution, since -- like many other investments -- there is still an incentive for shareholders to liquidate holdings sooner rather than later, and at a higher price rather than a lower price."
The piece adds, "Current institutional money fund shareholders should have a long time to react to changes. Time will be necessary as the accounting and tax implications of prospective changes will need to be vetted by various accounting bodies (FASB, IASB, GASB) and taxing authorities (IRS, Congress). Lack of clarity on these fronts prior to implementation may ultimately lead prime fund shareholders to pursue alternatives, if only temporarily. In a low interest rate environment, shifting from prime funds into Treasury or government funds is easy and has a relatively low opportunity cost. The same might be said of offshore money funds not governed under Rule 2a-7. Similarly, shifting into non-interest bearing transaction accounts remains an option, although it's uncertain if banks will sustain the current level of earnings credits for commercial customers given the Fed's current proclivity for creating reserves combined with the costs banks face for holding these liabilities. However, in the event that US interest rates rise before MMF reforms become effective, it's possible higher yields could entice some shareholders into higher yielding alternatives including short duration mutual funds, separate accounts or direct investments."
Finally, Roever writes, "We have been asked multiple times what MMF reforms could mean for borrowers in the short-term markets. Again, the answer depends heavily on the reaction of MMF shareholders to the yet unknown details of forthcoming proposals. As with the fund shareholders, we think borrowers will have time to adapt to reform, and given the changes in the financing market forced upon them since the crisis (including a lessened reliance on short-term funding), borrowers may be able to better adapt to new financing than some shareholders.... [R]eliance of individual firms on prime money funds for funding is relatively low, as our analysis of the top 25 borrowers indicates."
Note that Crane Data's Peter Crane will be attending the ICI's MFIMC conference in Palm Desert Sunday through Tuesday (March 17-19). The keynote (9am California time) will be given by Norm Champ, Director of the Division of Investment Management, U.S. Securities and Exchange Commission. We're guessing that more details will be released on the SEC's timetable and plans for money fund reforms, so look for a Crane Data News update later on Monday or on Tuesday a.m.
