Citi's Tuffy on MMF Reform 2.0
In the March edition of its "What Does it Mean for FinReg?" newsletter, Citi Securities Services includes a brief entitled, "It Begins: Money Market Funds Reform 2.0." Author Sean Tuffy writes, "As part of the global COVID-19 postmortem, the Securities and Exchange Commission (SEC) has initiated a review of its money market fund regulations. The SEC is looking for comments on the potential measures that were highlighted in the December 2020 report issued by the Treasury that was commissioned as a result of the US government stepping in to backstop money market funds during the volatility experienced in March and April. The Treasury's report concluded that reform is needed to reduce the potential risk that money market funds pose to short-term funding markets in times of stress and outlined a number of potential actions." He explains, "Almost all of the suggestions have been proposed during previous reform efforts. They cover the spectrum from tactical changes, such as the removal of the connection between fund liquidity and the deployment of gates, to more structural changes, such as requiring all money market funds prices be floating, rather than fixed at $1. Some of the suggestions will likely be welcomed by the industry. For example, even before last spring, many in the industry had called for automatic fee triggers if certain liquidity thresholds are breached to be revised. The industry has argued that these triggers may be counterproductive and actually exacerbate a liquidity issue because they could hasten redemptions as funds near the thresholds. However, not all suggestions have been welcomed and it is likely there will be push back from the industry on the proposals that would impose more bank-like regulation on money market funds, such as capital buffer requirements and the suggestion to make all funds floating NAV." Finally, Citi's update adds, "The new leadership at the SEC and the US Treasury could mean that there is more of an appetite for a larger structural reform. Ultimately, how far reaching any potential reform is depends largely on if policymakers believe that money market funds present a potential systemic risk and should be considered more like banking products than fund products. Given this, the SEC's request for feedback is the first step in the process that could transform the money market fund industry."
