Federated Hermes, the sixth largest manager of money market mutual funds in the world according to Crane Data, also submitted a comment letter to the Financial Stability Board in response to the FSB's "Policy proposals to enhance money market fund resilience: Consultation Report". Federated's Deborah Cunningham and Dennis Gepp state, "Federated Hermes has been in business since 1955 and has more than 45 years of experience managing money market funds ('MMFs').... Federated Hermes manages Low-Volatility Net Asset Value MMFs ('LVNAV'), and Public Debt Constant NAV MMFs ('CNAV') domiciled in the EU, and LVNAV and Variable NAV MMFs ('VNAV') in the UK. Federated Hermes also manages MMFs in the United States [and] accounts for institutional customers that invest in money market instruments, as well as US local government investment pools that invest in money market instruments. In all, Federated Hermes manages more than $400 billion (€330 billion) in money market assets, the vast majority of which have ESG integrated into their investment process. We appreciate the opportunity to comment on the consultation report on the FSB's policy proposals to enhance money market fund resilience that was published on 30 June 2021." (Note: Federated's Cunningham is scheduled to co-keynote our upcoming Money Fund Symposium conference, Sept. 21-23 (live) in Philadelphia. We hope to see you there!)
The letter's "Executive Summary" explains, "In March 2020, financial markets around the world experienced a liquidity crisis caused by the affirmative decisions of governments around the world to shut down their local economies in response to the Covid-19 Global Health Pandemic ('Liquidity Crisis'). Contrary to assertions made in the FSB report, the Liquidity Crisis was not caused or amplified by MMFs and any statements to such effect are simply untrue and are not supported by the data."
It continues, "In assessing the events of the Liquidity Crisis, it is critically important to follow the data and understand the timeline of events as they unfolded and how the markets were impacted. The Liquidity Crisis started with public reaction to the then rapidly spreading COVID-19 pandemic, the very sharp contraction of the real economy in early March as people stayed home to avoid contracting the illness under government-imposed lockdowns in many jurisdictions around the globe. These government actions to stem the pandemic sharply reduced investor confidence, price discovery and liquidity across all markets. Predictably, a contagion then ensued as the prospect of the worst pandemic in 100 years shut down global markets."
Federated comments, "The data clearly shows that the Liquidity Crisis did not discriminate against any one asset class, it impacted funds across the spectrum and investors of all types. While MMFs experienced significant liquidity pressure in March 2020, such pressure exposed a critical error in previous regulatory reform efforts: the improper linkage of potential liquidity fees and gates to a MMF's weekly liquid asset ('WLA') requirement. This linkage created an unnecessary incentive for investors to redeem and led to artificially high redemptions in both the United States ('US') and in the European Union ('EU') during the Liquidity Crisis. This linkage of WLA and potential imposition of fees and gates is without question the key vulnerability in US and EU MMFs that should be remedied, and it is supported by the data."
They write, "In addition to delinking the WLA thresholds from the potential imposition of fees and gates, the FSB should expand its review and focus on improving the resilience of the short-term funding markets ('STFMs'). The FSB must better analyse how the STFMs function and the role of their market participants. A proper analysis of the STFMs needs be a collaborative endeavour. MMFs are but one small player in the STFMs and playing a role in the markets and reacting to market stresses should not be confused with causing such market stresses. Additionally, vulnerabilities in the STFMs should not be confused or designated as vulnerabilities in MMFs. Most of the vulnerabilities identified in the FSB report are inherent to the STFMs, not MMFs."
Cunningham and Gepp tell the FSB, "We appreciate the desire for central banks to avoid having to step in and provide liquidity in the markets and we fully support any enhanced regulation that makes sense, is supported by the data, and increases the safety and stability of MMFs. However, in a Liquidity Crisis caused by affirmative actions by governments around the world, central banks, however reluctant, will need to step in and support market-wide liquidity. A desire to eliminate any risk that central bank intervention will be required again is simply not realistic, contrary to a fundamental tenet of central banks (to provide liquidity) and ill-conceived if one believes regulating MMFs out of existence will accomplish an impossible objective."
They write, "To enhance the safety and stability of MMFs the FSB should focus on the following Reforms which would strengthen and enhance the safety and stability of MMFs in the US and EU: 1. Eliminate the Link Between WLA Requirements and Potential Fee/Gate Implementation. Reducing/removing the ill-conceived regulatory incentive to runs by delinking the 30% WLA requirement and potential imposition of a fee or gate addresses the FSB's point on 'reducing the demand from the non-bank financial system for liquidity rising unduly in stress periods.'"
Federated's letter also suggests, "2. Enhance Know Your Customer ('KYC') Requirements. In the EU, MMFs are already required to 'establish, implement, and apply procedures and exercise all due diligence with a view to anticipating the effect of concurrent redemptions by several investors, taking into account at least the type of investor, the number of units or shares in the fund owned by a single investor and the evolution of inflows and outflows' as part of KYC requirements set forth in Article 27 of the Money Market Fund Regulation ('MMFR'). However, for an intermediated investor, whilst MMF managers are required to ask for such information, intermediaries are not subject to a regulatory obligation to provide the information. In the US, the scope of Rule 22c-2 under the Investment Company Act of 1940 should be expanded to apply to MMFs (currently excluded)."
It also recommends, "3. Short-Term Funding Market Reform. Enhancing the resiliency of STFMs by addressing the vulnerabilities in the STFM structure addresses the FSB's point on 'ensuring the resilience of the supply of liquidity in stress; and assessing what can, or should, be done by central banks to backstop market functioning effectively, without creating incentives for market participants to take on more risks'."
The comment letter adds, "In addition to the reforms noted above, to further enhance the safety and stability of MMFs in Europe, the FSB should also focus on the following reforms: 1. With a MMF's liquidity delinked from the potential imposition of a liquidity fee or gate we believe that the current regulatory requirements of 10% daily and 30% weekly (subject to increase by the KYC Rule) are appropriate and should not be increased. These levels are consistent in both the EU and the US but for one type of EU MMF (VNAV MMFs) which are subjected to lower liquidity requirements, which likely contributed to its stress during the Liquidity Crisis. As such, we support increasing the required liquidity levels of EU VNAV MMFs from 7.5% daily and 15% weekly liquidity, to 10% daily and 30% weekly liquidity requirements consistent with other EU MMFs and US VNAV MMFs."
Federated says, "MMFs in the EU are also subject to arbitrary restrictions on holding high-quality government securities, which is inconsistent with the economic realities of these securities. We support removing the arbitrary 17.5% restriction on including high-quality government securities as WLA for EU MMFs as, through both the 2008 Financial Crisis and Liquidity Crisis, high-quality government securities have proved to be the most liquid; and 3. MMFs in the EU are also restricted on their ability to use repo due to a drafting inconsistency. The global standard should support the inclusion of 5-day repo as eligible WLA. The conflict between Article 15 of the EU MMFR, which limits investments in repo to 2 days, and Article 24 of the MMFR, which specifically sets forth the inclusion of 5-day repo as part of an EU MMF's WLA, should be corrected."
Finally, they summarize, "MMFs are important short-term high-quality diversified and transparent investment products which have provided significant benefits to investors and issuers in the US and EU since their inception. MMFs in the EU and the US are the highest regulated product in the market and they are fully transparent to not only regulators but to investors. MMFs are 100% capitalized and investment risk remains with the investors. It is critically important that MMFs remain a viable product available for global investors."
