FSOC Proposes Money Market Reforms: You Should Know…

“The FSOC’s proposals also set the stage for fresh tension between a vocal group of regulators, who feel that despite limited reforms in 2010, money market funds are still vulnerable to havoc-wreaking asset runs, and the fund industry, which has devoted significant public-relations efforts to arguing that reform would harm investors by making money market funds less viable investments.” (Rob Silverblatt, A New Chapter in the Money Market Saga, US News.com)

On November 13 2012, the Financial Stability Oversight Council voted to move forward with proposed recommendations for reforming the money market industry.

Reforming money-market funds has been a priority for regulators since 2008, when the US-based Reserve Fund (the country’s biggest money market fund) “broke the buck:”

“The problem was that it owned $785 million in Lehman Brothers’ commercial paper, so when the bank collapsed, the Reserve Fund could no longer claim that its shares were worth $1.” (Linette Lopez, Treasury Is Trying To Shame The SEC Into Doing Something About A Problem That Almost Brought Down The Global Economy, Business Insider)

But moving forward with reform has proved elusive: in August of this year, Securities and Exchange Commission Chair Mary Schapiro was forced to abandon the two such measures drafted by SEC staff.

For your reference, here’s a look at the three alternative – but not mutually exclusive – approaches proposed by the FSOC:

• Option One: Floating Net Asset Value:

“Under the first alternative, money market funds (MMFs) would be required to use a floating net asset value (NAV) instead of seeking to maintain a constant share price of $1 per share. FSOC believes that this approach ‘could make investors less likely to redeem en masse when faced with the prospect of even modest losses by eliminating the “cliff effect” associated with breaking the buck.’” (Pepper Hamilton)

• Option Two: NAV Buffer and “Minimum Balance at Risk” Limitations on Redemptions:

“MMFs would be allowed to maintain a stable share price but would be required to have a risk-based NAV buffer of up to 1 percent of the fund’s assets. In addition to the NAV buffer, MMFs would be a required to delay redemptions of a shareholder’s minimum balance at risk (“MBR”), defined as 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days.” (Ropes & Gray)

• Option Three: Stable NAV with NAV Buffer and Other Measures:

“The third option would impose a risk-based NAV capital requirement of three percent, as well as other standards. Such standards would include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The FSOC said that it would be open to a lower capital standard if it can be ‘adequately demonstrated’ that diversification requirements (and possibly other standards) would reduce the vulnerabilities of MMFs.” (Morrison & Foerster)

The updates:

Related reading:

Find related banking and finance law updates on JD Supra>>