The Securities and Exchange Commission (SEC) recently proposed to change both the reporting structure for money market funds (MMFs) and the transparency behind the net asset value (NAV) calculation, to make it easier for MMF investors to understand the risk involved in their investments. In particular, this involves new reporting requirements and changes to the NAV calculation of funds, both of which could carry high costs for regulatory compliance.
In addition, the SEC’s proposals include liquidity fees and redemption gates as part of a MMF’s investment scheme. The SEC hopes that the combination of these measures with the floating NAV will alert investors to the risks of MMFs and limit contagion/systemic risk.
However, these are controversial proposals: Since June, the consultation has received more than 1000 letters of feedback, with many expressing concern over the effectiveness of the new proposals to curb potential runs, inform investors, and to stabilise the MMF in question. For instance, one firm’s response to the proposals argued that the new changes would negatively impact the efficacy of the NAV in promoting fund performance. Regarding the proposals’ potential impact on levels of investment, the letter noted that investors will have a more difficult time investing in MMFs when they are confronted with possible floating NAVs and hindrances to funds withdrawals, especially if more efficient options might be available.
Other interested non-MMF groups listed several issues arising from the proposed regulation, including the lack of investor insight to be gained from changing the NAV structure as well as new projected costs of regulatory compliance and implementation, which one estimated at $1.8 billion in initial costs and up to $2.5 billion in continual operational costs. If the cost figures are accurate, this would only add to the building financial burden that new regulations have placed on financial services firms operating under similar terms.
Aside from the potential new costs of operating, the implementation of the new rules could also fall short of regulating the MMFs in the way that the SEC may be angling for. Former Federal Reserve Chairman Paul Volcker has stated his position on the reforms, noting the MMFs should be regulated like banks and mutual funds. A paper written by three Harvard Business School professors takes this argument further, claiming that new regulations take more notice of the need to keep capital reserves available to provide for on-demand investments.
While it is clear that the SEC’s proposals were intended to strike a balance between MMF interests and the stability for investors, there appears to be minimal consensus other than within the SEC’s voting chambers on a satisfactory outcome. As Europe prepares similar regulation proposals on MMFs for implementation, including redemption gates and capital buffers, the necessity to understand exactly how MMFs differ from one another and could be subject to different levels of scrutiny depending on their size, investment term lengths, type, etc. is critical.
Moving forward, the MMF regulation debate should be expected to heat up, especially given the protests above from both fund proponents and hard-line regulators, representing both sides of the argument. As a result, firms need to make their concerns known on both sides of the Atlantic, and help to define a globally coherent regulatory framework for MMFs.