Money Market Changes Delayed

The Securities and Exchange Commission Chairman wants to reform money market funds, and Congress ordered the SEC to do so. I’ve covered the proposals in the past here and in Retirement Watch. The main proposals were to remove the ability of the funds to report a $1 per share value when the values of their assets fluctuate. The other is to require the companies operating the funds to maintain reserves to cover liquidation requests.

The proposal is dead for now, because three of the five SEC commissioners announced they would vote against the proposal. So the SEC chairman has delayed consideration of the proposal. Money fund sponsors lobbied aggressively against the proposals. They would increase the cost of doing business in a sector that already is unprofitable because of the Federal Reserve’s zero interest rate policy. In the meantime, Treasury and the Federal Reserve are considering implementing some form of regulation on their own. They fear money market funds remain susceptible to runs and won’t be able to meet redemption requests.

It’s true that the topic is more complicated than simple declarations of “reform them” would suggest. And not all parts of Schapiro’s proposals necessarily had equal merit (we think having more capital and a holdback are good ideas; we genuinely are uncertain whether requiring a floating NAV is a good idea).

But that simply means that reforms should be implemented carefully, not that there shouldn’t be any. For instance, we recognise that margins for many of these funds are currently razor-thin, and also that right now they are an important part of money markets. Much like with capital requirements for banks, forcing MMFs to hold more capital should be done in such as way as to address the longer-term systemic risk without causing short-term havoc — over time.