The International Organization of Securities Commissions (IOSCO) said it will continue its work on policy recommendations for money market fund (MMF) reform, regardless of the US SECs abandonment of moves to regulate the $2.6 trillion industry.
IOSCOs statement comes three days after that of SEC chair Mary Schapiros regarding the regulation of the industry. In her statement, Schapiro noted that three commissioners, constituting a majority of the SEC, would not support a proposal to reform the structure of MMFs. The proposed structural reforms were intended to reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts, she said.
IOSCO chair Masamichi Kono, while not directly commenting on the statement of a member organization, reaffirmed that IOSCO will continue its work on the basis of the mandate given to it by the G20 Heads of State and the Financial Stability Board, to develop policy recommendations for strengthening oversight and regulation of the shadow banking system, including MMFs.
The SEC had for several years been working on a proposal to reform the money market funds industry. However, the refusal of the three commissioners to support the proposals means it cannot be published for public comment and there is no longer a need to formally call the matter to a vote at a public commission meeting.
MMFs exist as a result of a special exemption granted by the SEC three decades ago, allowing them to seek to maintain a stable $1.00 net asset value by using penny rounding and amortized cost accounting. As a result of this exemption, these funds do not have to comply with the mark-to-market valuation standards required for all other mutual funds. In exchange, money market funds relying on rule 2a-7 must follow strict limitations on their investments. Before long, retail investors were using them as substitutes for checking accounts -and institutional investors were using them as vehicles for their cash management. However, the $62.5 billion Reserve Primary Fund broke the buck in the fall of 2008, shattering the stability that was created since 1983. Due to its size, the impact from that event did not spread to other money market funds or the broader market. During that period, however, numerous sponsors of money market funds supported the funds’ stable $1.00 NAVs by purchasing out troubled securities at above-market values; injecting cash infusions into the funds; and otherwise engaging in capital support of their money market funds. In a matter of days, panicked investors had redeemed not only massive amounts from the Reserve Fund, but more than $300 billion from prime money market funds across the industry. The short term credit markets froze.
To stop the growing damage, the Treasury Department stepped in by temporarily guaranteeing investments in money market funds. In short, every taxpayer in the nation found themselves a partial insurer of a $multi-trillion investment product.
In its work following the collapse of the Reserve Primary Fund, the SEC developed alternatives for regulating MMFs including, first, that money market funds float the NAV and use mark-to-market valuation like every other mutual fund.
Second, and alternatively, a tailored capital buffer of less than 1% of fund assets, adjusted to reflect the risk characteristics of the money market fund. This capital buffer would be used to absorb the day-to-day variations in the value of a money market fund’s holdings. The Commission adopted those reforms in January of 2010.
Since the three commissioners would not accept the staff proposal, Schapiro has urged other policy makers to take action. The fight over regulating the industry will now move to the Financial Stability Oversight Council, a panel of regulators created by the Dodd-Frank Act. Congress charged FSOC with identifying threats to U.S. financial stability.
Furthermore, the IOSCO Committee 5 on Investment Management will meet at the end of August to consider the extensive public feedback received to its consultation report Money Market Fund Systemic Risk Analysis and Reform Options of April 27 2012, and to elaborate draft final recommendations for addressing regulatory reforms to mitigate MMFs susceptibility to runs and other systemic risks. The IOSCO Board will determine IOSCOs further course of action on this subject at its meeting in Madrid on Oct. 3-4 2012, and will report to the G20 Finance Ministers meeting in November.
(JDC)