MMF Regulations – What’s Next?

The much-anticipated vote on proposed changes to money market fund regulations was called off by SEC Chairwoman Mary Schapiro just days ago after she apparently failed to persuade the “swing vote,” Commissioner Luis Aguilar, to support her proposal. Ms. Schapiro’s reforms specifically targeted the issue of shareholder risk and they included the implementation of a combination of capital buffers, redemption holds and floating NAVs which were designed to discourage or prevent runs on money market funds.

Although the SEC’s vote was canceled, we believe the proposal’s goal to reduce shareholder risk is right on target. The stability of a money market fund’s NAV and its daily liquidity are greatly influenced by the steadiness of the investors of the fund. However, gaining effective control of shareholder risk in pooled products such as money market funds has proved to be very difficult. Over the years, financial regulators have tightened the rules governing money market funds a number of times and the result is a risk/reward relationship that is remarkably different from what was enjoyed during the early days of the investment vehicle. Notably, each subsequent revision to money market fund rules has shortened the average maturity of money market funds, thus reducing the reward side of the equation. And while it is debatable that shorter WAMs have reduced shareholder risk, there is no question that the downward adjustments to WAMs also have reduced returns for shareholders.

We expect that some form of money market fund reform will emerge eventually, but whether it will be proposed by the SEC, the Fed or the Financial Stability Oversight Council (FSOC) remains to be seen. In any event, Treasurers and CFO’s should be prepared for additional changes to the functions and benefits of money market funds in the not too distant future. As an industry leader that aims to identify and minimize money market fund risk, we have tools for identifying, quantifying and helping to control shareholder risk through our FundIQ® platform. Of course, it’s possible to reduce shareholder risk through the adoption of separately managed accounts. With all of the regulatory adjustments to money funds over the years, and with further changes likely, it might be a worthwhile exercise to model out the potential risk reduction, cost savings and yield gains that separate accounts may offer you.

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Best Regards,

Ben Campbell
President & CEO