On September 12, the presidents of the 12 regional Federal Reserve banks submitted a letter to the SEC urging the commission to take a tougher stance on money market reforms, including extending the floating NAV to retail funds.
The letter both conveys strong support of the floating NAV alternative, and firmly opposes the stand-by liquidity fees and temporary redemption gates alternative because, the letter asserts, those provisions of the proposal “do not meaningfully reduce the risk that MMMFs pose to financial stability.”
The letter argues that some steps need to be taken to augment the effectiveness of the floating NAV proposal. The letter asks that all prime MMMFs, including those characterized as “retail”, should be subject to the floating NAV requirement, despite the fact that retail investors did not heavily redeem shares during the crisis. The letter notes that “it seems imprudent to assume that their behavior in the future will be the same as in the past.” The letter also encourages the SEC to consider more strict requirements for “government” exemptions, tightening the diversification requirements for government MMMFs or increasing the minimum percentage of U.S. government-related securities required to claim the exemption.
The letter strongly opposes the alternative proposals that would rely upon liquidity fees and temporary redemption gates. The presidents argue that “stand-by liquidity fees and temporary redemption gates do not meaningfully address the risk to financial stability posed by MMMFs” because they do not eliminate run risks as “investors could have an incentive to redeem before their fund breaches the weekly liquid assets threshold.”
To read the full letter, click here.