As the Securities and Exchange Commission prepares to release new proposed reforms for money market funds this week, other financial regulators continue to observe the Commission’s process and emphasize their view that further reform is necessary to reduce systemic risk. For example, last Friday, Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, speaking at a conference on financial stability analysis co-sponsored by the Federal Reserve and the Treasury Department, reiterated her view further reform is warranted and the entire regulatory community, not just the SEC, should work together to enact that reform:
Greater regulatory transparency also can result from supervisors and regulators being more forceful and proactive in carrying out our expanded responsibilities. For example, in 2010, the Securities and Exchange Commission (SEC) imposed tougher rules on money market funds to bolster their solvency. However, some do not think these steps are sufficient to safeguard financial stability.
The Dodd–Frank Act gives the Financial Stability Oversight Council (FSOC) the authority to provide for more stringent regulations by recommending that the SEC apply new or heightened standards or safeguards. And, in fact, in an effort to address threats money market funds can pose to the financial system, the FSOC is considering whether to formally recommend that the SEC proceed with structural reforms of money market mutual funds, and has asked for public comments on several options designed to address the issue. In the interest of full and transparent disclosure, I should note that I, and each of the other 11 Federal Reserve Bank Presidents, co-signed a letter recently in support of the FSOC's efforts to address the risks to financial system stability that are posed by money market funds. Regardless of the final resolution, this new process enables the regulatory community, acting as a whole, to take action.
President Pianalto’s focus on joint efforts by financial service regulators to reduce systemic risk in the money market industry is consistent with the ongoing emphasis in regulatory circles on “macroprudential regulation” – that is, regulation that is focused less narrowly on regulating specific types of institutions, products or transactions, and more focused on the system as a whole. For example, speaking at the same conference, Richard Berner, Director of the Treasury’s Office of Financial Research noted that:
The macroprudential toolkit is the collection of policy instruments available to financial policymakers and supervisors to address system-wide vulnerabilities early and to respond to stress events as they occur. Importantly, we are beginning to turn from a bank-centric discussion of prudential tools to one that is truly macroprudential…. We must focus simultaneously on the specific channels — across institutions, activities and markets — through which threats to financial stability typically surface, such as defaults, runs, and fire sales. And we must seek policy instruments with the potential to reduce or neutralize these threats, such as capital requirements, liquidity requirements, and minimum haircuts.
Notably, the “policy instruments” identified in Berner’s remarks have each been discussed as possible approaches for the reform of money market funds. While the SEC’s proposal may well focus – as has been speculated in the press -- primarily on instituting a floating NAV for certain types of money market funds, the manner in which the Commission discusses the tools available to it may offer significant clues to how the SEC views its role in reducing systemic risk more broadly.