Treasury Secretary Timothy Geithner has written a letter asking the members of the Financial Stability Oversight Council (FSOC) to take action on money market funds. His first recommendation is for the FSOC to use its authority under the Dodd-Frank Act to formally recommend that the SEC implement money market fund reform. FSOC staff is currently working on drafting such a formal recommendation. If the FSOC decides to exercise this authority, the SEC would be forced to adopt the recommended standards or explain to the FSOC in writing why it has failed to act. The proposed recommendation that will be presented to the FSOC for consideration will include (1) the money fund reform options supported by SEC Chairman Schapiro (floating NAV and a capital buffer combined with a 3% holdback) and (2) a third option that would impose capital and enhanced liquidity standards, potentially coupled with liquidity fees or redemption “gates.”
Secretary Geithner also states that the FSOC should, in parallel, take action itself on money funds. He asks the Council to closely evaluate money funds to identify firms that could pose a threat to US financial stability. Designating money funds or their sponsors would subject those firms to supervision by the Federal Reserve and give the Federal Reserve authority to impose enhanced prudential standards, potentially including the reform options discussed above.
In his letter, Secretary Geithner outlines additional alternatives to impose tighter regulations on money market funds. He urges individual regulators, particularly the bank regulatory agencies, to evaluate their authorities to impose capital surcharges on entities they regulate (e.g., bank sponsors of money market funds). He also suggests that the FSOC may attempt to use authority in the Dodd-Frank Act to regulate systemically important payment, clearing and settlement activities to regulate money funds on an industry-wide basis.
A copy of the letter can be found here.