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IMF Calls for More MMF Reform, ICI Rebuts

The IMF criticizes the regulatory treatment of money market funds and offers several recommendations in a recent publication. The report notes that the funds enjoy features “that support[] the appearance of money-like liabilities,” yet are not “subjected to reserve requirements and deposit insurance levies.” The IMF criticizes the ability of money market funds to hold securities as collateral that they would not be permitted to hold outright, noting that the funds “could be in breach of SEC rules—notably those governing maturity of assets—where they take possession of the collateral after a counterpart failure, perhaps leading to forced sales and broader market disruption.” As a result, the IMF suggests that regulators should consider restricting collateral to the type of securities that the funds are able to hold outright.

The IMF also notes concerns regarding the types and extent of reforms the SEC implemented. The report suggests that “[t]he existence of redemption gates may however lead to damaging pre-emptive runs,” citing a study from the staff of the Federal Reserve. Additionally, “a fund seeking to maximize value for its own investors would likely not consider the externalities of imposing gates, and once it had imposed gates, contagion to other MMMFs is possible given the similarity of portfolios across the industry.” The report suggests that many fund managers will reposition their funds as government money market funds to avoid redemption restrictions to meet sweep account objectives. The IMF worries that “longer-term, the structural shift away from credit product will mean that private sector borrowers will likely have to pay relatively more for funds as compared to the Government at a time when other regulatory initiatives (e.g., LCR) have also increased the demand for high quality liquid assets.”

The report criticizes the SEC’s approach to applying redemption restrictions and a variable NAV only to some funds. It notes that while government money market funds, which are not subject to redemption restrictions and may maintain a stable NAV under the new rules, pose relatively low risk, they are not completely immune from risk. For example, as debt ceiling negotiations became tense in October 2013, “there was a real prospect that some Treasury securities were not going to be redeemed on their due dates.” Under the new rules, “[w]ith investors treating their units in the funds as money-like liabilities, together with a commitment to a constant NAV and with no mechanism to manage redemption risks, the scene could again be set for an investor run, albeit under quite different circumstances than in 2008.” Instead, the report argues that the floating NAV requirement should be applied to all types of money market funds and suggests that the FSOC should move to standardize definitions of “cash” and “cash-equivalent,” presumably because the SEC is applying those terms to floating NAV money market funds.

The ICI pushed back on many of the IMF’s assertions in a recent post. The ICI takes issue with the IMF’s call to float the NAV of government money market funds, finding that “the IMF offers no credible evidence to back up its recommendation.”  The article states that government money market funds “easily accommodated redemptions” during the period, noting that the funds daily liquidity of 63 percent and weekly liquidity of 85 percent at the end of September 2013. The ICI also notes that during the same period, short-term government bond funds with floating NAVs also saw outflows during the debt-ceiling issue, leading to the conclusion that a variable NAV was unrelated to the redemptions seen. Additionally, the ICI points out that if the government failed to pay maturing debt or allowed agency default (an extremely unlikely event), the event would impact the entire financial system, not just government money market funds. Lastly, the ICI notes that government money market funds have experienced inflows in past market stress events.