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Money Fund Providers Weigh in on SEC Staff Analyses

In March, the SEC staff published reports prepared by the SEC’s Division of Economic and Risk Analysis (“DERA”) with “potential to be informative for evaluating final rule amendments for the regulation of money market funds.”  Commenters addressed each area covered by the staff’s analyses.

Liquidity costs during the financial crisis

A number of commenters took issue with the data the staff used as the basis for its liquidity cost study, finding that the report overestimated liquidity costs.  In its comment letter, Fidelity addressed in detail the staff’s liquidity cost study.  Fidelity’s letter asserts that DERA’s report overestimates the costs of liquidity because it relies on TRACE data, which provides spreads in secondary market corporate bond transactions.  Fidelity states that this data includes trades that are smaller than typical money market fund transactions and in securities that money funds rarely holds.  Instead of relying on this data to determine liquidity costs, Fidelity suggests that the SEC should instead compare crisis level and non-crisis level spreads on Tier 1 securities.  Fidelity asserts that Tier 2 securities do not need to be considered as such securities would not be relied on to provide liquidity during periods of market stress.  Fidelity provided an estimate of liquidity premium by comparing prices of its own portfolio securities as of September 11, 2008 with the sales prices in the week immediately following the Lehman bankruptcy.  Fidelity’s data shows that the average spread was 12 basis points, with a maximum spread of 57 basis points.  While Fidelity acknowledged that liquidity premiums in future crises could be greater, it maintained that a 1 percent liquidity fee would nonetheless be a “reasonable and conservative level.”

The exposure of government money market funds to non-government securities

Commenters also took issue with the staff’s report analyzing government money market funds’ investments in non-government securities.  In its comment letter, BlackRock addressed DERA’s conclusion that few government money market funds invest in non-government securities and therefore that a reduction in the currently permitted 20 percent investment would not result in significant money market fund rebalancing.  While BlackRock agreed that this is currently true, it questioned whether SEC rule changes would result in a change in government money market fund holdings.  BlackRock suggested allowing money market funds to retain the ability to invest up to 20% of assets in non-government securities initially, and after further study once other reforms are in place, phasing out the ability to invest in other securities over time should the data find that government funds do not change their holdings of non-government securities.  Invesco and Wells Fargo agreed that government funds should retain the ability to invest up to 20 percent of assets in non-government securities, with Wells Fargo emphasizing the importance of government money market fund disclosure to describe their investment policies.  Fidelity supported allowing government money market funds to avoid any structural changes only if the funds are invested 100 percent in government securities.

Municipal money market fund exposure to parents of guarantors

Commenters questioned whether the staff’s analysis supported ending a municipal money market fund’s ability to invest up to 25% of its total assets in securities subject to guarantees or demand features of a single institution.  Wells Fargo’s letter noted that the concentration by money market funds in the top give guarantors indicated that portfolio managers did not view the top 20 guarantors as interchangeable and that supply issues may also account for some of the concentration.  BlackRock agreed that market supply issues could account for the concentration in guarantors, encouraging further analysis of the market supply of securities subject to guarantees or demand features.  The ICI’s letter echoed the importance of preserving the 25 percent basket.  The ICI encouraged the SEC, should it remain concerned about a money market fund’s exposure to a single credit provider, to consider adding limitations to individual providers in the 25 percent basket.

Demand and supply of safe assets in the economy

The comment letters also were critical of DERA’s assumptions regarding the supply of safe assets in the economy.  The ICI commented on DERA’s finding that supplies of government securities would be able to meet demand caused by changes in money market fund rules and its analysis of the availability of domestic government securities and “global safe assets.”  The ICI asserted that the supply of “global safe assets” was not relevant when considering whether funds could find adequate supply of U.S. government securities in response to structural changes in money market funds.  The ICI stated that the better measure is the amount of U.S. Treasury and agency securities with maturities of less than one year and repurchase agreements backed by government securities, with those markets consisting of $4 trillion and $1.2 trillion, respectively, as of March 2014.