"Only prime funds suffered runs on their assets and posed a systemic risk to the wider markets during the crisis," wrote Patricia Maleski, president of JPMorgan Mutual Funds, one of the world's largest MMF managers in the world overseeing $412 billion in fund assets, in a Jan. 14 letter. "Government and Treasury funds were a safe haven for investors leaving prime funds during the 2008 crisis, and government and Treasury debt enjoyed excellent liquidity across the spectrum."
While some stakeholders argued that regulators should differentiate between institutional and retail funds, JP Morgan's Maleski argued that there is "no difference in terms of exposure to credit risk between these classes of investors. Retail funds are not immune to a run on their assets, and so should be subject to the same regulatory protections."
Commenters also tackled other flaws they saw in the council's proposed recommendations.
For example, industry participants argued against using a floating NAV due to accounting, tax treatment, and operational considerations that would need to be taken into consideration.
"A requirement for MMFs to float NAVs would fundamentally reshape the product and its ability to deliver these core benefits to investors," said Maleski. "Floating the NAV has the benefits of providing transparency of market values to investors and reducing the possibilities for transaction activity that results in non-equitable treatment across all shareholders; however, it will likely give rise to a number of consequences for investors and market participants that should be examined rigorously and addressed in order to arrive at a constructive solution."
Broker-dealer and investment adviser firm Edward D. Jones & Co., which provides services to more than seven million clients, raised specific concerns that the reforms would have on individual investors who have long used money market funds as a key investment product.
"We believe any proposed reforms should seek to maintain money market mutual fund features that are critical to the needs of individual investors," wrote James Weddle, managing partner for Edward Jones, in a Feb. 15 letter. "Specifically, we are concerned that some aspects of the proposed recommendations, notably a floating NAV and delayed redemptions, would so fundamentally change the character and utility of money market mutual funds as to render them no longer attractive or useful to individual investors."
Using a floating net asset value, or NAV, would require individual investors and others to calculate taxable gains and losses on their money market funds that would be incurred because of market fluctuations on even minimal purchases or sales within the fund, Weddle said.
"Indeed, it would be incongruous for individual investors to have to consider the daily price fluctuations in their money market account prior to writing a check, making a purchase with their debit card or making a cash withdrawal at the ATM machine," said Weddle.
That concern was shared by others, including UBS Global Asset Management Inc., which argued that the council's proposal to require money market funds to float their NAVs would ultimately increase systemic risk.
A floating NAV would drive investors toward "higher yielding, short-term bond funds, which also have floating NAVs, increasing investors' interest rate and credit risk," wrote Robert Sabatino, managing director of the head of U.S. Taxable Money Markets for UBS.
Market participants also dislike the council's second option, calling for MMFs to hold capital. While they saw some benefits to this approach, which entails a first loss reserve that could be used in case of liquidation or day-to-day fluctuations in market-based values, they also saw several challenges. Those included the difficulty in raising capital in the current low-interest rate environment.
"Capital requirements can create barriers to entry," said Maleski. "Investors who delay their share purchases would receive all the benefits of the reserve but incur none of its costs. With regard to a dedicated amount of sponsor support, sponsors without access to capital would find it difficult to enter or remain in the market."
Buffers, others noted, would also inaccurately provide investors with a sense of security.
"Capital buffers are also likely to carry unintended consequences, as some funds may purchase riskier, higher-yielding securities to compensate for the reduction in yield," Vanguard's McNabb wrote. "As a result, capital buffers are likely to provide investors with a false sense of security."
"FSOC and SEC should not underestimate the unintended effects of a capital buffer. At the end of the day, capital buffers reduce total returns for investors in MMFs. A permanent, built-in reduction to returns may result in funds purchasing investments that are higher-yielding and more prone to default."
