On Tuesday, November 13, 2012, Treasury Secretary Tim Geithner will preside over an open session of the Financial Stability Oversight Council. The Council will discuss, among other topics, proposed recommendations regarding money market mutual fund reform pursuant to the Council’s authority under section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Geithner warned in September that the council of regulators was likely to step in if the Securities and Exchange Commission did not act to address reform. SEC Chairman Mary Schapiro has attempted to push forward on a reform proposal, but has been unable to win approval from the agency's board.
In a letter to FSOC, Geithner said money market mutual fund reforms are ""essential to financial stability," and said the Dodd-Frank Act "gives the council both the responsibility and authority to take action to address risks to financial stability if an agency fails to do so."
He said the council should issue a set of proposals, including two alternative reforms proposed by Schapiro and a third alternative that would impose capital and enhanced liquidity standards.
The money market mutual fund industry has protested the reforms as too stringent.
Possibilities include floating the net asset values of money market funds, or requiring them to hold a capital buffer of adequate size — "likely less than 1%" — to absorb fluctuations in the value of their holdings.
Geithner urged the council to carefully evaluate the money market fund industry to determine which firms might pose a threat to financial stability. Designating certain MMFs — or their sponsors or investment advisers — would subject those firms to enhanced supervision by the Federal Reserve Board, which would be able to impose enhanced prudential standards.
Geithner noted that, alternatively, the council could designate systemically important payment, clearing or settlement activities under Title VIII, which would enable heightened risk management standards for the entire industry.
Regulators remain concerned that money market mutual funds are vulnerable to runs, as seen during the financial crisis four years ago.