NEW YORKIn the wake of the ongoing credit crisis and illiquid money market, much of it due to the failure of a single money market mutual fund, the
Money market funds have been stable throughout some of the most challenging environments, said Andrew J. Donohue, director of the SECs division of investment management, addressing
In fact, Donohue told the audience at the ICIs Equity, Fixed Income & Derivatives Markets Conference, There are three classes of money market fund investors: redeemers, purchasers and investors. It is easy in times of stress to focus on the needs of one and not the needs of all. Rule 2a-7 must be rethought, even though it has worked well for 37 years.
One possibility is to devise various types of money market mutual funds that accomplish these goals separately, Donohue said.
The SEC will also explore putting a cap on redemptions. Institutional investors can move large blocks of money. This can work to the detriment of shareholders, Donohue explained. Certainly, one weakness in the current rule governing money market funds is that it has no real focus on liquidity, he said.
Disclosure and risk are two other areas the SEC will review, seeking to provide better and more timely information about money market funds and their holdings.
Finally, the SEC will look into whether a $1 NAV or a $10 NAV is a more efficient pricing model; ensuring that orderly securities lending continues in times of stress to provide additional liquidity; and whether the SECs powers and oversight should extend to non-regulated cash management accounts, which have recently experienced the same investment and liquidity strains as money market funds, Donohue said.
Mutual fund executives can expect these and a wide range of other market-oriented regulations to restore order and safety toand, most critically, faith intrading and investing, speakers said.
Elusive Liquidity
Despite the overwhelming actions of the federal government to provide guarantees and absorb faulty debts, noted ICI President Paul Schott Stevens, The crucial elementfree and liquid trading in the money marketsremains elusive. Thus, the ICI will continue to work with the public sector and private; buy side and sell; funds, banks and dealersto find mechanisms to unfreeze these markets. We are continuing our urgent discussions with all responsible policy-makers, Stevens said.
The governments goal is not to usurp the free markets but to remove the excesses of the past and restore equilibrium through balanced regulatory oversight, said Anthony Ryan, acting under secretary for domestic finance at the U.S. Department of the Treasury. The hope is to reengineer the capital markets and regulate them properly so that they can once again work competitively, innovatively and efficiently on their own, Ryan said.
In the wake of these actions and the Emergency Economic Stabilization Act of 2008, the financial landscape will be quite different, he predicted.
For starters, later this week the Presidents Working Group on Financial Markets will release its recommendations on six areas at the heart of the financial crisis: mortgage origination, capital market discipline and liquidity, ratings on structured credit, risk management, adequate and updated regulatory policies and the OTC derivative market.
Market Stability Regulator
Possibly the biggest contribution from the Treasury, Ryan said, would be the creation of a market stability regulator that would provide transparency and disclosure.
The market stability regulator would have the ability to evaluate capital, liquidity and margin practices across the entire financial system and their potential impact on overall financial stability, Ryan said.
The Treasury is also intent on updating outdated 20th Century laws and structure." he added.
Given the diversity of market participants, the constant innovation undertaken by market practitioners, the growing complexity of financial instruments and the convergence of financial intermediaries and trading platformsall within a global contextestablishing a more robust, nimble regulatory structure is critical, the Treasury under secretary said.