Abstract

http://ssrn.com/abstract=2227169
 


 



Comment Letter to Financial Stability Oversight Council on Money Market Fund Reform


Jeffrey N. Gordon


Columbia Law School; European Corporate Governance Institute (ECGI)

February 28, 2013

Columbia Law and Economics Working Paper No. 441

Abstract:     
This letter on Money Market Fund Reform was submitted in response to the Financial Stability Oversight Council’s proposals of November 2012. I endorse the so-called “Minimum Balance at Risk Proposal,” in which sponsors would contribute or raise capital of one percent of a MMF’s assets while users would be subject to delayed redemption of three percent of their MMF account over $100,000. This approach could cause sponsors to internalize cost of portfolio security selection while forcing large MMF users to internalize some of the costs of running on the fund. The letter has one novel legal argument, which is that the Dodd-Frank Act itself appears to contemplate capital for MMFs. Since the practical effect of DFA's tightening of the Fed's emergency lending authority (Fed Res Act sec.13(3)) is to require a collateral haircut, MMFs (especially with fixed NAV) will need loss absorbing capital to access a Fed liquidity facility. If they do a repurchase agreement without capital, they may well break the buck; the requirement that the Fed evaluate the collateral may force a revaluation of portfolio assets that may threaten $1 fixed NAV at other MMFs as well as the borrowing Fund.

MMFs are a novel financial intermediary, which arose out of regulatory arbitrage with an appeal principally for retail users who wanted a better interest rate deal than banks could offer. Some years later, institutional users found MMFs. These are cash-laden parties such as non-financial corporations, pension funds, securities lender, and asset managers, that want more safety than what the official banking system offers and also unrestricted liquidity, all without paying the costs of systemic stability. That is not possible -- unless, as now, the taxpayers bear the costs when the systemic bill comes due. The appeal of MMFs is the offer of a credit-screened diversified portfolio of financial assets that is safer than deposits in a single bank but highly liquid. If that value proposition holds, then the small restriction on liquidity and remote loss-bearing contingency should not be a significant disincentive for the institutional MMF user.

Number of Pages in PDF File: 36

Keywords: money market funds, non-banks, systemic risk

JEL Classification: G18, G23, K22

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Date posted: March 3, 2013  

Suggested Citation

Gordon, Jeffrey N., Comment Letter to Financial Stability Oversight Council on Money Market Fund Reform (February 28, 2013). Columbia Law and Economics Working Paper No. 441. Available at SSRN: http://ssrn.com/abstract=2227169 or http://dx.doi.org/10.2139/ssrn.2227169

Contact Information

Jeffrey N. Gordon (Contact Author)
Columbia Law School ( email )
435 West 116th Street
Ctr. for Law and Economic Studies
New York, NY 10027
United States
212-854-2316 (Phone)
212-854-7946 (Fax)
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
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