Abstract

http://ssrn.com/abstract=2456255
 


 



The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform


Jill E. Fisch


Institute for Law and Economics, University of Pennsylvania Law School

August 14, 2014

U of Penn, Inst for Law & Econ Research Paper No. 14-24

Abstract:     
Since the 2008 financial crisis, in which the Reserve Primary Fund “broke the buck,” money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis, in part because widespread redemption demands during the days following the Lehman bankruptcy led to a freeze in the credit markets. The response has been to deem MMFs a component of the nefarious shadow banking industry and to target them for regulatory reform.

Determining the appropriate approach to MMF reform has proven difficult. Banks regulators prefer a requirement that MMFs trade at a floating NAV rather than a stable $1 share price. By definition, a floating NAV would prevent future MMFs from breaking the buck, but it is unclear that it would eliminate the risk of large redemptions in a time of crisis. Other reform proposals have similar shortcomings. More fundamentally, pending reform proposals could substantially reduce the utility of MMFs for many investors, which could, in turn, dramatically reduce the availability of short term credit.

The complexity of regulating MMFs has been exacerbated by a turf war among regulators. The Securities and Exchange Commission has battled with bank regulators both about the need for additional reforms and about the structure and timing of any such reforms. Importantly, the involvement of bank regulators has shaped the terms of the debate. To justify their demands for greater regulation, bank regulators have framed the narrative of MMF fragility using banking rhetoric. This rhetoric masks critical differences between banks and MMFs, specifically the fact that, unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. Because of this structural difference, sponsor support is not a negative for MMFs but a stability-enhancing feature.

The difference between MMFs and banks provides the basis for a simple yet unprecedented regulatory solution: requiring sponsors of MMFs explicitly to guarantee a $1 share price. Taking sponsor support out of the shadows provides a mechanism for enhancing MMF stability that embraces rather than ignoring the advantage that MMFs offer over banks through asset partitioning.

Number of Pages in PDF File: 72

Keywords: regulation of financial markets, banking regulation, securities law and regulation, money market funds, mutual funds, MMFs, SEC, securities, net asset value, financial crisis, shadow banking, systemic risk, financial crisis

JEL Classification: G01, G23, K22

working papers series





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Date posted: June 19, 2014 ; Last revised: August 15, 2014

Suggested Citation

Fisch, Jill E., The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform (August 14, 2014). U of Penn, Inst for Law & Econ Research Paper No. 14-24. Available at SSRN: http://ssrn.com/abstract=2456255 or http://dx.doi.org/10.2139/ssrn.2456255

Contact Information

Jill E. Fisch (Contact Author)
Institute for Law and Economics, University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-3454 (Phone)
215-573-2025 (Fax)
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