Letter to the SEC on Money Market Fund Reform
12 Pages Posted: 14 Sep 2009
Date Written: September 9, 2009
In the wake of the near-calamitous run on Money Market Funds during last fall’s financial meltdown that produced, among other things, an emergency Treasury deposit guarantee program, the SEC has recently proposed a modest set of reforms. The reform package aims to improve the quality of MMF portfolio securities, shorten maturities, enhance portfolio liquidity, and provide a smoother resolution process for occasions when an MMF has “busted the buck.” The Comment Letter argues that the SEC has failed to grapple with the fundamental problems with MMFs revealed by last fall’s financial crisis and, in the main, its proposals will exacerbate systemic fragility, not reduce it. It is widely appreciated that MMF holders receive an unpaid-for benefit through an implicit, if imperfect, government guarantee of their accrued balances. The flaw with the SEC’s approach is that the regulatory effort to substitute for explicit deposit insurance and to limit the implicit subsidy through restrictions on MMF portfolios adds systemic risk to financial intermediation by heightening the pressure on short-term money markets in the critical function of maturity transformation. This flaw turns out to be fundamental and requires a rethinking of the general MMF framework.
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