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
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
Date posted: March 3, 2013