FSOC issues recommendations on money market reform

Mary Schapiro

The Financial Stability Oversight Council voted on Tuesday to release a set of three policy proposals aimed at convincing the Securities and Exchange Commission to take action on money market reforms.

The battle over money market reform dates back to 2008, when shares in the Reserve Primary Fund, the nation’s first money market fund, dipped below $1, the value generally given to money market shares. The drop sent panic throughout the entire money market industry, U.S. News & World Report reports.

Two of the FSOC’s proposals have previously been considered by the SEC, though they were removed from consideration after SEC Chairwoman Mary Schapiro was unable to garner enough support to push the proposals through.

The FSOC’s proposals will have a significant impact on retail investors, who rely on money market funds to stow away their assets, and adds further tension between regulators and the fund industry.

Regulators have voiced concern that, despite limited reforms implemented in 2010, money market funds are still risky and vulnerable to runs, while the fund industry maintains that reform would only hurt investors by making funds less feasible investments, according to U.S. News & World Report.

The first proposal would require money market funds to “float” net-asset values. Though money market shares are typically valued at $1, net-asset values frequently depart from the $1 target by small fractions. The FSOC proposal would require funds to report NAV fluctuations.

The second option, instead of requiring funds to float NAVs, would be for funds to maintain one percent capital buffers and limit shareholders’ ability to withdrawal more than 97 percent of their assets. The rule would apply to individuals with more than $100,000 invested in a fund and would require that funds establish a waiting period for the remaining three percent.

Additionally, the FSOC put forth a third recommendation that would require funds to maintain three percent capital buffers in addition to “other measures,” which may include “more stringent investment diversification requirements, increased minimum liquidity levels and more robust disclosure requirements,” U.S. News & World Report reports.

In issuing the proposals, the FSOC echoed former arguments used by Schapiro, saying that money market funds remain “susceptible to runs that can have destabilizing implications for financial markets and the economy,”  according to U.S. News & World Report.

The FSOC proposals will be available for a 60 day comment period following their publication in the Federal Register. After the FSOC makes a final recommendation to the SEC, the SEC would be required to adopt the measure or explain to the FSOC why it failed to do so.