Reforms for money market funds

»» Impose for the first time daily and weekly minimum liquidity requirements and require regular stress testing of a money market fund’s portfolio.
»» Tighten the portfolio maturity limit currently applicable to money market funds and add a new
portfolio maturity limit.
»» Raise the credit quality standards under which money market funds operate. This would be
accomplished by requiring a “new products” or similar committee; encouraging advisers to follow best practices for determining minimal credit risks; requiring advisers to designate the credit rating agencies their funds will follow to encourage competition among the rating agencies to achieve this designation; and prohibiting investments in “Second Tier Securities.”
»» Address “client risk” by requiring money market fund advisers to adopt “know your client” procedures and requiring them for the first time to disclose client concentrations by type of client and the potential risks, if any, posed by a fund with a client base that is strongly concentrated.
»» Enhance risk disclosure for investors and the market and require monthly website disclosure of a money market fund’s portfolio holdings.
»» Assure that when a money market fund proves unable to maintain a stable $1.00 NAV, all of its
shareholders are treated fairly…
»» Enhance government oversight of the money market by developing a nonpublic reporting regime for all institutional investors in the money market, including money market funds, and encouraging the SEC staff to monitor higher-than-peer performance of money market funds.
»» Address market confusion about money market institutional investors that appear to be—but are not—money market funds.

pp.7-8 tell you what they don't want to do, take a look.  Maybe that above list sounds reasonable, but it also sounds designed to prevent money market-like institutions from…guess what…competing with money market funds.  It also sounds designed to preserve the good name of money market funds next time something goes screwy.  It is designed to preserve p (share) =1 without requiring a legal commitment to that effect and without instituting overly burdensome regulation.  Pretty neat, huh?  It's a circle the wagons approach, combined with a reluctance to ante up any cash on the table.  You don't suppose they are still planning to depend on the Fed as a lender of last resort, do you?

You'll see a lot more proposals like this from industry participants.  "Help me look good again," but with little recognition of the toothpaste tube metaphor and with few remedies for wherever the next bout of systemic risk gets squeezed to.  I don't blame the money market sector for not solving this problem (economists can't solve it either), but at the same time it's important to recognize such proposals for what they are: the new financial services sector equivalent of NIMBY.  Put your systemic risk junk somewhere else.  But where?


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