WASHINGTON (Reuters) - Money market fund regulations adopted by U.S. securities regulators in 2010 reduced risks in the $2.5 trillion industry, according to a report sponsored by the U.S. Chamber of Commerce that questions the need for further reforms.
The report, drafted by three finance and economics professors, concludes that the Securities and Exchange Commission’s 2010 rules have left money market funds more liquid and better able to withstand a wave of customer withdrawals.
The report says the industry weathered the economic turmoil in Europe in 2011 despite an uptick in redemptions and did not pose any systemic risk to the marketplace.
“Given the remarkable stability of the industry in the summer of 2011 during the eurozone crisis and uncertainty about whether the U.S. would raise its debt ceiling, we question whether there is sufficient evidence to support additional reform,” says the report by David Blackwell and Kenneth Troske from the University of Kentucky, and Drew Winters of Texas Tech University.
The 2010 reforms tightened credit quality standards, shortened weighted average maturities, imposed a liquidity requirement on money market funds and increased disclosure of fund holdings.
The report is the latest effort by the Chamber of Commerce to fend off efforts by SEC Chairman Mary Schapiro and the Financial Stability Oversight Council, or FSOC, to impose another round of rules on the money market fund industry.
The chamber released the report just two days before the FSOC is slated to meet behind closed doors, where the topic of money market funds is expected to be discussed.
Last month, Treasury Secretary Timothy Geithner said the FSOC will begin considering new reforms after Schapiro failed to attract the three SEC votes she needed to advance her own plan.
Schapiro has argued that more regulations are needed to prevent another run like the one seen in the 2008 financial crisis, when the Reserve Primary Fund “broke the buck,” meaning its net asset value fell below $1 per share.
She had hoped to put out a proposal for public comment with two key components. One would have called for new capital buffers and redemption restrictions in a time of chaos. The other explored moving to a floating net asset value.
Banking regulators are supportive of her efforts. In a report on Monday, a group of researchers at the Federal Reserve Bank of New York argued for new rules, saying funds could delay full redemptions from all customers at all times to encourage investors to look closely at a fund’s risk before putting in money.
But the money market fund industry worries that new rules would drive money out of their funds and into bank accounts at a time of very low interest rates. Opposition to the reforms has also been mounted by many companies and local-government agencies that rely on money funds to buy their short-term debt instruments.
Three SEC commissioners - Democrat Luis Aguilar and Republicans Daniel Gallagher and Troy Paredes - have also expressed skepticism and have said they want first to study the effects of the 2010 reforms before proceeding with new rules.
The SEC’s economists are currently conducting the study requested by the three commissioners, and results could come in a few weeks, according to one person familiar with the matter.
Despite his resistance to Schapiro’s original proposal, Gallagher has said he hopes the agency will consider a fresh package of reforms. He has also said he would be open to considering a floating net asset value coupled with allowing fund boards to impose liquidity ”gates.
Any move to a floating net asset value is likely to be strongly opposed by the industry.
“If the fund value of money funds is undermined, investors are likely to move their money to products that increase risk in the financial system,” said Fidelity’s Money Markets President Nancy Prior at a U.S. Chamber event on Tuesday convened to examine the report’s findings.
“A greater concentration in banks... will increase financial pressure on the Federal Deposit Insurance Corp. and the American taxpayer.”
Geithner has said the FSOC will likely weigh a package of money market reforms at its November meeting. Eventually, he hopes to present those suggestions to the SEC for consideration.
Under the Dodd-Frank financial oversight law of 2010, the SEC would need to adopt the FSOC’s suggestions, or reject them in writing within 90 days.
The Chamber has previously said it prefers to leave money market fund matters to the SEC, and not to the FSOC.
Reporting By Sarah N. Lynch; Additional reporting by Ross Kerber in Boston; Editing by Tim Dobbyn and Dan Grebler