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October 17, 2012
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UK Gatton College profs co-author U.S. Chamber study arguing against need for further money market fund industry reforms

Study cites lack of sufficient evidence for additional reform

LEXINGTON, Ky. (Oct. 17, 2012) – University of Kentucky Gatton College of Business and Economics Dean David Blackwell and Senior Associate Dean Kenneth Troske, are co-authors of a major study released by the U.S Chamber of Commerce that questions the need for further reforms in the money market fund industry.

Money market fund regulations adopted by the U.S. Securities and Exchange Commission (SEC) in 2010 have significantly reduced risks in the $2.5 trillion sector, according to the report. Blackwell, a professor of finance, and Troske, Sturgill Endowed Professor of Economics, joined by Drew Winters, head of the finance area and the Lucille and Raymond Pickering Professor and Chair of Finance at Texas Tech University, conclude that the rules have left money market funds more liquid and better able to withstand a wave of customer withdrawals.

“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,” the report stated.

The 2010 reforms, put in place as a result of the 2008 financial crisis, tightened credit quality standards, shortened weighted average maturities, imposed tighter liquidity requirements on money market funds, and dramatically increased disclosure of fund holdings.

Mary Schapiro, the chair of the SEC, and the Financial Stability Oversight Council (FSOC), reportedly are considering another round of rule reforms for the money market fund industry, according to a news report by Reuters.

The chamber released the report before the FSOC is slated to meet behind closed doors on Thursday (Oct. 18), where the topic of money market funds is expected to be discussed.

In September, U.S. Treasury Secretary Timothy Geithner said the FSOC will begin considering new reforms.  This was after Schapiro failed to attract the three SEC votes she needed to advance her own plan aimed calling for new capital buffers and redemption restrictions in a time of chaos.  Another component of her plan would explore moving to a floating net asset value.

Banking regulators, including a group of researchers at the Federal Reserve Bank of New York, are supportive of Schapiro’s efforts.

However, 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.

Any move to a floating net asset value is likely to be strongly opposed by the industry.

Fidelity Money Markets President Nancy Prior said this week, “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.  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.

 

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