In recent months there has been concern that there may be a significant reduction in the assets of institutional prime MMFs. Certain large asset managers have indicated that they will further reduce their offerings of institutional prime MMFs. Fidelity recently
announced that the firm plans to stop offering prime MMFs and instead offer
government money market funds.45 Charles Schwab recently announced it will convert its institutional MMFs to retail funds and one of its prime funds to government.46
Furthermore asset managers, including Blackrock and Federated, have indicated that they are considering offering private MMFs that have stable NAVs and no redemption
restrictions, as an alternative to SEC publicly registered institutional prime MMFs.47
Shifting from public to private funds does not eliminate such funds, in fact it makes them
more risky since such funds would not even be subject to the 2010 SEC liquidity reforms.
But a shift of these funds to government funds would eliminate the risk of runs in those funds; however, such risk would still exist for retail prime funds.
In my view, none of the existing reforms solves the problem of contagion. The options for doing so are: (1) prohibit prime funds, retail or institutional; (2) insure prime funds in some manner; or (3) provide strong lender of last resort to such funds.
Notes
1. Financial Stability Oversight Council, Proposed recommendation regarding money market mutual fund reform (Nov. 2012); and money market fund reform;
Amendments to Form PF; Proposed Rule, 78 Fed. Reg. 36,834, 36,844 (Jun. 19, 2013).
2. Money Market Fund Reform; Amendments to Form PF; Final Rule, 17 CFR 230, 239, 270, 274, 279 (Oct. 14, 2014) (File S7-03-13).
3. Press Release, Bd. of Governors of the Fed. Res. Sys. (Sep. 19, 2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20080919a.htm; Bd. of Governors of the Fed. Res. Sys., Asset-backed commercial paper money market mutual fund liquidity facility, available at
http://www.federalreserve.gov/monetarypolicy/abcpMMMF.htm.
4. Press Release, Bd. of Governors of the Fed. Res. Sys. (Oct. 7, 2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm.
5. Press Release, Bd. of Governors of the Fed. Res. Sys. (Oct. 21, 2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20081021a.htm.
6. Press Release: Treasury announces temporary guarantee program for money market funds, US Dept. of Treas. (Sep. 29, 2008), available at http://www.treasury.gov/press- center/press-releases/Pages/hp1161.aspx.
7. Dodd–Frank Act §1101(a)(2), (6) (requiring lending facilities to be structured with
“broad-based eligibility” with “the purpose of providing liquidity to the financial system, and not to aid a failing financial company” and stating that a “program or facility that is structured to remove assets from the balance sheet of a single and specific company … shall not be considered a program or facility with broad-based eligibility”) (emphasis added).
8. See 12 USC §5236(b) (2006).
9. Inv. Co. Inst., Money market mutual fund assets (Dec. 31, 2013), available at http://www.ici.org/research/stats/mmf/mm_01_02_14.
10. Money Market Funds, 17 CFR §270.2a-7 (2010).
11. James Angel, Money market mutual fund reform: The dangers of acting now, Ctr. for Capital Mkt. Competitiveness 8 (2012), available at
http://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/Angel-Costs- and-Costs-of-MMMF-Reforms-draft-6.18.2012-FINAL.pdf.
12. SEC Money Market Reform Memo, Responses to questions posed by Commissioners Aquilar, Paredes, and Gallagher (Nov. 30, 2012).
13. Id.
14. iMoneyNet, Retail money funds, available at http://www.imoneynet.com/retail- money-funds/money-fund-basics.aspx#three.
15. Id.
16. Inv. Co. Inst., Report of the money market working group 1, 62 (Mar. 17, 2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf.
17. Money Market Fund Reform; Amendments to form PF; Final Rule, 17 CFR 230, 239, 270, 274, 279 (Oct. 14, 2014) (File No. S7-03-13).
18. Id.
19. Money Market Fund Reform; Amendments to form PF; Final Rule, 17 CFR 230, 239, 270, 274, 279 (Oct. 14, 2014) (File No. S7-03-13).
20. 17 CFR 270.2a-7(a)(2) (2010).
21. 17 CFR 270.2a-7(a)(20) (2010).
22. Money Market Fund Reform; Amendments to form PF; Final Rule, 17 CFR 230, 239, 270, 274, 279 (Oct. 14, 2014) (File No. S7-03-13) at 36,834.
23. See Inv. Co. Inst. comment letter to the Sec. & Exch. Comm’n regarding the
President’s Working Group report on money market fund reform options 1, 34 (File 4–
619) (Jan. 10, 2011), available at http://ici.org/pdf/11_sec_pwg_com.pdf
24. Presentation by David S. Scharfstein to Harvard Law School Class on capital markets regulation (Apr. 1, 2015).
25. Money Market Fund Reform; Amendments to form PF; Final Rule, 17 CFR 230, 239, 270, 274, 279 (Oct. 14, 2014) (File S7-03-13).
26. Id.
27. Id.
28. Letter from Fidelity Invs. to Elizabeth M. Murphy, Secretary, Sec. & Exch. Comm’n
(Mar. 1, 2012), available at http://www.sec.gov/comments/4-619/4619-125.pdf.
29. Inv. Co. Inst., Taxable money market fund portfolio data, Report: Monthly Taxable Money Market Fund Portfolio Summary, December 2013, Table 5 (Jan. 21, 2014), available at https://www.ici.org/info/mmf_summary_131231.xls.
30. Sec. & Exch. Comm’n, Statement of Commissioner Kara M. Stein (Jul. 23, 2014).
31. Money Market Fund Reform; Amendments to form PF; Proposed Rule, 78 Fed. Reg.
36,914 (Jun. 19, 2013).
32. Id.
33. Id.
34. See, for example, William L. Silber, Why Did FDR’s Bank Holiday Succeed? Fed. Res.
Bank of New York Econ. Pol. Rev. 19, 21–23, (Jul. 2009), available at http://www.newyorkfed.org/research/epr/09v15n1/0907silb.pdf.
35. Adam L. Aiken, Christopher P. Clifford, and Jesse L. Ellis, Hedge funds and discretionary liquidity restrictions 116 J. Fin. Econ. 197 (2015).
36. See Financial Stability Oversight Council, Proposed recommendation regarding money market mutual fund reform (Nov. 2012), available at
http://www.treasury.gov/initiatives/fsoc/Documents/Proposed%20Recommendations%20Regarding%20Money%20Market%20Mutual%20Fund%20Reform%20-
%20November%2013,%202012.pdf.
37. European Commission, Proposal for a regulation of the European Parliament and of the Council on Money Market Funds (Sep. 4, 2013), available at http://eur-
lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013PC0615&from=EN.
38. Money-market funds face capital buffer rules in EU plan, Bloomberg (Sep. 4, 2013), available at http://www.bloomberg.com/news/articles/2013-09-04/money-market- funds-face-capital-buffer-rules-in-eu-plan.
39. See Samuel Hanson, David S. Scharfstein, and Adi Sunderam, An evaluation of money market fund reform proposals (2014), available at
http://www.people.hbs.edu/dscharfstein/MMF_Reform_20140521.pdf.
40. Mary Schapiro, Chairman, Sec. & Exch. Comm’n, Testimony before the Comm. on Banking, Housing & Urban Affairs of the US Senate: Perspectives on Money Market Mutual Fund Reforms (Jun. 21, 2012), available at
http://sec.gov/news/testimony/2012/ts062112mls.htm.
41. President’s Working Group on Financial Markets, Money market fund reform options 26–28 (Oct. 2010), available at http://www.treasury.gov/press-center/press-
releases/Documents/10.21%20PWG%20Report%20Final.pdf.
42. Id.
43. Id.
44. Inv. Co. Inst. comment letter to the Sec. & Exch. Comm’n regarding the President’s Working Group report on money market fund reform options (File 4-619) 1, 49 (Jan.
10, 2011), available at http://ici.org/pdf/11_sec_pwg_com.pdf.
45. Daisey Maxey, Advisors weigh impact of new money fund rules, Wall St. J. (Aug. 1, 2014).
46. Schwab going all retail, converting Inst Shares; MMP switches to Govt,
CraneData.com (Oct. 13, 2015), available at http://cranedata.com/archives/all- articles/5795/.
47. Sabrina Willmer, Federated, Blackrock mull private money funds amid rules, Bloomberg (Mar. 15, 2015).
20 Dependence of the Financial System on Short-Term Funding
Contagion depends critically on short-term funding, without such funding creditors
cannot run. They can, however, refuse to lend more, and this was a major problem in the crisis—institutions that were dependent on short-term funding, like broker-dealers or corporate commercial paper issuers, could not get such funding. If one could design a financial system that was not critically dependent on short-term funding, the possibilities of contagion would be greatly diminished. In the extreme, if there were no private short- term funding, contagion would be impossible. This, of course, depends on one’s definition of short-term funding—if short-term funding was defined as 30 days or less, and such funding was replaced by 31 day funding or even 60 day funding, there would still be a contagion concern, albeit it would take more time to unfold. This chapter and the next one explore how short-term funding could be sufficiently limited to control contagion to the point where the need for lender of last resort or guarantees was virtually eliminated, and concludes this is not feasible. It also explores the downside of the government
replacing the private sector as supplier of short-term funding.