WASHINGTON — Securities and Exchange Commission chairman Mary Schapiro insists further reforms are needed to ensure that money market funds do not “break the buck” and trigger investor runs, warning that the funds have “structural flaws.”
“In the post-mortem of the financial crisis many have argued that regulators sat silent on the sidelines rather than raising alarm bells,” Schapiro said in a speech before the Society of American Business Editors and Writers’ annual convention in Indianapolis Thursday night. “As a regulator who saw the damaging effects of the 2008 run on money market funds, I find it hard to remain on the sidelines despite calls to declare victory on this issue.”
“While many say our 2010 reforms did the trick — and no more reform is needed — I disagree,” she said. “The fact is that those reforms have not addressed the structural flaws in the product. Investors still have incentives to run from money market funds at the first sign of a problem.”
Schapiro said that the SEC should propose either that MMFs be required to move to floating net-asset values or that they be required to meet capital requirements, combined with limitations of fees on investor redemptions of shares.
“These proposals are designed to, respectively, desensitize investors to the occasional drop in value or make it less likely that the funds will be not be able to absorb a loss and cause a run,” she said.
The SEC chief harkened back to September 2008 when the Reserve Primary Fund held just over 1% of its assets in commercial paper issued by Lehman Brothers. Following Lehman’s filing for bankruptcy protection, investors redeemed $40 billion, or roughly two thirds of the reserve fund’s total value in just two days, she said.
The fear began to spread and within the week, investors had withdrawn $310 billion from prime money market funds, 14% of the funds’ total assets. This helped freeze the short-term credit markets, according to Schapiro.
The runs stopped after the federal government stepped in with a taxpayer-funded Treasury guarantee program for MMFs, leaving taxpayers implicitly on the hook for $3 trillion in money market shares, she said.
Now Congress has eliminated the possibility that the Treasury Department will be able to offer such a program again.
Schapiro argued that MMFs “remain particularly vulnerable to exogenous shocks,” such as a sovereign debt crisis in Europe or a natural disaster around the globe.
Her remarks come as 14 muni market groups told her last week that forcing MMFs to move to a floating NAV would have a disastrous effect on the muni market. The Investment Company Institute and mutual fund companies have also strongly opposed any further SEC reforms.
In 2010, the commission adopted tighter standards on the kinds of securities MMFs could hold and permitted those that break the buck to suspend redemptions while they undertake orderly liquidations of assets. The groups have argued the reforms were sufficient.
But, Schapiro said, “When we passed these reforms, I clearly stated that we needed to do more — that those reforms were just a first step. Because, despite changes in the assets they hold, money market funds remain susceptible to a sudden deterioration in quality of holdings and consequently, remain susceptible to runs.”