WASHINGTON — State and local officials would not invest in money market funds if the funds were required to shift to having floating, rather than stable, net asset values, Hartford, Md., Treasurer Kathryn Hewitt told regulators Tuesday.
“To us it’s extremely important to have a stable net-asset value,” Hewitt, representing the Government Finance Officers Association, said during a Securities and Exchange Commission-sponsored roundtable on money market funds and systemic risk. “It’s very important to us to be able to put a dollar in and get a dollar out.”
Hewitt made the remarks as SEC chairman Mary Schapiro and other regulatory officials considered recommendations made for money market funds by the President’s Working Group on the Financial Markets last October. Money market funds are the largest investor in short-term municipal securities, holding 65% of the $500 billion that are outstanding, according to the group.
The working group, some of whose members attended the SEC roundtable, suggested a number of options for money market fund reforms — including requiring the funds to move to floating net-asset values — in addressing the vulnerabilities that stemmed from the financial crisis in 2008 and led to an unprecedented $50 billion federal liquidity backstop for the funds.
In September 2008, the Reserve Primary Fund “broke the buck” — dropped below $1 per share — after Lehman Brothers securities it owned defaulted following that firm’s collapse.
During the week of Sept. 15, investors withdrew about $310 billion from prime money market funds or 15% of the funds’ assets, with the heaviest redemptions coming from institutional funds, Schapiro said.
The run was halted after regulators established the Treasury money market fund guarantee program, which temporarily guaranteed money market fund balances as of Sept. 19, 2008. Government facilities also were put in place to provide liquidity for the commercial market in which money market funds invest.
The President’s Working Group recommended, among several options, that money market funds shift to floating NAVs, believing this would “help remove the perception” that they are risk-free and reduce the incentive for investors to flee distressed funds.
But “it’s very important to our members that we have access to diversified assets,” Hewitt said, and that money market funds provide that and investment expertise that most governments do not have in house.
“We use a mixture of investments and this [money market funds] is one piece of our investments. But we would not be in a money market fund with no stable net asset value, not with our daily operating cash,” she said.
Hewitt also said that while she is well aware that money market funds are not guaranteed, she relies on the fact that the investment companies managing the funds must comply with the requirements of the SEC’s Rule 2a-7, which are designed to ensure that the funds’ investments are relatively safe and of high credit quality.
Brian Reid, the Investment Company Institute’s chief economist, and fund officials at the roundtable questioned whether requiring funds to have floating net-asset values would reduce the risk of investor runs on funds.
He said he was concerned that a floating NAV would instead cause investors to move money out of the funds to other instruments that are not as highly regulated or transparent.
Robert Brown, president of the money market group at Fidelity Management and Research Co., noted that the SEC has amended its Rule 2a-7 since the financial crisis to require money market funds to make more disclosures about their portfolio holdings and said he thinks the increased disclosure will prevent investor runs on funds.
Carol DeNale, senior vice president and treasurer of CVS Caremark, said: “We need the safety and stability of a $1 NAV .... Corporate treasurers are not running investment companies. We are not geared up to mark-to-market on a daily basis.”
Other recommendations discussed at the roundtable included converting money market funds into banks that would be subject to bank regulation but have access to Fed funds, requiring funds to hold capital reserves, and creating a facility that would provide liquidity to help funds redeem shares in the event of another Reserve Primary Fund-like situation.
