CHICAGO--(BUSINESS WIRE)--Fitch views the potential U.S. money market fund (MMF) regulations expected to be put forth by the Securities and Exchange Commission (SEC) as positive from a ratings perspective. Still, the changes could have secondary effects on the industry, which require further consideration.
SEC Chairman Mary Schapiro said Monday that the agency plans to propose new requirements for the MMF industry within the next few months. They include the addition of capital buffers and a change from constant net asset value (CNAV) to variable net asset value (VNAV) funds.
Fitch thinks that while capital buffers would clearly provide additional credit and liquidity support, they could also potentially introduce increased costs and new conflicts between traditional MMF investors and those providing the capital buffers. Increased costs may create pressure on fund managers to reach for additional yield in order to maintain the overall economics of the product. Conflicts of interest could challenge a fund manager to maintain liquidity and capital preservation for shareholders while maximizing returns for capital investors. Fitch would also need to consider how a capital buffer could alter a fund sponsor's willingness to provide support to a MMF.
In her comments, Chairman Schapiro said a capital buffer system like that of banks is under SEC consideration. Though she declined to be specific about the size of the intended buffer, the potential safeguard would serve as a limited source of first-loss protection if a fund were to experience credit or market value losses.
The second change proposed by the SEC would be to require MMFs to operate as VNAV funds as opposed to CNAV funds. While this would offer investors additional price transparency, the potential price volatility and associated tax implications could reduce the appeal of the product to traditional MMF investors. The introduction of a VNAV product could also alter the dynamics of sponsor support.
"While floating NAVs would reinforce what money market funds are -- an investment -- and what they are not -- a guaranteed product -- this option poses challenges for policymakers, particularly in fostering an orderly transition from stable NAVs to floating NAVs," Chairman Schapiro said.
Both proposals are intended to strengthen MMFs and avoid a repeat of 2008, when MMFs experienced significant liquidity pressures as a result of Lehman Brothers defaulting and one MMF "breaking the buck." Recent market volatility stemming from the euro zone crisis has once again brought the question of the systemic risk of MMFs to the forefront of many market participants' minds, including regulators.
The SEC introduced MMF reform in 2010 that included minimum overnight and one-week liquidity guidelines, limits on portfolio maturities, and increased portfolio and net asset value transparency, among others. These regulatory enhancements, combined with proactive risk management by fund managers, leave MMFs well-positioned despite the current market volatility. The current ratings assigned to MMFs by Fitch reflect the status quo and are not contingent on further regulatory changes.
For more information on Fitch's analysis of potential MMF reforms, please see the report entitled 'U.S. MMFs: New Reforms on the Horizon' dated Oct. 6, 2011.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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U.S. MMFs: New Reforms on the Horizon
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