January 10, 2011
The Kentucky Chamber of Commerce is Kentucky's largest business organization, with more than 2,700 members representing over half of the state's private workforce. Kentucky and American business will lose one of its most important sources of short-term funding if money market funds are forced to abandon their stable per-share value, whether directly or indirectly, under the proposals discussed in the Report of the Presidents Working Group on Financial Markets on Money Market Fund Reform Options (PWG Report). With such a change, the expected flight of investors from these funds will severely impair the ability of companies to raise capital in the U.S. and undermine efforts to strengthen the American economy.
Businesses issue commercial paper to meet short-term financing needs such as funding payroll, replenishing inventories, and financing expansion. Since the mid-1980s, money market funds have been major, reliable buyers of those securities and today purchase more than one-third of the commercial paper issued by American businesses. Should regulators eliminate these funds stable net asset value (NAV) some investors will be forced to walk away due to mandatory investment guidelines that require a stable per share value. Others will take their money elsewhere after the simplicity and convenience of the stable NAV disappears. According to one survey of institutional investors, 55 percent of respondents said they would substantially decrease investment in money funds if regulators mandated a floating NAV. These harmful consequences will occur whether all funds are required to abandon the stable NAV (Option a. of the PWG Report) or a significant subset of funds are required to float their value in a two-tier system (Options e. and f. of the PWG Report).
There are no immediate substitutes for money market funds in this financing role. Bank lending cannot fill this funding gap unless banks raise substantial new capital. Unregulated private pools might see an opportunity to expand, but encouraging investors to migrate to these vehicles hardly seems consistent with efforts to reduce risk, increase transparency, and ensure greater market stability. Mandating a floating NAV would make short-term financing for American business less efficient and far more costly, ensuring a severe setback for an economy emerging from recession.
We support appropriate steps taken by the Securities and Exchange Commission, the Federal Reserve Board, and the Department of the Treasury to preserve and strengthen this vital source of business financing, but believe the idea of requiring all or most funds to float their value should be rejected outright. We urge your support for policies that promote the use of the stable NAV that has served American investors and businesses so well for decades.
Thank you for your consideration.