Speech by SEC Chairman:
Statement on Money Market Funds Before the Open Commission Meeting
Chairman Mary Schapiro
U.S. Securities and Exchange Commission
January 27, 2010
This is an open meeting of the U.S. Securities & Exchange Commission on January 27, 2010.
Today, we will consider two recommendations.
First, we will consider whether to adopt new rules to strengthen the resiliency of money market funds.
And second, we will consider whether to provide interpretive guidance to public companies regarding the Commission’s existing disclosure rules, and how to apply them in the context of changing business or legislative events that relate to the issue of climate change.
Money Market Funds
The Commission today is considering adopting significant revisions to our oversight of money market funds — revisions that include increasing credit quality, improving liquidity, shortening maturity limits, and requiring the disclosure of a fund’s actual “mark-to-market” net asset value, known as a “shadow NAV,” on a delayed basis.
Today’s action grows out of the financial crisis of 2008 and the weaknesses revealed by the “breaking of the buck” of the Reserve Primary Fund in September 2008. Those events precipitated a full-scale review of the money market fund regulatory regime by the SEC. And the adoption of today’s rules is an important step — but just a first step — in our efforts to strengthen that regime.
The new rules will have substantial benefits for investors.
First, the rules will help reduce risks associated with money market funds, so that investor assets are better protected and money market funds can better withstand market crises. The rules will tighten the maturity and credit quality standards for money market funds, and impose new liquidity requirements.
For example, with respect to a fund’s weighted average maturity, our new rules will impose a 60-day standard, rather than the current 90-day standard. And for the first time our rules will impose a weighted average life restriction to limit the risks of securities with interest rate resets in money market portfolios. The weighted average life limit is 120 days.
With respect to “second tier” securities, which are securities rated in the second highest rating category, we are limiting such securities to 3 percent of a money market fund’s total portfolio instead of the 5 percent permitted today; limiting exposure to any single tier two issuer to ½ of 1 percent; and substantially shortening the permitted maturity of any second tier security from 397 days to 45 days.
I believe one of the key lessons of the financial crisis is the need for strong liquidity buffers in money market funds. Today’s rules for the first time, will establish liquidity standards for money market funds. These new liquidity standards will require money market funds to have enhanced reserves of cash, and securities that can be readily converted to cash, so that they can meet heightened investor demand for redemptions, as occurred in September 2008.
Under the new liquidity standards, money market funds would have to meet both daily liquidity requirements of 10 percent of assets in cash and cash equivalents, and weekly liquidity requirements of 30 percent. The rules also will impose a requirement to have “know your customer” procedures in order to identify the potential for large redemptions and have sufficiently liquid securities in place to meet them.
Second, the rules will create a substantial new disclosure regime so that everyone from investors to the SEC itself can better monitor a money market fund’s investments and risk characteristics. Our rules will require monthly disclosure of money market fund portfolio information on fund websites and detailed reporting of information to the SEC. This way we can build an interactive database of money market fund information and monitor risks in money market funds. No such database exists today. This detailed information will also be made available to the public on a delayed basis so that academics, industry observers, investors and others can more closely monitor money market funds.
An important change to the regulatory requirements for money market funds is that our new rules will require monthly disclosure of a fund’s “shadow” NAV, with a 60-day lag. This information will enable investors to better judge the risk profile of their money market funds and become acclimated to the fact that money market funds may not always maintain a stable $1.00 NAV. I believe this new disclosure also will impose a discipline on fund managers to avoid taking undue risks that may result in the disclosure of a lower-than-expected shadow NAV.
Third, in addition to imposing additional risk limitations and improving disclosures, these rules will take important initial steps toward making money market funds less vulnerable to “runs” — and seek to limit the contagion effect of any run that may occur. Such broad-based or large-scale requests for redemptions can overwhelm a money market fund and challenge its ability to return proceeds at the anticipated $1.00 net asset value.
The new rules will permit the board of a money market fund to halt redemptions if the fund "breaks the buck." The halting of redemptions will stem the motivation for runs. It also will eliminate the need for a failing fund to sell securities into a potentially de-stabilized market and further drive down prices, which could impact other money market funds holding the same securities. Our rules also will require money market funds to be able to process transactions at prices other than $1.00. This will avoid unnecessary processing delays should a fund break the buck.
While no set of rules could make money market funds impervious to risk of loss, money market fund investments will be safer as a result of today’s actions. In addition, money market fund investors will have a better sense of the holdings, value and risk profile of their money market funds.
Our work, however, is not yet complete. We will continue to pursue more fundamental changes to the structure of money market funds to further protect them from the risk of runs. Among those possible reforms are:
- a floating NAV, rather than the stable $1.00 NAV prevalent today;
- mandatory redemptions-in-kind for large redemptions (such as by institutional investors);
- “real time” disclosure of shadow NAV;
- a private liquidity facility to provide liquidity to money market funds in times of stress;
- a possible “two-tiered” system of money market funds, with a stable NAV only for money market funds subject to greater risk-limiting conditions and possible liquidity facility requirements; and
- several other options being discussed with the President’s Working Group.
While each of these ideas is under serious and active consideration, they represent substantial revisions to the money market fund landscape and therefore require further review and study. That said, I am committed to continuing to move forward with reforming the money market fund industry. At my request, the Commission’s staff is actively engaged in evaluating and preparing recommendations that will more fundamentally transform money market funds — with a particular focus on evaluating the merits of a floating NAV.
I applaud the staff for their thoughtful work to bring us the important rule adoptions we are considering today, and I look forward to our continuing efforts.
For now, I'll turn the meeting over to Buddy Donohue, Director of the Division of Investment Management, to hear more about the Division's recommendation. Before I do that, however, I would like to thank our staff who have shared their expertise to make this a strong, thoughtful and well-crafted piece of work: Buddy Donohue, Bob Plaze, Hunter Jones, Penelope Saltzman, Diane Blizzard, Daniel Chang, Adam Glazer, Thu Ta, Daniele Marchesani, and Sarah ten Siethoff from the Division of Investment Management; Henry Hu, Adam Glass, Woodrow Johnson, Chuck Dale and Amy Edwards from the from the Division of Risk, Strategy and Financial Innovation; and David Becker, Meridith Mitchell, Lori Price and Vince Meehan from the Office of the General Counsel.