The US SEC’s 2014 reforms were intended to strengthen liquidity and run risk in money market funds. Do you think they have achieved this?
From the standpoint of US regulators, the objective of the reform was achieved when the very first president of the Securities and Exchange Commission (SEC) released a working group report in 2009, which provided recommendations to strengthen financial markets.
One of the recommendations was to institute reform that would improve reliance of the industry, essentially to move it all under
one umbrella.
The 2010 reform and 2014 reform that came into compliance this year, firstly improved the creditors profile of money market funds and secondly improved the transparency of the market. The main objectives were all achieved. This also included liquidity fees and redemption restrictions.
Why did you choose to conduct and release the survey now?
This is a subject that came up a few times and in speeches of various officials and those involved in the Federal Housing Finance Agency (FHFA). The supervisor of validation and head of the agency Mel Watt revealed an increase in certain findings of fiscal common banks twice this year, and in 2016.
In the assessment of monetary condition, there was a reference to development, which the Federal Reserve Board related to the US money market twice this year. It is clearly something that other US agencies and fiscal agencies have continued to monitor. We saw that providing a more in depth analysis of the development of money market mutual funds is what we needed to do.
Was there anything in the report that surprised you?
During the transition period of the reform and reparation of the compliance deadline, the majority of market participants were surprised about the amount of funds that moved from private funds to government funds.
When the reforms were announced, estimates suggested that there would be a cash move, ranging between $200 billion to about $600 billion, but the ultimate move was $1 trillion.
That’s a large amount and nobody anticipated it to be that big. The transition was orderly and well instructed, there was a clear deadline and the essential resources, as well as the funds, were well invested in preparation.
The report suggests that changes to money market fund behaviour was driven primarily by investor’s preference for stable net asset value funds. Are there additional factors?
There were two factors. The first was the stable net asset value issue, the second was liquidity fees and redemption restrictions. For the foreign types of investors, these restrictions have different weights.
Both the lack of stable net asset value and redemption restrictions were consistent with some investors objectives, in terms of reliability of the funds.
The investors chose not to stay in those funds, and we saw that they moved cash to the funds that did not adopt fees. With the redemption restrictions there were different types of stresses, but all within money market funds.
In 2017, the SEC offered temporary relief on MiFID II research payment obligations. To what extent do will EU regulations affect US money market funds?
The regulation of money market funds is strictly local, just like European regulation is strictly local. It does not apply to US funds. It’s different from operations of broker dealers who operate internationally.
That’s why MiFID II changed how companies can distribute. It could have a negative impact because it’s regulated differently in the US. And, if you are in the US acting on an international basis, you’re going to see different requirements in every single country.
Pulling from different sources and situations is inefficient. This is why the reforms provided some relief for US regulations because they don’t have the same jurisdictions as other countries. That’s why changes in EU regulations will have no affect on how US funds are regulated.
Will you run the same study again in the future?
We are constantly looking at money market funds. We monitor them and update our news and reports mid-monthly. Every time we look there is a chance of more development that may have not been obvious at first. The size of our study always varies too.
Are there other areas of this market you are planning on analysing soon?
More recently we have looked at developments in the repo market, there was a lot of financial media attention around this. The most growth we saw was around the growth of money fund investments, as well as the growth of banks borrowing in the repo market, particularly in the treasury market.
This seems to be the main focus in terms of development of disintermediation of dealers in the market. We have been looking at deals within this. We haven’t yet published much on that, but that may be something we’ll consider to research more in depth, however different things happen everyday.
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