The outflow of money fund assets to an unregulated market is a significant systemic risk concern, and can result in harm to our market and investors.
The Financial Stability Oversight Council, Financial Stability Board, and Securities and Exchange Commission still fear the systematic risks posed by potential runs on money market funds. Seeing money funds as unfinished business from the 2008 financial crisis, the FSOC and FSB have floated some fairly serious structural changes to that industry. It is not clear, however, that the cures they propose are not potentially more systematically risky than the status quo. SEC Commissioner, Luis Aguilar, typically a champion of more regulation designed to protect investors, has
raised the alarm regarding a potential unintended consequence of additional money market reforms. It is Aguilar who threw the spanner in the in the plans of former SEC Chairman, Mary Schapiro, to propose a slate of structural regulations for money market funds. He did so over this very issue. Aguilar worries that money fund assets will migrate to an opaque, unregulated market as a result of structural changes to money market funds. He feels that the earlier rounds of regulatory reform for money market funds were a resounding success, making money market funds one of the most transparent financial instruments for both regulators and investors. Further reform proposals, however, could steer funds into markets that are not as open to the SEC, ultimately making them less regulated.
Aguilar is not the only one worried. Both
Treasury Secretary Geithner and the
FSOC have expressly raised the need to address the concern of money fund assets migrating to an opaque, unregulated market as a result of structural changes to money market funds. In addition, Aguilar's torpedoing of Schapiro's money fund reform proposal appears to have brought the SEC's staff on board with his concerns as well. The SEC staff’s
recently issued report responding to Commissioners' questions now identifies the issue of migration to unregulated products and, for the first time, offers a more in-depth analysis. Moreover, the new Director of Investment Management, Norm Champ, who has experience with unregulated funds, has indicated that the staff is now actively considering this issue.