Banking regulation is inappropriate for MMFs and would end MMFs as we know them at great cost to the millions of investors who value them for their efficiency and safety, and to the financial system as a whole.  

Already subject to a comprehensive regulatory regime, amendments in 2010 to the rules governing money market funds tightened regulation even further to make money funds more resilient to certain short-term market risks, and to provide greater protections for investors in a money market fund threatening to "break the buck."  More recently, however, Federal Reserve officials and some members of the Financial Stability Oversight Council have said money market funds are subject to runs, a source of systemic risk, and part of a shadow banking system that sorely needs even more regulation.  In response, Melanie L. Fein, former senior legal counsel to the Board of Governors of the Federal Reserve System has published a paper describing why further changes to the money market regulatory regime are unwarranted overkill.  


Fein's paper takes the position that, contrary to assertions by the Fed, money market funds are not part of the shadow banking system, are not subject to runs, and pose no systemic risk requiring bank-like supervision by the Fed.   Ms. Fein further argues that money market funds are currently more strictly regulated than even banking organizations, so any further regulation would merely be overkill.  In fact, she argues, money funds have a record of safety far superior to that of banks, and that subjecting money market funds to bank-like regulation would in reality increase, not decrease, systemic risk.  


Fein also tackles the question of whether Congress ever really intended to include regulation of money funds under the Dodd-Frank Act. In her opinion, Congress did not, and consequently, money funds should be exempt from SIFI analysis.

In developing the criteria for exemptions, the  Dodd-Frank Act requires the Fed to consider the factors that FSOC is required to consider in determining whether to designate a nonbank financial company as a SIFI.  Because  those factors as applied to  MMFs  show that MMFs  are not appropriate candidates for  SIFI  status, MMFs  warrant an exemption.   An exemption would remove uncertainty concerning the intentions of FSOC and the Fed with respect to the future regulation of MMFs.  Such uncertainty has resulted in substantial cost to the industry and confusion among its shareholders, and diverted the attention of regulators at both the Fed and the SEC from far more pressing regulatory matters that require their attention.

Feins' paper may be found here.