SEC's Schapiro: More Money Market Reforms Coming

Latest reforms would include instituting a capital buffer and floating NAVs

SEC Chairman Mary Schapiro. SEC Chairman Mary Schapiro.

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The Securities and Exchange Commission plans to issue a proposed rule on money market funds “in very short order,” said SEC Chairman Mary Schapiro on Monday, which would reduce the funds’ susceptibility to runs.

Schapiro said this latest round of money market fund reforms by the agency would include two regulations: instituting a capital buffer and floating NAVs.

Speaking at the Securities Industry and Financial Markets Association (SIFMA) annual meeting in New York, Schapiro said she wants to make “substantial progress” on the SEC’s initiative to reform money market funds that the regulator has undertaken with the Financial Stability Oversight Council (FSOC).

The financial crisis of 2008, Schapiro said, “revealed shortcomings in the functioning of the short-term credit markets–and money market funds represented a weakness.” Structural flaws in money market funds “were exposed,” she said. “The crisis began with the failure of a large investment bank, followed by a run on a single money market fund that spread. Within days, the short-term credit market was frozen.”

Schapiro went on to say that just as the SEC “has taken substantial steps to address market structure inadequacies in the equity markets that were revealed on May 6 of last year, we have an obligation to evaluate and address weaknesses in the short-term credit market, and the $2.6 trillion money market fund industry, in particular.”

After the financial meltdown in 2008, the SEC in February 2010 enacted significant reforms to its money market fund regulations by tightening credit quality standards, shortening weighted average maturities, and for the first time, imposing a liquidity requirement on money market funds. 

The SEC also adopted reporting requirements that provide public transparency so investors can see their money market funds’ exposure and also provided investors access to money market funds’ mark-to-market valuations, known as the “shadow NAV.” This information is reported on a monthly basis, with a 60-day lag to the public. 

But while the money market fund reforms “were a critical first step,” Schapiro said that “additional steps” are needed.

The options under the proposed rules, she said, would include a “capital buffer option to serve as a cushion for money market funds in times of emergency and floating NAVs, which would eliminate the expectation of stability that accompanies the $1 stable NAV.”

Both of these reform options, she said, “would ensure that investors who use money market funds realize the costs that might be imposed during rare market events.”

Following her speech, Schapiro was interviewed by Charlie Rose of PBS from the stage where she spoke at the Marriott Marquis in Times Square. Rose asked Schapiro why she wanted to focus on money market funds at SIFMA’s annual meeting.

“It’s pretty unanimous among federal and European regulators that we need to further bolster the resiliency of this financing mechanism,” Schapiro responded.

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