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Geithner Plans FSOC Recommendation on Money Market Fund Reform

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  • Baker, John
    Treasury Secretary Timothy Geithner, in his capacity as Chairperson of the Financial Stability Oversight Council, has circulated a letter to other FSOC members
    Message 1 of 1 , Sep 27, 2012
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      Treasury Secretary Timothy Geithner, in his capacity as Chairperson of the Financial Stability Oversight Council, has circulated a letter to other FSOC members outlining options for reform of money market funds. Meanwhile, Daniel Gallagher, one of the two Republican members of the Securities and Exchange Commission, said that he would likely support requiring money market funds to have a fluctuating share price. Gallagher's position seemingly is a reversal of the position he expressed last month, when he and Commissioner Troy Paredes opposed SEC Chairman Mary Schapiro's plan to propose two alternative reforms: either floating the net asset values of money market funds by removing the ability to use amortized cost accounting, or requiring money market funds to hold a capital buffer, combined with a 3% holdback on shareholder redemptions. In the face of opposition to those proposals, Schapiro said the SEC would not act and called for FSOC to use its authority under the Dodd-Frank Act to recommend reforms.

      Geithner's letter indicates that he has asked staff to begin drafting a formal recommendation immediately and is hopeful that FSOC will consider that recommendation at its November meeting. The recommendation should include Schapiro's two reform alternatives, as well as a third option that would entail imposing capital and enhanced liquidity standards, potentially coupled with liquidity fees or temporary "gates" on redemptions that may be imposed as an alternative to a holdback requirement. The letter says that the proposal should take into account the concern expressed that reform of money market funds may result in outflows from money market funds to less-regulated parts of the cash management industry.

      Geithner contemplates that FSOC would make a recommendation to the SEC for new or heightened standards and safeguards under Section 120 of the Dodd-Frank Act. Section 120 requires public notice and comments prior to the recommendation. The SEC then "shall impose the standards," unless it explains in writing within 90 days why the agency has determined not to follow the recommendation of FSOC. It is not entirely clear whether the SEC would need to conduct its own notice and comment process. In any case, the SEC has something of a practice of not meeting statutory deadlines for rulemaking activity.

      Geithner's letter addresses the possibility that the SEC may be unwilling to act in a timely and effective manner. He notes that FSOC has the authority to designate any nonbank financial company that could pose a threat to U.S. financial stability. Alternatively, he suggests, FSOC's authority to designate systemically important payment, clearing, or settlement activities under Title VIII of the Dodd-Frank Act could enable the application of heightened risk management standards on an industry-wide basis. Geithner did not mention that "payment, clearing, or settlement activity" is defined not to include any offer or sale of a security under the Securities Act of 1933, which would seem to make it difficult to include money market funds.

      Geithner also indicated that bank regulatory agencies should evaluate their authorities to impose capital surcharges on regulated entities that sponsor money market funds, or restrict financial institutions' ability to sponsor, borrow from, invest in, and provide credit to money market funds that do not have structural protections. This suggestion sounds quite ominous for bank-affiliated money market funds, and it would not involve the SEC or require aggressive interpretations of statutory law. Additionally, he said, the potentially destabilizing role of money market funds in the tri-party repo market should be carefully assessed as part of the ongoing efforts to improve the safety, soundness, and resiliency of that market.

      Gallagher's comments were made in a Bloomberg interview published today, in which he said that requiring money funds to have a fluctuating share price "is an attractive option that I am likely to support." He said he couldn't vote for Schapiro's plan because its centerpiece was to make money market funds hold extra capital, with floating NAVs only a secondary alternative. He also had the interesting comment that "This whole exercise has been about the role that money market funds play in the short-term funding markets on which banks rely, something that FSOC members are very concerned about. It was never really about investors."

      Geithner's letter is available online at


      For the Bloomberg interview with Gallagher, see


      My last post on money market fund reform, including the Gallagher-Paredes statement, is at


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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