Fidelity: No More Money Fund Reform Needed
February 22, 2013
The largest purveyor of money market mutual funds in the United States this month told the Financial Stability Oversight Council that no further reform of such funds is necessary.
And that the oversight council, set up after the credit crisis of 2008 to watch for risks to the national's financial industry, has not justified the need to carry out any of the recommendations it proposed in November.
Fidelity Investments, which manages more than $430 billion in money fund assets, said in a February 14 comment letter, said that the FSOC has not provided "any reasonable justification for additional regulation" of money funds. But, if it should "elect to proceed" with more reform, that the focus be "narrowly tailored" to short-term, high-quality funds that institutions invest in.
Fidelity, which manages funds that constitute roughly 16% of all money fund assets in the United States, argued that a distinction needed to be made between "prime" money market funds that are owned by large institutional shareholders and those owned by individual investors.
Retail investors, Fidelity said, "are far less likely to redeem" shares in money market funds "in times of stress" than institutions.
The investors who are prone to pull out at a rapid pace are "institutional investors with substantial amounts at stake,'' Fidelity said.
The difference, the fund business of FMR Corp. said, played out in September 2008, when the Reserve Primary Fund could not maintain the value of its shares at $1 each, the bedrock promise of money funds.
The net asset value of shares in the nation's oldest money fund plunged due to a precipitous drop in the value of its holdings in Lehman Brothers assets.
In the week that followed the Lehman bankruptcy, "risk-averse institutional investors...accounted for 95% of the net redemptions from prime funds,'' Fidelity said, in its letter, signed by general counsel Scott Goebel.
Investors withdrew roughly $300 billion from prime money market funds during the week of September 15, 2008, by the tally of former Securities and Exchange Commission chairman Mary Schapiro, who pushed for a second set of reforms until dropping her case in August 2012.
"Any reforms that regulators determine to implement should be limited to general-purpose prime money market mutual funds primarily purchased by institutional investors,'' said Stephen Austin, senior director of media relations at Fidelity Investments. "There is no justification for further reforms to Treasury, government, tax-exempt, or retail general purpose/prime money market mutual funds."
Prime money market funds, also known as general purpose money funds, are used by both retail and institutional investors, and invest in short-term money market instruments of high quality.
But Fidelity, before and in its Feb. 14 letter, argues the first set of reforms instituted in 2010 have worked to insulate money funds that invest in government bonds and short-term credit.
Those reforms included a requirement that funds invest 10% of their holdings in assets that can be turned into cash daily, another 30% that can be turned into cash weekly, an average maturity of holdings of 60 days, and wind-down procedures that allow a fund's board to suspend redemptions, to avoid forced asset sales.
In November, the FSOC made three recommendations for a new round of reforms, including allowing the net asset value of shares in a fund float, to reflect the value of holdings at any time; requiring a capital buffer equal to 1% of assets and a "minimum balance at risk" in funds; or a 3% capital buffer and more stringent diversification of assets.
Such "fundamental changes" could cause individual and institutional investors to "shift assets out of money market funds and into banks and other short-term investment vehicles,'' Fidelity told the council. The fund industry, in particular, has been opposed to ending the bedrock promise that each share will always be worth $1.
The council, Fidelity argues, has not shown any empirical evidence that funds with floating net asset values are less prone to redemptions. The council also has not given any explanation for the need for a 1 percent buffer, given the liquidity of the funds themselves, and argues that the costs of maintaining minimum balances or the higher 3 percent buffer could force some fund sponsors, intermediaries and service providers out of the business.
In early January, Goldman Sachs said it will begin publishing values of the assets held in its money market mutual funds in the United States on a daily basis. Other fund managers, including J.P. Morgan Funds, BlackRock, Fidelity Investments, Federated Investors, Reich & Tang and State Street Global Advisors, quickly followed suit. Their point: Publishing the market values of assets in a fund on a daily basis provides the "transparency" that investors need, and does not require the net asset value of a share to float.
Fidelity argues that any additional reform should be aimed narrowly at the funds in which institutions invest. Its alternative: Close the gate on redemptions of funds by institutions in times of stress; and, charge fees if liquid assets fall below the 30% required to be held in a fund, by the 2010 reforms.
Fidelity as well as the Investment Company Institute maintain that the council does not have the authority to propose or force adherence to further reforms. That, they say, remains the purview of the Securities and Exchange Commission, which, ICI maintains "is best positioned to implement reforms to address the risks that [money market funds] present to the economy."
The Securities Industry and Financial Markets Association, which represents securities firms, banks and asset managers, also called for the FSOC to recognize the SEC's "role as primary regulator on this issue" and backed Fidelity's idea of a redemption "gate" to block runs on funds by institutions.