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President’s Working Group Proposes Money Market Fund Reforms


Following the September 2008 run on money market funds, which began following the failure of Lehman Brothers Holdings, Inc., the Treasury Department requested that the President’s Working Group on Financial Markets (“PWG”) prepare a report on the regulatory changes needed to address systemic risk and to reduce the susceptibility of money market funds to runs. On October 21, 2010, the PWG responded with its report entitled “Money Market Fund Reform Options.” The policy options discussed in the report include:

  • requiring money market funds to have floating net asset values;
  • creating emergency liquidity facilities funded by the money market fund industry;
  • requiring large redemptions to be paid in kind, rather than in cash; and
  • mandating participation in an insurance system.

The report emphasized that new measures intended to mitigate money market fund risks would also likely reduce the appeal of money market funds to many investors and cause investors to shift assets to unregulated funds with stable NAVs, such as offshore money market funds, enhanced cash funds, and other stable value vehicles. As such funds are subject to little or no regulatory oversight, the growth of unregulated money market funds would likely increase systemic risks. Therefore, any policies intended to reduce the risks associated with money market funds would need to limit the potential for regulatory arbitrage by imposing enhanced constraints on unregulated money market fund substitutes (for example, by providing that the exemptions from registration under the Investment Company Act of 1940 provided by Sections 3(c)(1) and 3(c)(7) thereunder are not available to investment vehicles maintaining a stable net asset value).

The Financial Stability Oversight Council will further examine the reform options discussed in the report in order to identify those most likely to reduce money market funds’ susceptibility to runs.