It’s interesting that SEC Chairwoman Mary Schapiro
is only now increasing regulation of money market mutual funds. MMMFs are
mutual funds that hold fixed income assets, usually short-term (less than one
year) assets like commercial paper. Their liability side has a fixed value
claim of $1. When Lehman collapsed, Reserve Primary Fund, a large MMMF, broke
the buck, meaning it lowered its share price below $1. This caused a run on the
Fund, and subsequently a general run on money market mutual funds. The government
had to step in and guarantee all existing MMMF claims.
Now Schapiro is proposing several regulations:
- capital buffer against the assets in the MMMF portfolio
- limit amount of shared that can be redeemed at
any one time
- or, in lieu of the limit, make funds float their
net asset values, meaning they will no longer be fixed to $1
The limit on the number of shares is curious
since, as I understand, money market mutual funds can already hold money back
for 90 days, although they rarely do this. Also, I am not sure how the limit-or-float
mechanism would prevent an imitator run like the one that happened in 2008 when
Reserve Primary Fund broke the buck. Presumably the limit prolongs the run, but
the float encourages it, as a falling share price may spook investors and spark
a run.
The capital buffer is also curious. I presume,
although I have not checked, that the size of the 2008 run exceeds the size of
the capital buffer than Schapiro is proposing. This means that her proposed
regulation would not have stopped the 2008 run from occurring. A friend
recently mused that financial regulation is always designed to avoid the
previous crisis. Well, it should do at least that.
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