Another batch of "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" has been posted to the SEC's website on Money Market Fund Reform. This time, the comments are in response to the SEC's 4 "mini" March 24 studies, "Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform." The comments overall appear to be critical of the works, and they take particular aim at the SEC's "Safe Assets" study. Below, we excerpt from Wells Fargo Funds Management's letter, written by President Karla Rabusch, which says the SEC's methodology and studies "miss the mark" and are inadequate to support several possible proposed changes. Rabusch writes, "On behalf of Wells Fargo & Company and its subsidiaries, Wells Fargo Funds Management, LLC appreciates the opportunity to comment on the analyses of money market fund-related data and economic literature conducted by the staff of the Securities and Exchange Commission's Division of Economic and Risk Analysis ("DERA") and issued on March 24, 2014 ("Analyses")."
She tells us, "As the ninth largest money market fund provider in the industry, with over $110 billion in money market fund assets under management as of March 31, 2014, we have a significant interest in the continued strength and viability of money market funds, which are an invaluable investment option for retail and institutional investors alike, and a critical source of short-term financing for American businesses, states, and municipalities. For this reason, we carefully reviewed the money market fund rule proposal issued by the Securities and Exchange Commission ("Commission") in 2013, and submitted a detailed comment letter in response. In that letter, we supported those proposals with demonstrable benefits and reasonable costs to shareholders and other stakeholders, but opposed those that fail to meet the same criteria."
Wells explains, "Because we strongly believe a robust, informed, and objective cost-benefit analysis is critical to effective regulation, we are pleased to now have the opportunity to address certain of the Analyses. While we recognize the Analyses represent the work of the staff, and not the Commission itself, we assume that these Analyses, and public comments in response, will inform Commission decision-making with respect to any final rule. In fact, each of the Analyses appears intended to support a particular regulatory outcome or conclusion. As discussed below, we believe the Analyses are inadequate to support certain of these outcomes and conclusions. In particular, we do not believe the Analyses adequately support the following: (i) ending a tax-exempt (or "municipal") money market fund's flexibility to invest up to 25% of its total assets in securities subject to guarantees or demand features of a single institution ("25% Basket"); (ii) modifying the proposed flexibility for a government money market fund to invest in non-government securities; and (iii) quelling legitimate concerns voiced in public comments on the Proposal that government money market funds may not have capacity to accept assets leaving institutional prime money market funds due to imposition of a variable net asset value ("NAV") requirement on those funds."
The letter continues, "In response to the Commission's proposed variable NAV requirement for institutional prime money market funds, we questioned the capacity of government money market funds to accept assets migrating from institutional prime money market funds. We pointed out that supply of U.S. Government securities and repurchase agreements collateralized by U.S. Government securities has declined in recent years. The Safe Assets Analysis appears intended to address concerns about government money market fund capacity to accept substantial inflows from institutional prime money market funds. However, as discussed in greater detail below, we believe that the Safe Assets Analysis misses the mark and fundamentally fails to address the capacity question. In citing an abundant supply of foreign safe assets, the Analysis does not take into account that non-U.S. safe assets are ineligible investments for both government money market funds and many other investors in domestic government securities in light of associated foreign currency risks and the typically long-dated maturities of these assets. In addition, the study does not quantify or qualitatively assess the supply of assets that must make up most or all of government money market fund portfolios -- U.S. Government securities and repurchase agreements collateralized by U.S. Government securities."
It adds, "The Safe Assets Analysis provides statistical information and analysis about the demand and supply of "safe assets," defined as debt securities with virtually no default risk. The analysis focuses on the availability of both domestic government securities and global safe assets, rejecting the prediction of an International Monetary Fund ("IMF") report that the global economy will experience a shortfall of safe assets. In discussing the potential impacts of changes to money market fund regulation, the Safe Assets Analysis correctly notes that a significant portion of prime money market fund investors could shift investments into government money market funds, increasing demand for domestic government securities and safe assets in the economy."
Wells continues, "However, it goes on to suggest that an ample supply of safe assets would meet increased demand for government securities precipitated by such a shift. Specifically, the Analysis contends that the market contains, or will contain, an adequate supply of portfolio securities necessary to allow government money market funds to absorb assets leaving institutional prime money market funds due to a potential variable NAV requirement. In support of this assertion, the Safe Assets Analysis explains that a hypothetical $357 billion shift from prime money market funds to government money market funds, based on a 20% shift, would be unlikely to create a problem given the estimated amount of $74 trillion in global safe assets."
But, they say, "The availability of global safe assets, regardless of their total magnitude, is simply not germane to of the question of government money market funds' ability to absorb assets shifting from prime money market funds in the event the Commission imposes a variable NAV requirement on institutional prime money market funds. As noted in footnote 25 of the Safe Assets Analysis, a government money market fund must invest at least 80% of its total assets in cash, government securities as defined in section 2(a)(16) of the 1940 Act, or repurchase agreements that are collateralized with cash or government securities ("80% Test"). The 1940 Act defines a government security as "any security issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing." Foreign safe assets, for example, are not eligible to satisfy a government money market funds' 80% Test."
Rabusch states, "The Safe Assets Analysis appears to be suggesting that even if foreign safe assets are not eligible to meet the 80% Test, their availability to other investors seeking greater yields may draw other investors to those opportunities, thereby ameliorating domestic government security supply concerns for government money market funds. In this vein, the analysis baldly asserts that the fungibility and substitutability of global safe assets for non-money market funds would free up the supply of domestic government securities for government money market funds absorbing assets from prime money market funds. The Analysis contains no data, analysis or citation to other publications that supports the contention that foreign safe assets are fungible or substitutable for investors in domestic government securities. If fact, no qualitative or quantitative data is provided about the identities of other investors in domestic government securities, their past investment behaviors, legal restrictions on their investment mandates, their ability to assume associated foreign currency risks or invest in longer-dated securities or other salient characteristics. For example, accepting exposure to volatility in foreign currency exchange rates may be legally impermissible for certain investors in domestic government securities, or may present unacceptable risks because currency related losses may wipe out all, or in some cases more than all, of the income earned on foreign safe assets. In addition, other investors in government securities may be restricted to those instruments by governing documents, guidelines or other agreements. Thus, by assuming its conclusion with respect to fungibility and substitutability of global safe assets, the Safe Assets Analysis fails to affirmatively support the conclusion that the impacts of changes to money market fund regulation will be mitigated by the availability of alternative assets worldwide."
Finally, Wells adds, "The assets that are eligible to meet a government money market fund's 80% Test constitute less that 10% of the $74 trillion figure cited in the IMF estimate of total safe assets. Moreover, as noted above, the supply of short-term treasury securities, short-term federal agency securities and repurchase agreements available to government money market funds is declining due, in part, to evolving regulatory standards and other government actions. And, as noted in our previous Comment Letter, increased demand resulting from adoption of a variable NAV rule may push yields on short-term treasury securities into negative territory for a considerable time, which, in turn, may limit the ability of government money market funds to absorb assets from prime money market funds. Displaced assets from prime money market funds may instead gravitate to alternative vehicles that are less regulated than money market funds, offer less reporting and transparency, and may entail greater idiosyncratic, counter-party and non-diversification risks."
