Why US money market reform isn't dead and may just be beginning

The demise of US SEC Chairman Mary Schapiro’s plan to vote on additional money market reforms can be seen as a major loss for the SEC and a major win for money market fund operators. We hear that the lobbying going on in Washington was fast and furious. However, taking the SEC out of the game in the short term in no way ends the conversation about money market reform in the US. We see two factors keeping the ball rolling: Shadow Banking conversations and the loud and persistent commentary of the US Treasury and the Federal Reserve that change is required.

Under the G20’s Shadow Banking investigations being undertaken by the Federal Reserve Board, money market reform comprises one of the five big working groups. In its October 2011 release, the FSB said that IOSCO would work to deliver its version of money market reforms by July 2012. That didn’t happen, but IOSCO did come out with a comment paper back in April 2012 that covered the exact same ground as the SEC proposals. Two days ago IOSCO also issued a press release in support of the SEC and money market reforms. According to the press release:

The Chairman of the Board of IOSCO, Masamichi Kono, has issued the following statement following the press release by SEC Chair Mary Schapiro on August 22 on Money Market Fund Reform.

“I have taken careful note of Mary Schapiro’s statement on Money Market Fund Reform in the United States. While refraining from directly commenting on a statement of the Chair of a member organization, I would like to reaffirm that IOSCO will continue its work on the basis of the mandate given to it by the G20 Heads of State and the FSB, to develop policy recommendations for strengthening oversight and regulation of the shadow banking system, including Money Market Funds.

IOSCO Committee 5 on Investment Management will meet at the end of August to consider the extensive public feedback received to its consultation report “Money Market Fund Systemic Risk Analysis and Reform Options” of 27 April 2012, and to elaborate draft final recommendations for addressing regulatory reforms to mitigate MMF’s susceptibility to runs and other systemic risks. The IOSCO Board will determine IOSCO’s further course of action on this important subject at its meeting in Madrid on 3/4 October, and will report to the G20 Finance Ministers meeting in November.”

Back in the US, Dodd-Frank makes it clear that the Financial Stability Oversight Council (FSOC) has the legal authority to take regulatory powers away from the SEC if it needs to and put them with the Treasury or the Fed. Given the strength with which both agencies have spoken about the need for greater money market reform (and reviewed frequently in our articles), if the SEC fails to act, we expect that the FSOC will take action to move regulatory jurisdictions to somewhere that can make the changes they want to see.

In sum, it would be foolish for anyone to think that the conversation on US money market reform is over. More likely, it is just getting started.

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