Vanguard to SEC: More Money Market Fund Reforms Should Be Weighed Carefully

Vanguard told the Securities and Exchange Commission (SEC) in a comment letter on Monday that while the agency’s recent regulation imposing new minimum liquidity levels on money market funds has had beneficial effects, any further action should be looked at with great caution.

Vanguard's letter said that the new regulations “greatly increased the funds’ liquidity and ability to satisfy large redemption requests,” and will help prevent a “future systemic market disruption” from threatening the liquidity of money market funds, as was the case in the financial crisis of 2008, further reforms to money market funds pursued by the Financial Stability Oversight Council (FSOC) should be weighed carefully.

In its comment letter, Vanguard said that the President’s Working Group on Financial Markets’ (PWG) report on money market funds that was released last October “appropriately underscores the complexity involved in further reducing money market funds’ potential susceptibility to runs, and demonstrates the very real danger that the potential ‘cure’ is worse than the ‘disease.’ It is important, therefore, Vanguard continued, that any reforms pursued by FSOC, created under Dodd-Frank, “carefully consider the consequences that such reforms may impose on the economy, financial markets, borrowers and investors.”

Careful and deliberate consideration of the downstream effects of any additional money market fund reform, Vanguard continued, “will help ensure that any changes will be positive and enduring, and will bolster rather than destroy a valuable cash management product for millions of investors and a much-needed source of financing for government, financial and corporate borrowers.”

The PWG stipulated that the SEC must assist the FSOC in its analysis of money market funds.

Vanguard went on to say that the fund firm does not believe that the “market-wide illiquidity that occurred in the 2008 market crisis resulted from money market fund activity, but rather from banking entities’ unwillingness to accept each others’ credit risk.” Nonetheless, Vanguard continued, “we understand that the PWG, [FSOC] and Commission believe more should be done to further mitigate the potential structural vulnerabilities of money market funds to runs.”

The SEC’s recent amendments to Rule 2a-7 and certain other rules that govern money market funds under the Investment Company Act of 1940, Vanguard said, “have made money market funds more resilient to credit and liquidity pressures, and will help reduce the likelihood of runs. We believe the amendments to Rule 2a-7 and related money market fund rules, which we strongly supported, significantly improve a fund’s ability to withstand unusually high redemption activity.”

Vanguard said it also supports the creation of a private emergency liquidity facility for prime money market funds, as laid out in the PWG report, as it “is the best alternative that directly addresses the liquidity issue and, therefore, would be the most effective and appropriate option to address the potential for a run.”

The proposals for a floating NAV, on the other hand, Vanguard said, “do nothing to make money market funds more robust in the face of adverse liquidity conditions. They merely change accounting mechanics and make investment in, and management of, money market funds more complex.”