The Regulator Is In: Treatment Without Diagnosis
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“We don’t know what disease you have. But we’re certain chopping your head off is the answer.”
Sound crazy? A doctor who approaches patient care with that mindset makes as much sense as the haphazard approach to stacking on more regulations for money market funds today.
In the wake of the financial crisis, the SEC implemented an extensive overhaul of money market funds in 2010. The major changes worked to ensure the stability of funds by requiring tightened credit quality, more liquidity, and stress tests against hypothetical risk.
The question we should be asking now is, are the reforms working? Instead regulators are jumping straight to more rules.
Despite an appetite on the part of rule makers to regulate blind, the U.S. Chamber’s Center for Capital Markets Competitiveness (CCMC) took a look at the 2010 reforms.
Working with researchers at the University of Kentucky and Texas Tech University, the report released today confirms that it would be ill advised to propose additional reforms that would substantially alter the structure of the industry and lead to a host of unintended consequences. In fact, there is plenty of evidence to suggest that these funds are stronger than ever before.
Three Reasons to Believe in Money Market Funds:
- More Transparency: The 2010 reforms required more detailed and frequent disclosures of holdings—monthly in addition to quarterly. The result of this increased transparency is that any investor can obtain timely, accurate data on the risk of any fund they have invested in.
- Increased Liquidity: Money market funds are now more liquid and better able to handle a significant change in redemptions.
- Lower Credit Risk: Substantial redemptions in the summer of 2011—the highest redemption level since the reforms—did not lead to any runs on money market funds and did not measurably impact financial commercial paper issuers.
Given the importance of money market funds to investors, businesses, cities, why risk changing them now?
To learn more about the effects of the 2010 reforms, check out CCMC’s study. And when it comes to money market fund regulation, let’s not lose our heads.