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Friday, September 28, 2012

Geithner: Further Reforms to MMF Industry are Essential

In advance of the Financial Stability Oversight Council (FSOC) upcoming meeting, Treasury Secretary Geithner sent a letter to the FSOC members regarding recent efforts to reform the money market fund industry and address the threats those funds can pose to the stability of the financial system.

FSOC, created by the Dodd-Frank Act, was established to lead efforts to detect emerging threats to financial system and has been given the power to define which non-banking financial firms will receive more oversight in order to curtail any excessive risk taking.

From Geithner’s letter:
Further reforms to the MMF industry are essential for financial stability… the financial crisis of 2007–2008 demonstrated that MMFs are susceptible to runs and can be a source of financial instability with serious implications for broader financial markets and the economy.

The SEC took important steps in 2010 to improve the resilience of MMFs by amending Investment Company Act Rule 2a-7 to strengthen the liquidity, credit-quality, maturity, and disclosure requirements of MMFs. But the effort toward reform should not stop there.

The 2010 reforms did not attempt to address two core characteristics of MMFs that leave them susceptible to destabilizing runs: (1) the lack of explicit loss-absorption capacity in the event of a drop in the value of a portfolio security and (2) the “first-mover advantage” that provides an incentive for investors to redeem their shares at the first indication of any perceived threat to the fund’s value or liquidity.
Read the full letter.

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