Thursday, May 21, 2009

Proposed money market funds practices/regulation - about time!

In March-09 the Money Market Working Group released their report to the Board of Governors of the Investment Company Institute. This was meant to create a set of good practices before the SEC steps in and does something dumb. And by the way this is a a positive development to avoid disasters like this in the future: Press Release. No major surprises in the report, but a couple of items worth noting:

1. Less reliance on rating agencies. The recommendation seems to focus on having each fund's "committee" select their rating agency and encaurage competition. About time!

2. The SEC to monitor funds that significantly outperform their peers. This is probably the best signal that there may be a problem.

Here is the summary of all the recommendations:

"* Impose for the first time daily and weekly minimum liquidity requirements and require regular stress testing of a money market fund’s portfolio.

* Tighten the portfolio maturity limit currently applicable to money market funds and add a new portfolio maturity limit.

* Raise the credit quality standards under which money market funds operate. This would be accomplished by requiring a “new products” or similar committee; encouraging advisers to follow best practices for determining minimal credit risks; requiring advisers to designate the credit rating agencies their funds will follow to encourage competition among the rating agencies to achieve this designation; and prohibiting investments in “Second Tier Securities.

* Address “client risk” by requiring money market fund advisers to adopt “know your client” procedures and requiring them for the first time to disclose client concentrations by type of client and the potential risks, if any, posed by a fund with a client base that is strongly concentrated.

* Enhance risk disclosure for investors and the market and require monthly website disclosure of a money market fund’s portfolio holdings.

* Assure that when a money market fund proves unable to maintain a stable $1.00 NAV, all of its shareholders are treated fairly. For this purpose, a money market fund’s board of directors, or a committee of the board, would be authorized to suspend redemptions and purchases of fund shares temporarily under certain situations, and permanently for funds preparing to liquidate, in order to ensure that all shareholders are treated fairly.

* Enhance government oversight of the money market by developing a nonpublic reporting regime for all institutional investors in the money market, including money market funds, and encouraging the SEC staff to monitor higher-than-peer performance of money market funds.

* Address market confusion about money market institutional investors that appear to be—but are not—money market funds."

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