The Presidents of all 12 Federal Reserve Banks support enacting reforms for money market funds, but are critical of an industry proposal for liquidity fees and redemption gates. In their joint comment letter to the FSOC, the Presidents took several positions on the money market fund debate, including:
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Any reforms in this area should initially focus on prime money market funds, as this is where the greatest credit risk can be taken.
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Any market-based NAV calculated for a money market fund should be based purely on the market value of the fund’s underlying assets, and not on any other value such as amortized cost (non-money market mutual funds are currently allowed to use amortized cost to calculate their market-based NAV for portfolio assets maturing in 60 days or less).
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Requiring money market funds to float their NAVs would reduce run risk and provide full liquidity to shareholders which “may be critically important to avoid contagion during periods of financial turmoil.”
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If money market funds are required to hold a capital buffer, the size of such buffer should vary depending on the level of risk in a fund and the level of diversification in the portfolio.
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A reform alternative, supported by many in the industry, to enact standby liquidity fees and temporary redemption gates “may increase the likelihood of a run . . . and increase the risk of contagion.”
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More than one alternative could address the financial stability concerns posed by money funds, in which case fund sponsors may offer both a floating NAV fund and, separately, a stable NAV fund with a capital buffer.