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Fitch: IOSCO Proposes Further Global MMF Reforms

NEW YORK--(BUSINESS WIRE)-- The International Organization of Securities Commission (IOSCO) published a report Tuesday on Oct. 10, 2012 suggesting that the global money market fund (MMF) industry should be further regulated to reduce systemic risk. Policy recommendations by IOSCO, the global body of regulators, concerning the market suggest that calls for additional MMF reform remain alive despite a lack of consensus regarding these recommendations from the IOSCO Board.

New IOSCO recommendations seek to address perceived MMF vulnerabilities highlighted by the financial crisis. Specifically, IOSCO recommends additional safeguards for those MMFs using amortized cost accounting and offering constant net assets value (NAV) per share. Furthermore, IOSCO recommends a conversion of constant NAV MMFs to floating NAV MMFs through limited use of amortized cost accounting only for assets maturing below 90 days.

Whether a change in accounting methodology would make MMFs less susceptible to a run has been hotly debated. Clearly, some of the other IOSCO recommendations would improve MMFs' stability and liquidity. For example, IOSCO recommends MMFs holding a minimum amount of liquid assets to facilitate redemptions and prevent fire sale. Fitch looks at portfolio liquidity in relation to fund investors' concentration and features. As a baseline, we view 10% of MMFs assets invested in daily liquid securities and 25% of MMFs assets invested in weekly liquid assets as consistent with a 'AAAmmf' rating for MMFs in the U.S. and Europe.

We note that Rule 2a-7, which governs activities of U.S. MMFs, was substantially amended in 2010 to address specific MMF vulnerabilities highlighted by the 2008 financial crisis, including a requirement for minimum liquidity. Still, U.S. bank regulators in addition to the Financial Stability Board have voiced concern that more needs to be done to improve MMFs' resilience during stressful times to avoid a run.

In August, Security and Exchange Commission (SEC) chairman Mary Schapiro announced that regulators would not implement additional MMF reforms as had been widely publicized. These proposals were meant to improve MMF's safety and soundness and to limit systemic risk. Following on what was considered to be SEC inaction, U.S. Treasury Secretary Timothy Geithner urged members of the Financial Stability Oversight Council to use its authority granted by the Dodd-Frank Act to recommend that the SEC proceed with MMF reform.

In addition, Secretary Geithner offered other alternatives to enhance systemic stability that could be implemented as alternatives to MMF reform. For example, designating MMFs or their sponsors or investment advisers as systemically important would give the Federal Reserve Board authority to impose enhanced prudential standards. Bank regulatory agencies could then use their powers to impose capital surcharges on banks sponsoring MMFs or otherwise restrict banks' ability to sponsor or deal with MMFs. Additionally, the role of MMFs in the triparty repo market was mentioned in connection with ongoing efforts to improve the safety and soundness of that market.

Despite continuous regulatory debate, it is clear that MMFs remain highly important as vehicles for institutional cash management and an important investment option for retail investors. The debate over MMF reform illustrates the multiple roles that money funds play within the broader financial system while also underscoring the importance of achieving a consensus that is economically viable.

For more information regarding Fitch's view with respect to MMFs, see "Global Money Market Fund Rating Criteria" published on March 29, 2012.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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