ASF Cautions Limiting Money Market Mutual Fund Liquidity Could Impact Access to Credit and Slow Economic Recovery
American Securitization Forum (September 9, 2009)
September 9, 2009
New York, NY - The American Securitization Forum (ASF), in a comment letter filed with the Securities and Exchange Commission (SEC), cautioned that additional money market mutual fund regulation may restrict bank liquidity, which could be particularly harmful in the current period of capital markets dislocation, as it would negatively impact access to credit by consumers and businesses. The ASF also notes that eliminating Tier II securities from eligible capital for money market mutual funds could increase volatility and place additional pressure on banks, and recommends the SEC consider increasing the 5% limit on these securities to avoid such a negative outcome. The comment letter was filed in response to proposed SEC amendments to Rule 2a-7 which address the risks that money market mutual funds may take.
"Restoring bank liquidity is essential to increasing the availability of credit, but some of these proposals would have the opposite effect," said Tom Deutsch, deputy executive director of the American Securitization Forum. "Banks need both capital and liquidity in order to lend, and restoring the flow of liquidity from money market funds to banks and, therefore, to consumers and corporations will bolster the liquidity and financial security needed for economic recovery."
The ASF opposes the SEC proposal to eliminate the ability of money market funds to invest in second tier securities because it could increase market volatility and place additional pressure on banks, thereby increasing systemic risk. Banks credit ratings are heavily concentrated within one notch of potentially becoming ineligible for money market funds. If a bank's short-term rating is downgraded, access to the money market could be eliminated, severely constraining liquidity. Increasing the 5% limit on Tier II securities could reduce market volatility and maintain banks' access to liquidity and funding.
"Banks cannot be the sole source of funding for corporate and consumer credit," said Mr. Deutsch. "They are limited by liquidity, regulation and capital constraints but at the same time, they are being encouraged to increase lending to promote economic growth. The SEC proposals may create additional systemic problems, rather than fostering additional liquidity and further investment in a fragile financial system."
In its letter, the ASF notes that proposals to limit the weighted average maturity of portfolio securities to 60 days and to cap the weighted average life of portfolio maturity at 120 days may not eliminate the systemic risk of a fund "breaking the buck," when its share price falls below $1.00. If money market mutual funds are required to shorten their investments, it could cause issuers to become more exposed to liquidity stress and shocks, further limiting lending activities.
Finally, the ASF believes that credit ratings serve an important purpose in enhancing asset-backed securities in the primary and secondary markets and favors retaining the requirement that these securities be rated. The ASF also believes that money market mutual funds should be permitted to designate a limited number of credit rating agencies that it would look to for all purposes under Rule 2a-7, and that it could help provide fund investors with more transparency on the substance and merits of the ratings relied on by the fund. However, it should be clarified that this approach is not intended to increase the minimum numbers of eligible ratings required for any other purpose under the rules.
The full comment letter is available at the following link: http://www.americansecuritization.com/uploadedFiles/ASF_SEC_Rule_2a-7_Comments_9.8.09.pdf
The American Securitization Forum is a broad-based professional forum through which participants in the U.S. securitization market advocate their common interests on important legal, regulatory and market practice issues. ASF members include over 350 firms, including issuers, investors, servicers, financial intermediaries, rating agencies, financial guarantors, legal and accounting firms, and other professional organizations involved in securitization transactions. The ASF also provides information, education and training on a range of securitization market issues and topics through industry conferences, seminars and similar initiatives. For more information about ASF, its members and activities, please go to www.americansecuritization.com. The ASF is an affiliate of the Securities Industry and Financial Markets Association.
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