The Financial Product that Could Affect Your Electricity

Jan 15, 2013

What do American mayors, local power providers, and furniture companies have in common?

Short of existence, seemingly nothing. But they’re all on a list of more than 75 companies, non-profits, and organizations uniting to express concern about proposed changes to money market mutual funds (MMMFs). 

In a letter being sent to the Financial Stability and Oversight Council (FSOC) today, this broad coalition is asking that regulators look at the consequences. The letter says, “Structural changes like those that FSOC has proposed would shrink the industry, deprive us of an essential source of working capital, and force us to move our investments to less regulated, less flexible products.”

MMMFs provide an essential source of liquidity for day-to-day operations. While the average person may not know what an MMMF is, chances are they are affected by them. This low-risk investment product also provides efficient, short-term financing, helping companies meet their working capital needs, banks finance home equity and auto loans, and local governments build roads, bridges, schools, and hospitals.

Beyond irreparably harming an essential cash management tool for millions of investors, businesses, cities, and non-profits, regulators haven’t fully flushed out whether additional reforms are necessary or what the impact of suggested reforms will be.  In fact, as Theresa Hamacher and Robert Pozen note in their recent Washington Post op-ed, in the 40-year history of MMMFs “only two money-market funds (both institutional funds) have ever broken the buck. And actual losses realized by investors were ultimately minimal — roughly 1 cent on the dollar.”  Once was during the midst of the financial crisis and the other was when Orange County filed for bankruptcy in 1984.

A recent report by the Chamber’s Center for Capital Markets Competitiveness aimed to inform the debate by analyzing the SEC’s 2010 reforms. The report found that MMMFs were more transparent, had increased liquidity, and offered lower risk.

At best, forcing additional regulation is a rush to judgment. At worst, it’s uninformed policymaking that will effectively destroy an important source of capital.

FSOC is soliciting comments on its recommended reforms until Friday, January 18.  If you want to add your voice to the broad coalition of people concerned about proposed changes, click here.

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