Money Fund Rollback Gains Traction
Bipartisan support is growing for a bill that would roll back money-market fund reform.
Eight representatives signed on as co-sponsors of the Consumer Financial Choice and Capital Markets Protection Act last week, according to the Library of Congress’ website, Congress.gov. Although similarly named, the bill is different from the Financial Choice Act, which aims to roll back many of the provisions of the Dodd-Frank Act.
So far, seven Democrat and eight Republican representatives are co-sponsoring the bill, which aims to revoke a slew of reforms to money-market funds that took effect last October.
The bill is part of an aggressive deregulatory push by the Republican-led Congress, which is also trying to rollback much of the post-crisis Dodd-Frank law. While much of that effort is being led by the GOP majority, in this case support is coming from both parties.
The reforms, which took effect in October, required money funds that invest in short-term corporate and municipal debt to abandon a fixed $1 share price. Funds also could impose fees on shareholders who withdraw assets, and offer the right to suspend redemptions temporarily. Funds that invest in government and agency debt were exempt.
The Securities and Exchange Commission imposed the restrictions in the wake of the financial crisis to avoid panic selling in another similar meltdown. But many investors reacted to the rules by looking for other places for their cash. Assets in the affected funds fell by more than $1 trillion last year, according to SEC data.
That loss of liquidity could make it more difficult and expensive for companies and municipalities to borrow in the future, said Rep. Keith Rothfus (R-Pa), who introduced the bill last month.
“It drives up borrowing costs,” he said, in an interview with The Wall Street Journal.
Short-term rates for corporate borrowers have jumped this year, although some of the increase is likely due to recent Federal Reserve rate hikes. Rates for 30-day commercial paper issued by non-financial borrowers with good credit averaged 0.89% as of June 7, according to Federal Reserve statistics, up from 0.64% in January.
Mr. Rothfus’ bill contemplates allowing funds to return to fixing prices at $1 a share, but funds that do so must forego any government bailouts if they get into trouble.
In the wake of Lehman Brothers’ collapse, the Reserve Primary Fund lost money and announced its net asset value fell below $1 a share. The news led to a panic in the market and forced the government to backstop the money funds.
The large, sophisticated investors that invest in the funds covered by the rollback bill shouldn’t need such protections, said Mr. Rothfus.“They should know [the risk] going in,” he said.
The October fund reforms already had a mechanism to dispel the illusion that the money funds would protect investors’ principal, said Marcus Stanley, policy director for Americans for Financial Reform, a group that opposes the rollback efforts. Share prices that fluctuated would remind investors that they could lose money in the funds, prodding them to be more vigilant, he said.
Although the flight of capital from the money funds exceeded many analysts’ expectations, there are signs that the bleeding has stopped. Assets under management at funds investing in corporate debt totaled $405.9 billion at the end of May, a 6% increase from Jan. 18, according to the Investment Company Institute, a trade group. Meanwhile, money managed by funds that invest in government and agency debt totaled $1.54 trillion, a 2.3% decrease.
Still, that rebound is only a fraction of the money that fled the funds, said Anthony Carfang, a managing director with consulting firm Treasury Strategies. Curtailing reform could help pump much more money into the funds and give a short-term liquidity cushion to companies that borrow in the commercial paper market if the economy contracts and credit gets squeezed, he said.
“Money funds lost a $1 trillion shock-absorber,” he said. “It was money available as liquidity in the private sector.”
The bill is currently with the House of Representatives’ finance committee, but there is no timeline for its review, said Mr. Rothfus.