ASF Weighs in on Money Market Liquidity Requirements

By Lisa Valentine

The American Securitization Forum (ASF) (an independent organization operating as part of the Securities Industry and Financial Markets Association (SIFMA)) has weighed on the Securities and Exchange Commission’s proposed changes to Rule 2a-7 that, among other restrictions, eliminate the ability of money market funds to invest in Tier II securities to make these funds less risky. The ASF “strongly opposes” the elimination of Tier II securities, stating that this proposal could increase market volatility and put banks under undue liquidity pressures. The SEC had asked for public comment by September 8 for the proposed changes.

Money market funds are a major source of bank funding – upwards of 80% of money market assets fund banks and other financial institutions. ASF contends that 6 of the largest S&P rated U.S. banks are close to becoming Tier II issuers (9 of the top 20 are already in the Tier II category) and would therefore be unable to access money market funds to meet their liquidity commitments. No liquidity means no consumer or commercial lending by banks. Loss of liquidity would seriously impact any economic recovery.

The ASF’s argument it that banks should not be the sole source of consumer and corporate lending and the market will continue to need alternatives to bank lending, including Tier II paper.

The SEC had also requested comments on whether its proposed diversification limits of 5% of assets in one issuer and no more than 10% of assets in one credit support provider will prevent money market funds from “breaking the buck” (when a share price dips below a dollar)and systemic risk. The ASF proposes this change as well and would like to see increased limits, arguing that even though the Primary Reserve Fund only had 1.2% of Lehman Brothers exposure before “breaking the buck” and starting a run on money market funds back in September, 2008.

The ASF gives the following reasons for proposing an increase in the 5% on Tier II securities:

• Money market funds that have done robust credit analysis should be able to purchase high credit quality Tier II bank issuance,
• It will give banks a stable source of liquidity funding,
• It will decrease the impact of rating agency actions.

Actually, the SEC is pondering the idea of eliminating credit rating agencies from this entire process. AFS believes that the credit rating agencies, which issued many bogus ratings on  asset-backed securities, have mended their ways and that ratings should continue to be used as “one relevant factor” in an investment decision. AFS is advocating for allowing money market funds to designate a limited number of credit ratings agencies (which are registered with the SEC) as the source of their ratings.