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Tarullo Calls For More Money Market Fund Regulation

by Glen Shapiro,, New York

17 October 2012

With recent global moves towards further structural reforms of money market funds (MMFs), Federal Reserve Governor Daniel Tarullo has added his call for the United States Securities and Exchange Commission (SEC) to agree on further regulatory action, or for other alternatives to be found.

During a speech at the University of Pennsylvania Law School, Philadelphia, he stressed that the primary aim of the Dodd-Frank Act can be read as “a reorientation of financial regulation towards safeguarding financial stability through the containment of systemic risk,” and that the vulnerability of shadow banking to runs, as investors rapidly withdraw funding, remains problematic in that respect.

As a significant sector of the US financial industry with some USD2.7 trillion in funds under management, Tarullo found that, “as many of us in the government have pointed out, MMFs remain a major part of the shadow banking system and a key potential systemic risk even in the post-crisis financial environment.”

He pointed out that the industry's survival in its present form is likely due in no small part to the unprecedented interventions by the Treasury and the Federal Reserve in providing insurance and liquidity support, after the run following the failure of the Reserve Primary Fund in 2008.

While the SEC, he said, took some steps in 2010 to improve the resilience of MMFs, opposition within the ranks of its Commissioners has impeded the approval of further necessary reforms, despite the fact that it “has ample regulatory authority to address the systemic risk problem”.

A majority of the current SEC commissioners have been opposed to the additional measures advocated by the SEC Chairman Mary Schapiro to reduce the vulnerability of MMFs to runs, including possibly requiring funds to maintain loss-absorbing capital buffers or to redeem shares at the market value of the underlying assets rather than a fixed net asset value of USD1 per share.

He therefore added his voice to those, including Treasury Secretary Timothy Geithner, calling for the Financial Stability Oversight Council (FSOC) to pursue alternatives if the SEC continues its failure to act.

Tarullo suggested that those alternatives could include FSOC designation of MMFs as systemically important and thus subject to the prudential requirements promulgated under Dodd-Frank. They could also include action by FSOC member agencies, such as the bank regulatory agencies imposing restrictions on regulated financial institutions' ability to sponsor, borrow from, invest in, or provide credit to money market funds that do not have structural protections.

He emphasized that each of those options would be “second-best” as compared to “a change in SEC rules to remove the fixed net asset value exception, to require a capital buffer that would staunch or buffer runs, or measures of similar effect. But that is the legal situation we all confront. My hope, of course, is that recent indications that other SEC commissioners are now willing to move forward with reforms will lead to the SEC adopting first-best measures in the near-term.”

Tarullo also concluded that the current situation regarding the MMF sector is noteworthy because it raises other institutional issues; particularly in that the capacity of private financial market entities to create ‘cash equivalents’ raises broader financial stability questions.

“Specifically,” he said, “there may be a need for new macro-prudential instruments, such as a comprehensive authority to impose margins on all cash-like instruments, regardless of whether a firm creating those instruments is a regulated entity such as a bank holding company.”

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at and a description of the report can be seen at
TAGS: business | law | banking | financial services | capital markets | legislation | United States | regulation | services

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