SEC Commissioners Gallagher and Paredes’ Statement on the Regulation of Money Market Funds

In response to SEC Chairman Mary Schapiro’s proposal to restructure money market funds, Commissioner Daniel M. Gallagher and Troy A. Paredes submitted a joint statement on the reasons for their disagreement with the Chairman’s proposal. Specifically, they asserted that the proposals were not supported by sufficient data, would be expensive to the economy and would create risk in the economy. The Commissioners recommended that the SEC staff conduct more detailed research and analysis on money market funds before the SEC proposed rules. 

This statement follows Commissioner Aguilar’s statement expressing his disagreement with the Chairman’s proposal. 

Lofchie Comment:  The debate between the various Commissioners over the regulation of money market funds, even if perhaps ill-tempered, seems enormously healthy to me. The mere existence of a debate over the direction of financial regulation serves as an exemplar of facts that ought to be obvious: (i) more regulation is not always better regulation; (ii) regulations can have effects which are the opposite of those intended; and (iii) it is good to think through laws/regulations before adopting them.

It might sound as if I am in opposition to Chairman Schapiro’s views on money market funds, but I am not.  I don’t have the economic background to take a view on theoretical issues, and money market funds are not my area of actual practice.  But I do welcome the possibility of a debate on a topic of financial regulation that is not painted as a battle between good and evil rather than a question of the better guess as to sound public policy.  We need this same debate over Dodd-Frank and over the direction of financial regulation generally. 

View statement in full here (links externally to SEC website).
See also
Chairman Schapiro’s Statement on Money Market Fund Reform (from August 22); Commissioner Aguilar’s Statement on Money Market Fund Reform (from August 23). 


Foreign Governments – Comments on ET Guidance

Australian Securities and Investments Commission, et al.: The Australian Securities and Investments Commission, Hong Kong Monetary Authority, Monetary Authority of Singapore, Reserve Bank of Australia and Securities and Futures Commission, Hong Kong, submitted a joint comment letter to CFTC Chairman Gary Gensler. The organizations discussed their concern that the CFTC Proposed Guidance (subjecting non-U.S. persons to the swap dealer or major swap participant registration requirements, as well as entity-level and transaction-level requirements) would have the following consequences:

  • Affected non-U.S. persons will have to comply with two sets of regulations, which may be overlapping and conflicting, imposed by the U.S. and individual non-U.S. regimes. This is compounded by the lack of clarity and specificity in a number of areas of the Proposed Guidance.
  • Potential market disruption or fragmentation, with consequently increased risks to systemic stability and market liquidity in our markets, may arise as market participants are compelled to change their business models or even withdraw from certain businesses, all within a relatively short period of time. The impact from any resulting (likely significant) increase in compliance costs and the potential reduction in liquidity of OTC derivatives markets should not be underestimated.

Comissao de Valores Mobiliarios (CVM): CVM outlined its assessment of the proposed interpretive guidance, addressing registration as a Swap Dealer/Major Swap Participant, Substituted Compliance, and privacy and data-protection issues.

European Commission (EC) Letter: The EC argued that the guidance requires further review, especially the significant potential risk attached to the broad definition of a U.S. person, which may lead to the duplication of laws, and to irreconcilable conflicts of laws, for market operators.

Financial Services Agency, Japan & Bank of Japan: Financial Services Agency, Japan & Bank of Japan, raised their concerns about the application of registration and transaction requirements to operations of foreign financial institutions established outside the U.S. In addition, they addressed three specific requests to amend the proposals, including further extension of the application of substituted compliance, deferral of application of CFTC regulations with respect to non-U.S. persons, and the exclusion of certain transactions from the calculation of swap transactions in regard to the de minimis threshold for non-U.S. persons.

Financial Services Authority (UK): FSA suggested that the CFTC delay imposing the registration requirement on non-U.S. persons until a defined period (perhaps six months) after the CFTC has finalized its cross-border guidance. This would allow firms time to interpret the guidance and make an informed and considered decision on the appropriate entities to register.

French Ministry of Economy and Finance; Autorite de controle prudentiel (ACP); Autorite des marches financiers (AMF): The French Ministry of Economy and Finance expressed support for the concept of substituted compliance related to non-U.S. Swap Dealers or non-U.S. Major Swap Participants. However, the Ministry also discussed how the mere extension of the scope of registration for Swap Dealers or Major Swap Participants to non-U.S. entities would create regulatory and oversight overlaps, which could cause serious concerns.

Swiss Financial Market Supervisory Authority (FINMA): FINMA raised a concern as to the potential CFTC margin requirements for swap deals that are not cleared by a central counterparty. In particular, if such margin requirements are applied to a Swiss-based entity, this may duplicate the requirements and possibly conflict with international and domestic capital adequacy rules, thereby leading to prudential inefficiencies.

Additional Letters: Available Here.

View Release in full here (links externally to CFTC website).


Commissioner Luis A. Aguilar’s Statement Regarding Money Market Funds

SEC Commissioner Luis A. Aguilar made a statement addressing the issue of additional structural changes to the cash management industry (i.e., SEC registered money market funds). Commissioner Aguilar argued that there are larger macro questions and concerns about the cash management industry as a whole that must be considered before the money market funds industry is fundamentally altered. Therefore, in his view, to move forward with further rules changes as to money market funds at this time is to risk serious and damaging consequences.

In particular, Commissioner Aguilar expressed his concern that the SEC Chairman Schapiro’s proposal (previously reported) would be a catalyst for investors moving significant dollars from the regulated, transparent money market fund market into the unregulated market.  He also expressed concern that, given the current volatility of the capital markets and the fragile state of the economy, the timing of this proposal and its collateral consequences could be harmful.  To address these concerns, Commissioner Aguilar recommended a concept release to study the cash management industry as a whole which would provide a foundation to understand the role, and relative size, of SEC-registered money market funds.

[Lofchie Comment:  Commissioner Aguilar’s statement was in response to the previously reported statement of SEC Chairman Schapiro that had argued against a go-slow approach.]  

View statement in full here (links externally to SEC website). Additional Materials: 2010 Money Market Amendments

SEC Chairman Mary Schapiro’s Statement on Money Market Fund Reform

SEC Chairman Mary Schapiro released a statement regarding her fellow Commissioners’ opposition to publishing a proposal to reform the structure of money market funds. According to the Chairman’s statement, three Commissioners have informed Chairman Schapiro they will not support the publication of the proposal (and that it therefore cannot be published for public comment) and have suggested issuance of a concept release instead.

Chairman Schapiro criticized this suggestion as being too go-slow, arguing that a concept release at this point does not advance the discussion as compared to concrete proposals. In the statement, Chairman Schapiro further lays out how most of the risks inherent in money market funds have resulted from SEC rules as to valuation standards and a (supposedly) stable net asset value, without any capital or asset cushion.   Given that it is SEC Rules that have created the risk, it is implicit in Chairman Schapiro’s remarks that the SEC is obligated to address the risks.  Finally, Chairman Schapiro outlines two reform alternatives that she believes would address the structural issues.

[Lofchie Comment:  Chairman Schapiro’s statements as to money market funds are consistent with prior statements by various staff members of the Federal Reserve Bank, such as a prior statement by the President of the Federal Reserve Bank of Boston.  Also, the recent first annual report of the Financial Stability Oversight Council (at page 134) [big document that may be very slow to open], of which Chairman Schapiro is a member, expressed the view that money market funds were an area of systemic risk.] 

View statement in full here (links externally to SEC website).


NFA – President and Chief Executive Daniel Roth’s Testimony on Shortfalls in Customer Segregated Funds at FCMs

In his testimony, Daniel Roth asserts the need to improve regulatory surveillance, audit and fraud detection techniques in light of customer losses resulting from the failures of MF Global and Peregrine.

Citing new NFA rules recently approved by the CFTC, Roth outlines the following forthcoming requirements:

“All FCMs must report certain information concerning the FCM’s financial condition that will then be made available to the public on NFA’s web site. This information includes the firm’s capital requirements; its excess capital; the amount of customer segregated funds held by the firm; the amount of excess segregated funds maintained by the firm; whether the firm engages in proprietary trading, once that term is defined in the context of the Volker rule; and whether any custodial bank holding customer funds is an affiliate of the FCM.

“All FCMs must report to NFA detailed information on how customer segregated funds are invested, and that information will also be made available to the public through NFA’s website.

“If any FCM reduces its level of excess segregated funds by 25% in any one day by making disbursements that are not for the benefit of customers, a financial principal of the firm must approve the disbursement, must immediately notify the firm’s DSRO, and must certify that the firm remains in compliance with all segregation requirements.”
Roth goes on to note that all of these rule changes will promote greater transparency for both customers and regulators, and suggests that they will help prevent a recurrence of the types of customer funds problems as experienced with the MF Global fallout.

View testimony in full here (links externally to NFA website).

CFTC Commissioner Bart Chilton’s Statement on the Futures Investor and Customer Protection Act (FICPA) Proposal

In this statement, Commissioner Chilton puts forth a proposal for how Congress might craft a new law to protect customer funds. His proposal includes the following three recommendations:

  1. The establishment of a Futures Investor and Customer Protection Fund
  2. FICPA would create a separate nonprofit Corporation and a Board of Directors for Futures Interests
  3. Futures Customers would have the right to file claims with a Trustee for priority treatment

[SL Comment: To continue my general stream of cynical comments as to Dodd-Frank, to my mind, the statute was inappropriately sold to the press as a cure for financial risk when, in many respects, it increases financial risk. As the defaults of MF Global and Peregrine demonstrate, many clients would be far better off posting collateral for swaps into tri-party repo rather than posting collateral with an FCM. Further, the provision of any proposed futures insurance is not a “gift” from the government; it will be financed by a tax on FCMs that is passed along to customers. Finally, I would note that such an insurance scheme is far more meaningful as to securities and banking, where many of the customers are retail. The futures world is historically more institutional. For institutional customers, the $250,000 of potential insurance protection is far less meaningful than the possibility of very large losses, far exceeding the $250,000 if a financial intermediary fails.]

View statement in full here (links externally to CFTC website).