More money market reform likely.

• Author: Crooks, Christina
• Position: WASHINGTON BEAT

Although one round of rule changes has already been adopted in response to the 2008 run on money market funds, federal regulators are looking at further reform options, some of which could impact the ability of companies to utilize money market funds to manage liquidity.

Remember the time of the 2008 financial crisis, when the ripple effects of financial institution failures were felt well beyond the large investment banks? For money market funds (MMFs), the failure of Lehman Brothers Holdings Inc. had a significant effect, as the Reserve Primary Fund, a money market fund holding commercial paper of the troubled investment bank "broke the buck"--meaning the net value of its assets fell below 51 a share.

This triggered investors to rapidly redeem shares from a broad array of MMFs out of concern for the safety ol their in-vestments, forcing the federal government to intervene with a temporary MMF guarantee program.

In January 2010, the U.S. Securities and Exchange Commission adopted rule changes to improve the safety of money market funds, which included enhanced liquidity requirements, disclosures and protections. Since that time, the resiliency of MMFs seems to be on a stable path. Still, additional reforms can be expected as soon as early 2012.

The call for additional reform can be linked lo a report issued in October 2010 by the President's Working Group on Financial Markets. The report stated that the SEC rules issued in response to the crisis addressed some of the issues, but that more needs to be done to mitigate systemic risk and the susceptibility of MMFs to runs. The report laid out several policy options, including floating net asset values, private emergency liquidity facilities for MMFs, mandatory redemptions in kind and insurance for MMFs.

Floating net asset values (NAV), or eliminating the stable NAV that has attracted so many investor to MMFs, have drawn a tremendous amount of concern from market participants, including FEI's Committee on Corporate Treasury (CCT). Yet, supporters of the floating NAV believe it will eliminate the perception that MMFs are completely safe and risk free.

At a May 2011 SEC Roundtable on Money Market Funds and Systemic Risk, the floating NAV option was again debated by regulators, academics and market partici-pants. During the roundtable discussion, Carol DeNale, senior vice president and treasurer of CVS Caremark Corp., raised concerns that many corporate treasurers will not invest in a floating...