Wednesday, September 2, 2009

Fidelity sends a letter to the SEC on money fund regulation

Fidelity has sent a letter to the SEC (included below) to comment on the recent SEC proposal to regulate money market funds. Here are some highlights:

* Fidelity points out that the proposed SEC rules, if implemented without changes, will essentially force their money market funds to yield zero in the current environment.
...we estimate that the potential yield reduction could be as high as 25 to 43 basis points for an institutional non-rated fund, 19 to 32 basis points for a rated institutional fund and 14 to 31 basis points for a retail fund. In today's low-rate environment, the average taxable fund is yielding 0.18% and the average municipal fund is yielding 0.17%.

* Fidelity is pushing to keep the 90 days limit on the average asset maturity, which the SEC has proposed to shorten. Fidelity's point is that 60 vs. 90 day maturity is not the issue when it comes to the risk profile of a money fund.

* Fidelity is asking to include Government Securities as "Liquid Assets" to avoid being restricted on the amount of government paper they can hold in the "prime" money markets fund. With the dearth of eligible corporate assets, Fidelity needs this option.

* They are trying to keep the 10% bucket for assets that don't qualify as "liquid" securities. Their view is that the daily and weekly liquidity requirements the SEC is proposing should be enough.

* Fidelity wants the ability to buy some amount of paper from "second tier" issuers (smaller corporates). Again, their view is this was not what caused the problem in money market funds - the Reserve was destroyed because it had Lehman CP, which was a "first tier" issuer.

* One of the biggest problems for money funds has been a push by some, including the SEC, to mark the portfolio to market and have investors come in and out at NAV, like any other fund. That completely destroys the appeal of a money market funds, and Fidelity wants to keep money funds at one dollar NAV.

* Related to that, the SEC has proposed that money funds disclose the mark to market of their portfolio (Market Value Pricing). Fidelity doesn't like that at all. Their view is that if an investor sees the mark to market at $1.001, thew will jump in because they will be getting in at a dollar. But as soon as anyone sees a market value of $0.999, they will move out, pressuring the fund (potentially creating a run on the fund).

* Fidelity slammed traditional approaches to asset backed CP investing:

Fundamental to the analysis of whether an asset backed security represents minimal credit risk is an evaluation of the sources of liquidity available to repay the security when due. Examples of sources of liquidity that appropriately should be considered in making a minimal credit risk determination include third party committed liquidity facilities and the cash flows generated by the underlying assets. Taken alone, neither an issuer's sale of underlying assets at market value nor its continued access to the market to issue new securities is sufficient.

The Commission could consider requiring that, in order to be an Eligible Security, an issuer of an asset backed security cannot rely solely on the sale of assets at market value or continued market access.

This may cause a further hit to the ABCP market as money funds leave that space altogether.

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