What Hath FSOC Wrought?
(This post has been updated for October 31st data.) The SEC released its money market fund statistics for the end of October, giving us a comprehensive view of the impact of the reforms which took effect on October 14th. We now have government, retail and floating NAV money market funds, the later two with the potential for liquidity fees and redemption gates. The Wall Street Journal has run a number of stories about the "unintended" consequences of the reforms. The impact on the funds has been entirely consistent with the comments the SEC received on the proposed reforms--so this outcome should have been expected. By the time the dust fully settles, FSOC may have momentarily succeeded in its objective of reducing the assets of prime money market funds to a level where they cannot pose a threat to the stability of the financial system, assuming they ever did.
The Fall Out
The trends since the reforms were adopted in July 2014 are indisputable. First, as shown below, the number of funds has fallen markedly since July 2014. This is a continuation of a trend that predates the reforms: there were over 600 funds in October 2012. Near zero interest rates and the resulting near zero fees probably explains much of the decline. But the funds were liquidated or merged away at a faster pace after the Fed increased rates at the end of 2015, so this cannot be the whole story.![1 number of funds](https://assetmanagementadvocateredesign.perkinscoieblogs.com/wp-content/uploads/sites/38/2016/10/1-number-of-funds-624x482.jpg)
![2 pime govt tax](https://assetmanagementadvocateredesign.perkinscoieblogs.com/wp-content/uploads/sites/38/2016/10/2-pime-govt-tax-624x482.jpg)
![3 prime percent](https://assetmanagementadvocateredesign.perkinscoieblogs.com/wp-content/uploads/sites/38/2016/10/3-prime-percent-624x482.jpg)
Systemic Impact?
To put these numbers in context, the percentage decline in prime fund assets last September (28%) was larger than the percentage decline in assets during September 2008 (24%). And rather than rebounding in October, prime fund assets fell another 24%. As predicted, the reforms resulted in a larger and more extended run on the prime funds than the Reserve Primary Fund breaking dollar. Yet the run did not produce a systemic impact. How could that be? The final chart shows the amount of commercial paper outstanding (as reported by the Federal Reserve) during the eight months ending October 31 (the period readily available at the Fed website), and the amount of CP held by the prime money market funds (as reported by the SEC). (Prime fund holdings are somewhat overstated, as the SEC data includes all nonfinancial company obligations.)![4 cp](https://assetmanagementadvocateredesign.perkinscoieblogs.com/wp-content/uploads/sites/38/2016/10/4-cp-624x482.jpg)
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