In an effort to address the threats money market mutual funds (MMFs) can pose to the financial system, the Financial Stability Oversight Council on Tuesday unanimously voted to propose structural reforms for the $2.4 trillion domestic marketplace. 

The Council, through its authority under the Dodd-Frank Act, is proposing three alternatives that are intended to reduce the risk of runs and other related problems. In doing so, the FSOC steps into an area left unaddressed by the Securities and Exchange Commission due to an impasse between its commissioners and Chairman Mary Schapiro over remedies that had ben debated for more than two years.

The first of the plans under consideration would require MMFs to have a floating net asset value (“NAV”) per share by removing a decades-old exemption from mark-to-market valuation standards, allowing the funds to utilize amortized cost accounting and/or “penny rounding” to maintain a stable NAV.

Shares would not be fixed at $1. Instead, they would reflect the actual market value of the underlying portfolio holdings, consistent with requirements that apply to all other mutual funds.

An alternative would require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds' portfolio securities and maintain a stable NAV. The buffer would be paired with a requirement that 3 percent of a shareholder's highest account value in excess of $100,000 during the previous 30 days — a minimum balance at risk (MBR) — be made available for redemption on a delayed basis. 

Most redemptions would be unaffected by this requirement, but redemptions of an investor's MBR itself would be delayed for 30 days. If an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed. This is intended to create a disincentive for redemption and provide protection for shareholders who remain in the fund. The requirements would not apply to Treasury MMFs, or to investors with account balances below $100,000.

A third initiative would require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity. It could be combined with other measures, including more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements.

If more stringent investment diversification requirements, alone or in combination with other measures, reduce the vulnerabilities of MMFs, the Council could include these measures in its final recommendation and would reduce the size of the NAV buffer required under this alternative accordingly.

The FSOC proposals are not mutually exclusive and could be implemented in combination.

The recommendations will undergo a 60-day public comment period following publication in the Federal Register. The public is also encouraged to provide commentary and pitch alternatives through regulations.gov.

In a statement, FSOC members recognized that regulated and unregulated cash management products may pose risks similar to those posed by MMFs, and that further MMF reforms could increase demand for non-MMF cash management products.  “The Council and its members intend to use their authorities, where appropriate and within their jurisdictions, to address any risks that might arise from a migration to non-MMF cash management products,” it wrote.

Among the FSOC members who took part in the vote: Treasury Secretary Tim Geithner: Federal Reserve Chairman Ben Bernanke; Richard Cordray, Director of the Consumer Financial Protection Bureau; Gary Gensler, chairman of the Commodity Futures Trading Commission; and SEC Chairman Mary Schapiro. Additional details on the proposed recommendations are available here.