In this report, FedFin analyzes the recommendations released last week by the President’s Working Group on Financial Markets (PWG) on reforming money market funds (MMFs). MMFs were left largely unaddressed in the Dodd-Frank Act, although the law provides a framework for systemic regulation of designated asset managers or “activities” (see FSM Report SYSTEMIC29). The PWG report builds on these provisions and others in the new law to “direct” the FSOC on ways to enhance MMF regulation to address systemic risk. The SEC is now set to issue a request for views on ideas in the report that can be implemented under current law. However, the PWG goes beyond the framework of even this sweeping new law to suggest other, still more far-reaching changes to MMFs. As detailed in this report, these would redefine MMFs, significantly reducing the competitive distinction between insured deposits or other funding provided to banking organizations and MMF investments. Recognizing that MMFs subject to tough U.S. standards could convert into “shadow” entities or be housed offshore, the PWG also recommends legislation to ensure its proposals could not be evaded or arbitraged. It also discusses issues for banking organizations reflecting unlimited coverage for non-interest bearing transaction accounts until 2013 under the Dodd-Frank Act (see FSM Report DEPOSITINSURANCE87) and the law’s authorization for banks to pay interest on corporate demand accounts (see FSM Report FHC15), noting the impact this will have on the relative competitiveness of banking organizations and MMFs.
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