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FINANCIAL STABILITY OVERSIGHT COUNCIL

Proposed Recommendations Regarding Money Market Mutual Fund Reform

AGENCY: Financial Stability Oversight Council.
ACTION: Proposed recommendation.
SUMMARY: Section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the Financial Stability Oversight Council (Council) to issue recommendations to a primary financial regulatory agency to apply new or heightened standards and safeguards for a financial activity or practice conducted by bank holding companies or nonbank financial companies under the agency's jurisdiction. The Council is seeking public comment on proposed recommendations that the Council may make to the Securities and Exchange Commission to implement structural reforms for money market mutual funds (MMFs).Proposed Recommendations Regarding Money Market Mutual Fund Reformprovides an overview of MMFs, an outline of the history of reform efforts and the role of the Council, the Council's proposed determination that MMFs' activities and practices create or increase certain risks, three proposed alternatives for reform, and an assessment of the impact of the Council's proposed recommendations on long-term economic growth. In addition, the Council is requesting public comment on alternative structural reforms for MMFs.
DATES: Comment due date: January 18, 2013.
ADDRESSES: Electronic Submission of Comments.Interested persons may submit comments electronically through the Federal eRulemaking Portal athttp://www.regulations.gov.Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt, and enables the Council to make them available to the public. Comments submitted electronically throughhttp://www.regulations.govcan be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically.

Mail:Comments may be mailed to Financial Stability Oversight Council, Attn: Amias Gerety, 1500 Pennsylvania Avenue NW., Washington, DC 20220.

Public Inspection of Comments.Properly submitted comments will be available for inspection and downloading athttp://www.regulations.gov.

Additional Instructions.In general, comments received, including attachments and other supporting materials, are part of the public record and are immediately available to the public. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: Amias Gerety, Deputy Assistant Secretary for the Financial Stability Oversight Council, Department of the Treasury, at (202) 622-8716; Sharon Haeger, Office of the General Counsel, Department of the Treasury, at (202) 622-4353; or Eric Froman, Office of the General Counsel, Department of the Treasury, at (202) 622-1942.
SUPPLEMENTARY INFORMATION:

Table of Contents I. Executive Summary II. Overview of Money Market Mutual Funds III. History of Reform Efforts and Role of the Financial Stability Oversight Council IV. Proposed Determination That MMFs Could Create or Increase the Risk of Significant Liquidity and Credit Problems Spreading Among Financial Companies and Markets V. Proposed Recommendations VI. Consideration of the Economic Impact of Proposed Reform Recommendations on Long-Term Economic Growth I. Executive Summary

Reforms to address the structural vulnerabilities of money market mutual funds (MMFs or funds) are essential to safeguard financial stability. MMFs are mutual funds that offer individuals, businesses, and governments a convenient and cost-effective means of pooled investing in money market instruments. MMFs are a significant source of short-term funding for businesses, financial institutions, and governments. However, the 2007-2008 financial crisis demonstrated that MMFs are susceptible to runs that can have destabilizing implications for financial markets and the economy. In the days after Lehman Brothers Holdings, Inc. failed and the Reserve Primary Fund, a $62 billion prime MMF, “broke the buck,” investors redeemed more than $300 billion from prime MMFs and commercial paper markets shut down for even the highest-quality issuers. The Treasury Department's guarantee of more than $3 trillion of MMF shares and a series of liquidity programs introduced by the Federal Reserve were needed to help stop the run on MMFs during the financial crisis and ultimately helped MMFs to continue to function as intermediaries in the financial markets.

The Securities and Exchange Commission (SEC) took important steps in 2010 by adopting regulations to improve the resiliency of MMFs (the “2010 reforms”). But the 2010 reforms did not address the structural vulnerabilities of MMFs that leave them susceptible to destabilizing runs. These vulnerabilities arise from MMFs' maintenance of a stable value per share and other factors as discussed below. MMFs' activities and practices give rise to a structural vulnerability to runs bycreating a “first-mover advantage” that provides an incentive for investors to redeem their shares at the first indication of any perceived threat to an MMF's value or liquidity. Because MMFs lack any explicit capacity to absorb losses in their portfolio holdings without depressing the market-based value of their shares, even a small threat to an MMF can start a run. In effect, first movers have a free option to put their investment back to the fund by redeeming shares at the customary stable share price of $1.00, rather than at a price that reflects the reduced market value of the securities held by the MMF.

The broader financial regulatory community has focused substantial attention on MMFs and the risks they pose. Both the President's Working Group on Financial Markets (PWG) and the Financial Stability Oversight Council (Council) called for additional reforms to address the structural vulnerabilities in MMFs, through the PWG's 2010 report onMoney Market Fund Reform Optionsand unanimous recommendations in the Council's 2011 and 2012 annual reports, respectively.

In October 2010, the SEC issued a formal request for public comment on the reforms initially described in the PWG report, and in May 2011 the SEC hosted a roundtable on MMFs and systemic risk in which several Council members and their representatives participated. However, in August 2012, SEC Chairman Schapiro announced that the SEC would not proceed with a vote to publish a notice of proposed rulemaking to solicit public comment on potential structural reforms of MMFs.

Under Section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act),1 if the Council determines that the conduct, scope, nature, size, scale, concentration, or interconnectedness of a financial activity or practice conducted by bank holding companies or nonbank financial companies could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, the financial markets of the United States, or low-income, minority, or under-served communities, the Council may provide for more stringent regulation of such financial activity or practice by issuing recommendations to a primary financial regulatory agency to apply new or heightened standards or safeguards. The recommended standards and safeguards are required by Section 120 to take costs to long-term economic growth into account, and may include prescribing the conduct of the activity or practice in specific ways, such as applying particular capital or risk-management requirements.

1Public Law 111-203, 124 Stat. 1376 (2010).

The Council is proposing to use this authority to recommend that the SEC proceed with much-needed structural reforms of MMFs. There will be a 60-day public comment period on the proposed recommendations. The Council will then consider the comments and may issue a final recommendation to the SEC, which, pursuant to the Dodd-Frank Act, would be required to impose the recommended standards, or similar standards that the Council deems acceptable, or explain in writing to the Council within 90 days why it has determined not to follow the recommendation.

Pursuant to Section 120, the Council proposes to determine that MMFs' activities and practices could create or increase the risk of significant liquidity, credit, and other problems spreading among bank holding companies, nonbank financial companies, and U.S. financial markets. This is due to the conduct and nature of the activities and practices of MMFs that leave them susceptible to destabilizing runs; the size, scale, and concentration of MMFs and the important role they play in the financial markets; and the interconnectedness between MMFs, the financial system and the broader economy that can act as a channel for the transmission of risk and contagion and curtail the availability of liquidity and short-term credit.

Based on this proposed determination, the Council seeks comment on the proposed recommendations for structural reforms of MMFs that reduce the risk of runs and significant problems spreading through the financial system stemming from the practices and activities described above. The Council is proposing three alternatives for consideration:

Alternative One: Floating Net Asset Value.Require MMFs to have a floating net asset value (NAV) per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV. The value of MMFs' shares would not be fixed at $1.00 and would reflect the actual market value of the underlying portfolio holdings, consistent with the requirements that apply to all other mutual funds.

Alternative Two: Stable NAV with NAV Buffer and “Minimum Balance at Risk.” 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 allow the funds to maintain a stable NAV. The NAV buffer would have an appropriate transition period and could be raised through various methods. The NAV 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. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, creating a disincentive to redeem and providing protection for shareholders who remain in the fund. These requirements would not apply to Treasury MMFs, and the MBR requirement would not apply to investors with account balances below $100,000.

Alternative Three: Stable NAV with NAV Buffer and Other Measures.Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The NAV buffer would have an appropriate transition period and could be raised through various methods. To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further 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.

These proposed recommendations are not necessarily mutually exclusive but could be implemented in combination to address the structural vulnerabilities that result in MMFs' susceptibility to runs. For example, MMFs could be permitted to use floating NAVs or, if they preferred to maintain a stable value, to implement the measures contemplated in Alternatives Two or Three.

Other reforms, not described above, may be able to achieve similar outcomes. Accordingly, the Council seeks public comment on the proposed recommendations and other potential reforms of MMFs. Comments on other reforms should consider the objectives of addressing the structural vulnerabilities inherent in MMFs and mitigating the risk of runs. For example, some stakeholders have suggested features that only would be implemented during times of market stress to reduce MMFs' vulnerability to runs, such as standby liquidity fees or gates. Commenters on such proposals should address concerns that such features might increase the potential for industry-wide runs in times of stress.

The Council recognizes that regulated and unregulated or less-regulated cash management products (such as unregistered private liquidity funds) other than MMFs may pose risks that are similar to those posed by MMFs, and that further MMF reforms could increase demand for non-MMF cash management products. The Council seeks comment on other possible reforms that would address risks that might arise from a migration to non-MMF cash management products. Further, the Council is not considering MMF reform in isolation. The Council and its members intend to use their authorities, where appropriate and within their jurisdictions, to address any risks to financial stability that may arise from various products within the cash management industry in a consistent manner. Such consistency would be designed to reduce or eliminate any regulatory gaps that could result in risks to financial stability if cash management products with similar risks are subject to dissimilar standards.

In accordance with Section 120 of the Dodd-Frank Act, the Council has consulted with the SEC staff. In addition, the standards and safeguards proposed by the Council take costs to long-term economic growth into account.

II. Overview of Money Market Mutual Funds A. Description of Money Market Mutual Funds

MMFs are a type of mutual fund registered under the Investment Company Act of 1940 (the Investment Company Act).2 Investors in MMFs fall into two categories: (i) Individual, or “retail” investors; and (ii) institutional investors, such as corporations, bank trust departments, pension funds, securities lending operations, and state and local governments, that use MMFs for a variety of cash management and investment purposes.3 MMFs are widely used by both retail and institutional investors for cash management purposes, although the industry has become increasingly dominated by institutional investors. MMFs marketed primarily to institutional investors account for almost two-thirds of assets today compared to about one-third of industry assets in 1996.4

215 U.S.C. 80a-1—80a-64.

3At times, these two categories may overlap. For example, retail investors may invest in institutional MMF shares through employer-sponsored retirement plans, such as 401(k) plans and broker or bank sweep accounts. Investment Company Institute, “Report of the Money Market Working Group” (March 17, 2009),at24-27,available at http://www.ici.org/pdf/ppr_09_mmwg.pdf.

4Investment Company Institute, “2012 Investment Company Fact Book” (“ICI Fact Book”),atTable 39; “Weekly Money Market Mutual Fund Assets” (Oct. 25, 2012),available at http://www.ici.org/research/stats/mmf.

MMFs are a convenient and cost-effective way for investors to achieve a diversified investment in various money market instruments, such as commercial paper (CP), short-term state and local government debt, Treasury bills, and repurchase agreements (repos). This diversification, in combination with principal stability, liquidity, and short-term market yields, has made MMFs an attractive investment vehicle. MMFs provide an economically significant service by acting as intermediaries between investors who desire low-risk, liquid investments and borrowers that issue short-term funding instruments. MMFs serve an important role in the asset management industry through their investors' use of MMFs as a cash-like product in asset allocation and as a temporary investment when they choose to divest of riskier investments such as stock or long-term bond mutual funds.

The MMF industry had approximately $2.9 trillion in assets under management (AUM) as of September 30, 2012, of which approximately $2.6 trillion is in funds that are registered with the SEC for sale to the public. This represents a decline from $3.8 trillion at the end of 2008.5 As of the end of 2011, there were 632 such funds, compared to 783 at the end of 2008.6

5Based on data filed on SEC Form N-MFP as of September 30, 2012; “Weekly Money Market Mutual Fund Assets” (Oct. 25, 2012),available at http://www.ici.org/research/stats/mmf; ICI Fact Book,atTable 39.

6 SeeICI Fact Book,atTable 5.

MMFs are categorized into four main types based on their investment strategies. Treasury MMFs, with about $400 billion in AUM, invest primarily in U.S. Treasury obligations and repos collateralized with U.S. Treasury securities. Government MMFs, with about $490 billion in AUM, invest primarily in U.S. Treasury obligations and securities issued by entities such as the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Banks (FHLBs), as well as in repo collateralized by such securities. In contrast, prime MMFs, with about $1.7 trillion in AUM, invest more substantially in private debt instruments, such as CP and certificates of deposit (CDs). Commensurate with the greater risks in their portfolios, prime MMFs generally pay higher yields than Treasury or government MMFs. Finally, tax-exempt MMFs, with about $280 billion in AUM, invest in short-term municipal securities and pay interest that is generally exempt from state and federal income taxes, as appropriate.

B. Rule 2a-7 and the 2010 Reforms

Like other mutual funds, MMFs must register under the Investment Company Act and are subject to its provisions. An MMF must comply with all of the same legal and regulatory requirements that apply to mutual funds generally, except that rule 2a-7 under the Investment Company Act7 allows MMFs to use special methods to value their portfolio securities and price their shares, subject to the conditions in the rule. These methods permit MMFs to maintain a stable NAV per share, typically $1.00. Pursuant to rule 2a-7, MMFs generally use the amortized cost method of valuation and the penny rounding method of pricing in order to effectively “round” their share prices. Under these methods, securities held by MMFs are valued at acquisition cost, with adjustments for amortization of premium or accretion of discount, instead of at fair market value, and the MMFs' price per share is rounded to the nearest penny. This permits an MMF to price its shares for purposes of sales and redemptions at $1.00 even though the fund's NAV based on the fair market value of its portfolio securities—rather than amortized cost—may vary by as much as 0.50 percent per share above or below $1.00. All other types of mutual funds, in contrast, must value their NAVs using the market value of the funds' portfolio securities and sell and redeem their shares based on that NAV without using penny rounding.

717 CFR 270.2a-7.

In order to protect investors from being treated unfairly, an MMF may continue to use these valuation andpricing methods only when the fund's stable $1.00 per share value fairly represents the fund's market-based share price. Rule 2a-7 requires an MMF to periodically calculate its market-based NAV, or “shadow price,” and compare this value to the fund's stable $1.00 share price. If there is a difference of more than 0.50 percent (or $0.005 per share), the fund's board of directors must consider promptly what action, if any, should be taken, including whether the fund should discontinue the use of these methods and re-price the securities of the fund at a value other than $1.00 per share, an event known as “breaking the buck” (i.e.,the fund would fail to maintain a stable NAV of $1.00).

In order to reduce the likelihood that an MMF would experience such a significant deviation, rule 2a-7 imposes upon MMFs certain “risk-limiting conditions” relating to portfolio maturity, credit quality, liquidity, and diversification. These risk-limiting conditions limit the funds' exposures to certain risks, such as credit, currency, and interest rate risks.8

8SEC, Money Market Fund Reform, 75 FR 32688, 10060 (Mar. 4, 2010).

The risk-limiting conditions, in their current form, include numerous changes to rule 2a-7 that were adopted by the SEC in 2010 as an initial response to the financial crisis. These 2010 reforms strengthened maturity limitations, increased MMFs' diversification and liquidity requirements, imposed stress-test requirements, improved the credit-quality standards for MMF portfolio securities, increased reporting and disclosure requirements on portfolio holdings, and provided new redemption and liquidation procedures to minimize contagion from a fund breaking the buck, as described below. The 2010 reforms were a necessary and important step in reducing MMF portfolio risk and increasing the resiliency of MMFs to redemptions.

Quality of portfolio securities.MMFs may purchase a security only if the security, at the time of acquisition, has received a specified credit rating from a nationally recognized statistical rating organization (“NRSRO”), generally the highest short-term rating (or is an unrated security of comparable quality as determined by the board of directors), and the fund's board of directors determines that the security presents minimal credit risks based on factors pertaining to credit quality in addition to any credit rating assigned to the security by an NRSRO.9 The 2010 reforms sought to reduce MMFs' exposure to risks from lower-rated securities—so-called “second-tier” securities—in several ways.10 First, the reforms reduced the limit on investments in these securities from 5 percent to 3 percent of the fund's total assets. Second, MMFs' allowable exposure to a single issuer of second-tier securities was reduced to 0.5 percent.11 Third, MMFs are only permitted to purchase second-tier securities with maturities of 45 days or less. The previous limit was 397 days. The reforms also tightened requirements relating to MMF holdings of repo that are collateralized with private debt instruments rather than cash equivalents or government securities.

9An MMF's board of directors may delegate to the fund's investment adviser or officers the responsibility to make this determination pursuant to written guidelines that the board establishes and oversees. In addition, Section 939A of the Dodd-Frank Act requires the SEC (and other regulators) to review its regulations for any references to or requirements regarding credit ratings that require the use of an assessment of the creditworthiness of a security or money market instrument, remove these references or requirements, and substitute in those regulations other standards of creditworthiness in place of the credit ratings that the agency determines to be appropriate. The SEC has proposed to remove references to credit ratings from rule 2a-7.SeeSEC, References to Credit Ratings in Certain Investment Company Act Rules and Forms, Investment Company Act Release No. IC-28807, 76 FR 12896 (Mar. 9, 2011). It is the Council's understanding that the SEC intends to act on removal of credit ratings from rule 2a-7 as required by the Dodd-Frank Act, and therefore the Council is not addressing this issue in these recommendations.

10Second-tier securities are defined in rule 2a-7 generally as securities that have received the second-highest short-term debt rating from an NRSRO or are of comparable quality.

11The previous limit was the greater of one percent or $1 million.

Maturity limitations.MMFs generally are prohibited from acquiring any security with a remaining maturity greater than 397 days (certain features, like an unconditional “put,” can shorten a security's maturity for this and certain other purposes under rule 2a-7), and are subject to a maximum allowable dollar-weighted average portfolio maturity (WAM) and weighted average life (WAL). The 2010 reforms strengthened the maturity limitations by reducing the maximum allowable WAM of an MMF's portfolio from 90 days to 60 days, which reduces an MMF's exposure to interest-rate risk. In addition, the 2010 reforms introduced a new 120-day WAL limit, which lowers MMFs' exposure to credit-spread risk from floating- or variable-rate portfolio holdings by taking into account the securities' ultimate maturity.12

12Widening credit spreads, reflecting additional yield demanded by investors over a comparable risk-free rate, can negatively affect the value of a fund's portfolio securities. The limit on an MMF's WAL is designed to protect the fund against spread risk because longer-term adjustable-rate securities are more sensitive to credit spreads than short-term securities with final maturities equal to the reset date of the longer-term security. Under rule 2a-7, therefore, MMFs are permitted to use interest-rate reset dates to shorten the maturity of an adjustable-rate security or a floating rate security in their WAM calculation, but not in their WAL calculation.

Diversification requirement.Generally, MMFs must limit their investments in the securities of any one issuer (other than government securities) to no more than 5 percent of fund assets at the time of purchase. They must also generally limit their investments in securities subject to a demand feature or a guarantee from any particular provider to no more than 10 percent of fund assets.

Liquidity requirements.The 2010 reforms added a requirement that each MMF maintain a minimum liquidity buffer. Each MMF must have at least 10 percent of its assets invested in “daily liquid assets” and at least 30 percent of its assets invested in “weekly liquid assets.”13 Daily liquid assets are cash, U.S. Treasury obligations, and securities that convert into cash (by maturing or through a put) within one business day. Weekly liquid assets are daily liquid assets, securities of an instrumentality of the U.S. Government that have a remaining maturity of 60 days or less, and securities that convert into cash within five business days. The amendments also reduced the amount of illiquid securities—those that cannot be disposed of within seven days without taking a discounted price—that an MMF can hold from 10 percent to 5 percent. These liquidity requirements are designed to help MMFs meet shareholder redemptions without selling portfolio securities into potentially distressed markets at discounted prices.

13Tax-exempt MMFs are exempt from the requirement regarding daily liquid assets.

Stress-testing requirement.The 2010 reforms introduced a stress-testing requirement for MMFs, requiring that a fund's board of directors adopt procedures for periodic stress tests of the fund's ability to maintain a stable share price. The stress tests are based on certain hypothetical stress events and the results of these tests must be provided to the MMF's board.

Disclosure and reporting.The 2010 reforms introduced enhanced reporting and disclosure obligations that require funds to post portfolio information on their Web sites within five business days after the end of each month. MMFs are also required to submit to the SEC each month more detailed portfolio holdings information, including the shadow price, which is made availableto the public 60 days after the end of the month to which the information pertains. These requirements allow the SEC, investors, and others to better monitor fund risk taking.

Facilitation of orderly fund liquidation.The 2010 reforms introduced a new rule, rule 22e-3 under the Investment Company Act, that permits the board of directors of an MMF, upon notification to the SEC, to suspend redemptions and liquidate the fund if it has broken, or is in danger of breaking, the buck. The rule is designed to prevent shareholder harm from distressed sales of securities that can occur with rapid liquidations when a fund breaks the buck.

While the enhancements introduced in the 2010 reforms increase resiliency and limit MMFs' exposure to certain risks, they do not address MMFs' structural vulnerabilities. These vulnerabilities and the resulting risks to financial stability are described in more detail in the following sections.

III. History of Reform Efforts and Role of the Financial Stability Oversight Council A. Reform Efforts to Date

Following the financial crisis, the Department of the Treasury (Treasury) released a roadmap for financial reform in June 200914 calling for: (i) The SEC to complete its near-term MMF reform efforts and (ii) the PWG to evaluate the need for structural reform of MMFs. The SEC addressed this first element when it adopted the 2010 reforms.

14Treasury, “Financial Regulatory Reform: A New Foundation” (2009),available at http://www.treasury.gov/initiatives/Documents/FinalReport_web.pdf.

At the time of the adoption of the 2010 reforms, the SEC noted that these reforms served as a “first step” in addressing MMF reform.15 In October 2010, the PWG released a report outlining a set of additional policy options intended to address the risks to financial stability posed by MMFs' susceptibility to runs.16 This report stated that the 2010 reforms “alone could not be expected to prevent a run of the type experienced in September 2008.” This report was released for public comment and generated a large number of thoughtful and detailed responses, including suggestions by both academics and industry participants that MMFs maintain a capital buffer or impose a liquidity fee to help absorb losses and mitigate liquidity pressures. To further engage the public on reform, the SEC hosted a roundtable to discuss potential reform options in May 2011 that included Council members and their representatives, other regulators, trade groups, issuers of securities in which MMFs invest, MMF sponsors, and MMF investors. Throughout this period, the SEC engaged with stakeholders and regulators in an intensive effort to consider and refine various potential reform options.

15SEC, Money Market Fund Reform, Investment Company Act Release No. IC-29132, 75 FR 10600, 10062 (Mar. 4, 2010) (“Our June 2009 proposals were the product of [the SEC's and staff's review of MMFs] and were, we explained, a first step to addressing regulatory concerns we identified.”).

16President's Working Group on Financial Markets, “Money Market Fund Reform Options” (Oct. 2010),available at http://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf.

Concurrently, the broader financial regulatory community in both the United States and abroad has made repeated calls for MMF reform. The Council, in both its 2011 and 2012 annual reports, highlighted the need for additional MMF reform to address structural vulnerabilities in the U.S. financial system. In 2012, the Council specifically recommended that the SEC publish structural reform proposals for public comment and ultimately adopt reforms that address MMFs' lack of loss-absorption capacity and susceptibility to runs. The Office of Financial Research, in its 2012 annual report, identified the run risk for MMFs as one of the “current threats to financial stability.”

Internationally, on October 9, 2012, the International Organization of Securities Commissions (IOSCO) issued policy recommendations for reforming MMFs. The IOSCO recommendations demonstrate the efforts by the G-20 and the Financial Stability Board to fulfill the mandate of strengthening the oversight and regulation of the “shadow banking system.”17 There are also other international efforts, along with IOSCO's, to consider aspects of MMF regulation where greater harmonization between jurisdictions and regulatory improvements could occur in an effort to avoid jurisdictional arbitrage.18

17IOSCO, “Policy Recommendations for Money Market Funds” (Oct. 2012),available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD392.pdf.Substantially all of IOSCO's recommendations are included in the SEC's current regulation of MMFs or are addressed in these proposed recommendations. IOSCO noted in a media release issued on October 9, 2012, that although a majority of the SEC's commissioners did not support the publication of IOSCO's recommendations, there were no other objections, and IOSCO's board approved the report containing the recommendations during its meeting on October 3-4, 2012. In addition, in a statement issued on May 11, 2012, three of the SEC's commissioners stated that IOSCO's consultation report on MMFs, published on April 27, 2012, did not reflect the views and input of a majority of the SEC and, accordingly, cannot be considered to represent the views of the SEC.

18The European Commission is also considering the need for further reforms to their regulation of money market funds.SeeEuropean Commission Green Paper on Shadow Banking (Mar. 19, 2012),available at http://ec.europa.eu/internal_market/bank/docs/shadow/green-paper_en.pdf; European Commission Consultation Document, Undertakings for Collective Investment in Transferable Securities (UCITS) Product Rules, Liquidity Management, Depositary, Money Market Funds, Long-term Investments (Jul. 26, 2012),available at http://ec.europa.eu/internal_market/consultations/docs/2012/ucits/ucits_consultation_en.pdf.

On August 22, 2012, SEC Chairman Schapiro announced that the majority of the SEC's Commissioners would not support seeking public comment on the SEC's staff proposal to reform the structure of MMFs. As a result, on September 27, 2012, the Chairperson of the Council, Treasury Secretary Geithner, sent a letter to Council members urging the Council to take action in the absence of the SEC doing so.

B. Role of the Council and Dodd-Frank Act Section 120

The Dodd-Frank Act established the Council “(A) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (B) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) to respond to emerging threats to the stability of the United States financial system.”19

19Dodd-Frank Act Section 112(a)(1).

To carry out its financial stability mission, the Council has various authorities, including the authority under Section 120 of the Dodd-Frank Act to issue recommendations to primary financial regulatory agencies to apply “new or heightened standards and safeguards” for a financial activity or practice conducted by bank holding companies or nonbank financial companies under the regulatory agency's jurisdiction. Prior to issuing such a recommendation, the Council must determine that “the conduct, scope, nature, size, scale, concentration, or interconnectedness” of the financial activity or practice “could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, financialmarkets of the United States, or low-income, minority or underserved communities.”20 The Council believes that MMFs are “predominantly engaged in financial activities”21 as defined in section 4(k) of the Bank Holding Company Act of 195622 and thus are “nonbank financial companies”23 for purposes of Title I of the Dodd-Frank Act.

20Dodd-Frank Act Section 120(a).

21 See12 U.S.C. 5311(b).

22 Seesections 4(k)(1), 4(k)(4)(A), 4(k)(4)(D), and 4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(1), 1843(k)(4)(A), 1843(k)(4)(D), 1843(k)(4)(H)).

23 See12 U.S.C. 5311(a)(4).

Pursuant to Section 120 of the Dodd-Frank Act, the Council proposes to determine that the activities and practices of MMFs, for which the SEC is the primary financial regulatory agency, could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies, nonbank financial companies, and the financial markets of the United States. This proposed determination is set forth below in Section IV. The Council seeks public comment on this proposed determination.

To address the concerns regarding MMFs, the Council also seeks public comment on the proposed recommendations described in Section V. Comments are due 60 days after publication in theFederal Register. The Council will then consider the comments and may issue a final recommendation to the SEC, which, pursuant to the Dodd-Frank Act, would be required to impose the recommended standards, or similar standards that the Council deems acceptable, or explain in writing to the Council, not later than 90 days after the date on which the Council issues the final recommendation, why the SEC has determined not to follow the Council's recommendation. If the SEC accepts the Council's recommendation, it is expected that the SEC would implement the recommendation through a rulemaking, subject to public comment, that would consider the economic consequences of the implementing rule as informed by the SEC staff's own economic study and analysis.

The SEC, by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risks that MMFs present to the economy. If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its Section 120 process, the Council expects that it would not issue a final Section 120 recommendation to the SEC.

In addition to the proposed recommendations to the SEC under its Section 120 authority, the Council and some of its members are actively evaluating alternative authorities in the event the SEC determines not to impose the standards recommended by the Council in any final recommendation.

For instance, under Title I of the Dodd-Frank Act, the Council has the authority and the duty to designate any nonbank financial company that could pose a threat to U.S. financial stability. Designated companies are subject to supervision by the Federal Reserve and enhanced prudential standards. Alternatively, the Council's authority to designate systemically important payment, clearing, or settlement activities under Title VIII of the Dodd-Frank Act could enable the application of heightened risk-management standards on an industry-wide basis. Additionally, other Council member agencies have the authority to take action to address certain of the risks posed by MMFs and similar cash-management products, as appropriate.

IV. Proposed Determination That MMFs Could Create or Increase the Risk of Significant Liquidity and Credit Problems Spreading Among Financial Companies and Markets

In order to issue a recommendation under Section 120 of the Dodd-Frank Act, the Council must determine that the conduct, scope, nature, size, scale, concentration, or interconnectedness of MMFs' activities or practices could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, or U.S. financial markets.

As further discussed below, the conduct and nature of MMFs' activities and practices make MMFs vulnerable to destabilizing runs, which may spread quickly among funds, impairing liquidity broadly and curtailing the availability of short-term credit.24 Because of the size, scale, concentration, and interconnectedness of MMFs' activities, the liquidity pressures on the MMF industry resulting from a run can cause this stress to propagate rapidly throughout the financial system and to the broader economy.

24The inherent fragility and susceptibility of MMFs to destabilizing runs has been the subject of considerable academic research and commentary.See, e.g.,Sean S. Collins and Phillip R. Mack, “Avoiding Runs in Money Market Mutual Funds: Have Regulatory Reforms Reduced the Potential for a Crash,” Working Paper 94-14, Federal Reserve Board Finance and Economics Discussion Series (June 1994); Naohiko Baba, Robert N. McCauley, and Srichander Ramaswamy, “US dollar money market funds and non-US banks,”BIS Quarterly Review (March 2009),at65-81; Gary Gorton and Andrew Metrick, “Regulating the Shadow Banking System,”Brookings Papers on Economic Activity(Fall 2010),at261-297; Patrick E. McCabe, “The Cross Section of Money Market Fund Risks and Financial Crises,” Working Paper 2010-51, Federal Reserve Board Finance and Economics Discussion Series (September 2010); Squam Lake Group, “Reforming Money Market Funds,” Letter to the Securities and Exchange Commission re: File No. 4-619; Release No. IC-29497 President's Working Group Report on Money Market Fund Reform (Jan. 14, 2011),available at http://www.sec.gov/comments/4-619/4619-57.pdf; Eric S. Rosengren, “Money Market Mutual Funds and Financial Stability: Remarks at the Federal Reserve Bank of Atlanta's 2012 Financial Markets Conference,” (April 11, 2012),available at http://www.bos.frb.org/news/speeches/rosengren/2012/041112/041112.pdf; Marcin Kacperczyk and Philipp Schnabl, “How Safe are Money Market Funds?” (April 2012); Burcu Duygan-Bump, Patrick Parkinson, Eric Rosengren, Gustavo A. Suarez, and Paul Willen, “How effective were the Federal Reserve emergency liquidity facilities? Evidence from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility,”Journal of Finance,forthcoming; Patrick E. McCabe, Marco Cipriani, Michael Holscher, and Antoine Martin, “The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money Market Funds,” Working Paper 2012-47, Federal Reserve Board Finance and Economics Discussion Series (July 2012); David S. Scharfstein, “Perspectives on Money Market Mutual Fund Reforms,” Testimony before U.S. Senate Committee on Banking, Housing, & Urban Affairs (June 21, 2012); Jeffrey N. Gordon and Christopher M. Gandia, “Money Market Funds Run Risk: Will Floating Net Asset Value Fix the Problem?” Columbia Law and Economics Working Paper No. 426 (Sept. 23, 2012),available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2134995.

As was evidenced in the financial crisis, even small portfolio losses may cause a fund to break the buck. If investors perceive a risk of such an event, MMFs' lack of explicit loss-absorption capacity, the first-mover advantage enjoyed by redeeming investors, investor uncertainty regarding sponsor support, and the similarity of MMFs' portfolios can incite widespread runs on MMFs. Heavy redemptions may magnify losses for other funds and potentially cause them to break the buck and suspend redemptions under rule 22e-3, harming investors by impairing their liquidity. Further, due to the significant role MMFs play in the short-term credit markets, an industry-wide run on MMFs can reduce the availability of credit to borrowers. Ultimately, a run on MMFs can create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies, nonbank financial companies, and U.S. financial markets.

• Conduct and nature of activities and practices: Several activities and practices of MMFs combine to create a vulnerability to runs, including: (i) Relying on the amortized cost method ofvaluation and/or penny rounding to maintain a stable $1.00 per share price; (ii) offering shares that may be redeemed on demand despite MMFs' limited same-day liquidity; (iii) investing in assets that are subject to interest-rate and credit risk without having explicit loss-absorption capacity; (iv) relying uponad hocdiscretionary support from sponsors, which has often shielded investors from losses and obscured portfolio risks; and (v) attracting a base of highly risk-averse investors that are prone to withdraw assets when even small losses appear possible. Together, these activities and practices foster MMFs' structural vulnerability to runs by creating a first-mover advantage that provides an incentive for investors to redeem their shares at the first indication of any perceived threat to an MMF's value or liquidity. Because MMFs lack any explicit capacity to absorb losses in their portfolio holdings without depressing the market-based value of their shares, even a small threat to an MMF can start a run.

• Size, scale, and concentration of activities and practices: The MMF industry is large, with $2.9 trillion in assets, and provides a substantial portion of the short-term funding available to a range of borrowers in the capital markets. The industry is also highly concentrated, as the top 20 MMF sponsors operate funds with 90 percent of aggregate MMF assets under management.

• Interconnectedness of activities and practices: MMFs are highly interconnected with the rest of the financial system and can transmit stress throughout the system because of their role as intermediaries, as significant investors in the short-term funding markets, as potential recipients of economic support from the financial institutions that sponsor them, and as important providers of cash-management services.

Below is a further discussion of MMFs' activities and practices and how they contribute to the funds' vulnerability to runs, how those runs may transmit stresses throughout the financial system, evidence from the run on MMFs during the financial crisis, and an explanation of why action is needed beyond the 2010 reforms. The Council solicits public comment on this proposed determination. Conduct and Nature

MMFs' vulnerability to runs results in part from the conduct and nature of the activities and practices of MMFs, their sponsors, and their investors.

The stable, rounded NAV per share. Unlike other mutual funds, most MMFs rely on valuation and rounding methods to maintain a stable NAV per share, typically $1.00. Rounding obscures the daily movements in the value of an MMF's portfolio and fosters an expectation that MMF share prices will not fluctuate. Importantly, rounding also exacerbates investors' incentives to run when there is risk that prices will fluctuate. When an MMF that has experienced a small loss satisfies redemption requests at the rounded $1.00 share price, the fund effectively subsidizes these redemptions by concentrating the loss among the remaining shareholders. As a result, redemptions from such a fund can further depress its shadow NAV and increase the risk that the MMF will break the buck. This contributes to a first-mover advantage, in which those who redeem early are more likely to receive the full $1.00 per share than those who wait. Thus, first movers have a free option to put their investment back to the fund by redeeming shares at the customary stable NAV of $1.00 per share (rather than at a share price reflecting the market value of the underlying securities held by the MMF). In the absence of an explicit mechanism to take losses in the value of the securities held by an MMF without depressing the fund's shadow NAV, the “first movers” leave other fund investors sharing in such losses.

Shares that can be redeemed on demand despite limited portfolio liquidity. MMFs perform maturity transformation by offering shares that investors may redeem on demand — providing shareholders unlimited daily liquidity — while also investing in relatively longer-term securities. MMFs invest not only in highly liquid instruments, such as securities that mature overnight and Treasury securities, but also in short-term instruments that are less liquid, including term CP and term repo. In the event of shareholder redemptions in excess of an MMF's available liquidity, a fund may be forced to sell less-liquid assets to meet redemptions. In times of stress, such sales may cause funds to suffer losses that must be absorbed by the fund's remaining investors, further reinforcing the first-mover advantage. Importantly, while the minimum liquidity requirements implemented in the SEC's 2010 reforms should make MMFs more resilient to market disruptions by increasing the funds' supply of liquid assets that can quickly be converted to cash, as noted below, these requirements are not designed to mitigate the first-mover advantage when a fund is at risk of suffering losses.

Investments with interest-rate and credit risk without explicit loss-absorption capacity. MMFs invest in securities with credit and interest-rate risk to increase the yields they offer to investors, but the funds do so without any formal capacity to absorb losses.25 The short maturities of these securities and their high credit quality generally limit portfolio risks, but MMFs on occasion have been exposed to potentially significant losses. For example, 29 MMFs participating in the Treasury's Temporary Guarantee Program for Money Market Funds reported losses in September and October 2008 that, absent sponsor support, would have exceeded 0.50 percent of assets, and losses among those funds averaged 2.2 percent of assets.26 As discussed in more detail below, the Reserve Primary Fund's experience demonstrates that the loss in value of a single security in an MMF's portfolio can cause the fund to break the buck. As a result of investors' expectations of a stable $1.00 per share NAV, even a small capital loss at an MMF can give its investors a strong incentive to redeem their shares.

25 SeeSEC, “Unofficial Transcript: Roundtable on Money Market Funds and Systemic Risk” (May 10, 2011),available at http://www.sec.gov/spotlight/mmf-risk/mmf-risk-transcript-051011.htm(quoting Seth P. Bernstein of J.P. Morgan Asset Management, “We find ourselves uncomfortable about the informal arrangements that have existed in the industry for some time because we believe it's both an issue of credit risk embedded in the portfolios, as well as the liquidity issues that arise in a run”).

26These data exclude losses that were absorbed by some forms of sponsor support, such as direct cash infusions to a fund and outright purchases of securities from a fund at above-market prices, so the number of funds that would have broken the buck in the absence of all forms of support may have exceeded 29.SeeMcCabe, Cipriani, Holscher, and Martin, 2012.

Reliance on discretionary sponsor support. In the absence of capital, insurance, or any other formal mechanism to absorb losses when they do occur, MMFs historically have relied uponad hocdiscretionary support from their sponsors to maintain $1.00 per share prices.27 Unlike other types ofmutual funds, MMF sponsors have often supported their funds, with researchers documenting over 200 instances of such support since 1989.28

27 SeeSEC, “Unofficial Transcript: Roundtable on Money Market Funds and Systemic Risk” (May 10, 2011),available at http://www.sec.gov/spotlight/mmf-risk/mmf-risk-transcript-051011.htm.At the roundtable, Bill Stouten of Thrivent Financial stated, “I think the primary factor that makes money funds vulnerable to runs is the marketing of the stable NAV. And I think the record of money market funds and maintaining the stable NAV has largely been the result of periodic voluntary sponsor support. I think sophisticated investors that understand this and doubt the willingness or ability of the sponsor to make that support know that they need to pull their money out before a declining asset is sold.”

28Moody's found 144 cases in which U.S. MMFs “would have `broken the buck' but for the intervention of their fund sponsor/investment management firm” from 1989 to 2003. Moody's identified a total of 146 funds that would have lost value before 2007 in the absence of support, but one of these losses occurred before the adoption of rule 2a-7 and another loss was in a European fund. The Moody's report covers “constant net asset value” funds other than MMFs, but we understand that the remaining 144 funds in question were all registered U.S. MMFs. Moody's Investors Service, “Sponsor Support Key to Money Market Funds” (Aug. 8, 2010). Separately, other researchers documented 123 instances of support for 78 different MMFs between 2007 and 2011. These totals include support in the form of cash contributions from sponsors and outright purchases of securities from MMFs at above-market prices. However, the totals cited here exclude some forms of sponsor intervention, including capital support agreements and letters of credit that were not drawn upon.SeeSteffanie A. Brady, Ken E. Anadu, and Nathaniel R. Cooper, “The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011,” Federal Reserve Bank of Boston Risk and Policy Analysis Unit, Working Paper RPA 12-3 (Aug. 13, 2012).

While MMF prospectuses must warn investors that their shares may lose value,29 the extensive record of sponsor intervention and its critical role historically in maintaining MMF price stability may have obscured some investors' appreciation of MMF risks and caused some investors to assume that MMF sponsors will absorb any losses, even though sponsors are under no obligation to do so. As such, it is not the sponsor support itself, but rather its discretionary nature that contributes to uncertainty among market participants about who will bear losses when they do occur. This uncertainty likely makes MMFs even more vulnerable to runs during periods of financial instability, when broader financial risks are most salient and when concerns arise about the health of the sponsors and their wherewithal to provide support to affiliated MMFs.

29An MMF's prospectus must state, “An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.” SEC Form N-1A, Item 4(b)(1)(ii).

Highly risk-averse investors. Although MMFs invest in assets that may lose value and the funds are under no legal or regulatory requirement to redeem shares at $1.00, the industry's record of maintaining stable and rounded $1.00 per share NAVs combined with the funds' low-risk investment strategies has attracted highly risk-averse investors that are prone to withdraw assets rapidly when losses appear possible.30 This has been exacerbated by the outsized growth of institutional MMFs in recent decades. MMFs marketed primarily to institutional investors made up only about one-third of industry assets in 1996 but account for almost two-thirds of assets today.31 Institutional investors are typically more sophisticated than retail investors in obtaining and analyzing information about MMF portfolios and risks, have larger amounts at stake, and hence are quicker to respond to events that may threaten the stable NAV.

30 SeeSEC, “Unofficial Transcript: Roundtable on Money Market Funds and Systemic Risk” (May 10, 2011),available at http://www.sec.gov/spotlight/mmf-risk/mmf-risk-transcript-051011.htm(quoting Lance Pan of Capital Advisors Group, “[MMF investors] will take zero loss, and they're loss averse as opposed to risk averse. So to the extent that they own that risk, at a certain point they started to own that risk, then the run would start to develop. It's not that throughout the history of money market funds we did not have asset deterioration. We did. But I think over the last 30 or 40 years, people have relied on the perception that even though there is risk in money market funds, that risk is owned somehow implicitly by the fund sponsors. So once they perceive that they are not able to get that additional assurance, I believe that was one probable cause of the run.”

31ICI Fact Book; Investment Company Institute, “Weekly Money Market Mutual Fund Assets,”available at http://www.ici.org/research/stats/mmf(Oct. 25, 2012).

Interaction of these activities and practices. In combination, the activities and practices of MMFs described above tend to exacerbate each other's effects and increase MMFs' vulnerability to runs. For example, by relying on the amortized cost method of valuation and/or penny rounding to maintain a stable $1.00 per share NAV, offering shares that may be redeemed on demand despite limited same-day portfolio liquidity, and investing in assets with interest-rate and credit risk without explicit loss-absorption capacity, MMFs create a first-mover advantage for investors who redeem quickly during times of stress. If MMFs with rounded NAVs had lacked sponsor support over the past few decades, many might have broken the buck, causing investors to recalibrate their perception of MMF risks and resulting in a less risk-averse investor base. Or if funds maintained credible loss-absorption capacity, even a risk-averse investor base might be less likely to run because the funds would be better equipped to maintain a stable $1.00 per share NAV. As a result, policy responses that diminish these destabilizing interactions hold promise for mitigating the risks that MMFs pose—even if not all five of these activities and practices are fully addressed through reform.

Size, Scale, and Concentration

MMFs' size, scale, and concentration increase both their vulnerability to runs and the damaging impact of runs on short-term credit markets, borrowers, and investors.

As discussed in Section II, the MMF industry is large, with $2.9 trillion in assets under management.32 MMFs are important providers of short-term funding to financial institutions, nonfinancial firms, and governments, and play a dominant role in some short-term funding markets. For example, as of September 30, 2012, MMFs owned 44 percent of U.S. dollar-denominated financial CP outstanding and about 30 percent of all uninsured dollar-denominated time deposits, including nearly two-thirds of the CDs that are tradable in financial markets.33 These funds also provided approximately one-third of the lending in the tri-party repo market and held significant portions of the outstanding short-term securities issued by state and local governments, the Treasury, and Federal agencies.34 Given the dominant role of MMFs in short-term funding markets, runs on these funds can therefore have severe implications for the availability of credit and liquidity in those markets.

32Aggregate assets under management in all MMFs that are registered under the Investment Company Act of 1940 and report on Form N-MFP to the SEC totaled $2.9 trillion at September 30, 2012. However, shares for some of these MMFs are not registered for sale to the public under the Securities Act of 1933. The assets in funds that are sold to the public totaled $2.6 trillion at September 30, 2012, according to data from the Investment Company Institute and iMoneyNet.

33Based on MMFs' filings of SEC Form N-MFP, CD data from the Depository Trust & Clearing Corporation (“DTCC”), large time deposits data from the Federal Reserve Board Flow of Funds Accounts, and CP data from DTCC and the Federal Reserve Board.

34For repo data,seeFederal Reserve Bank of New York,http://www.newyorkfed.org/banking/tpr_infr_reform.html; for short-term municipal securities,seeSIFMA,http://www.sifma.org/research/item.aspx?id=8589940509and Flow of Funds Accounts of the United States.

In addition, because of the concentration of the MMF industry, even heavy withdrawals from (or shifts in portfolio holdings of) MMFs offered by a handful of asset management firms may reverberate through financial markets. As of September 30, 2012, the top five MMF sponsors managed funds with $1.3 trillion in assets (46 percent of industry assets), and the top 20 sponsors managed $2.6 trillion (90 percent).35

35Based on Form N-MFP filings with the SEC.

Interconnectedness

MMFs' extensive interconnectedness with financial firms, the financial system, and the U.S. economy cancreate a significant threat to broader financial stability because the shocks from a run on MMFs can rapidly propagate to other entities throughout the financial system.

Most of the short-term financing that MMFs provide to non-government entities is extended to financial firms. As of September 30, 2012, 86 percent of the funding that MMFs extended to private entities was in the form of financial sector obligations, including CDs, financial CP, asset-backed commercial paper (ABCP), repo, other MMF shares, and insurance company funding agreements.36 Among the top 50 private sector firms that received funding from prime MMFs in September 2012, only four were nonfinancial firms.37 Moreover, because 13 of the top 15 private-sector firms receiving funding were domiciled outside the United States, MMFs can also represent a potential channel for rapid transmission of global stress to the U.S. financial markets.

36Based on Form N-MFP filings with the SEC.

37Based on Form N-MFP filings with the SEC;seeScharfstein, 2012.

MMFs are further interconnected with the U.S. financial system because bank and savings and loan holding companies sponsor MMFs. Sponsors face potential risks because, historically, sponsors have absorbed nearly all MMF losses that threatened the funds' $1.00 per share NAVs, and sponsors woul