Frequently Asked Questions
Consumer Financial Choice and Capital Markets Protection Act
The Consumer Financial Choice and Capital Markets Protection Act of 2019 is bipartisan legislation introduced as S. 733 by Senators Patrick Toomey (R-PA), Robert Menendez (D-NJ), Mike Rounds (R-SC) and Gary Peters (D-MI), and H.R. 4492 by Representatives Gwen Moore (D-WI) and Steve Stivers (R-OH). It simply restores and codifies the ability of any money market fund to choose to maintain a stable net asset value (NAV). The legislation does not amend the Dodd-Frank Act, nor does it affect any consumer protection laws or regulations. To strengthen safety and soundness, the legislation prohibits Federal assistance from being provided directly to any money market fund, regardless of whether it operates as a Stable Value Fund or a floating NAV Fund.
Money market funds invest in a diversified, high-quality portfolio of short-term assets such as U.S. Treasuries, government obligations, repurchase agreements, commercial paper, tax-exempt municipal debt and bank certificates of deposit. The widespread use of these funds as a short-term investment vehicle by businesses, state and local governments and non-profit organizations is not practicable without a stable $1 per share value characteristic. This share pricing convention, which uses amortized cost to produce a stable net asset value (NAV), is preferable to a floating NAV that uses mark-to-market pricing. That’s because a stable NAV provides significant administrative and accounting cost benefits for both fund companies and short-term cash management investors. In contrast, a floating NAV rule complicates and slows down the process for establishing unit values, thereby delaying settlement of fund unit purchases and redemptions.
S. 733 and H.R. 4492 have the support of organizations representing a broad spectrum of public and private sector finance officers and entities, including:
- Government Finance Officers Association
- National Association of Counties
- U.S. Conference of Mayors
- National League of Cities
- International City/County Management Association
- National Association of Health and Educational Facilities Finance Authorities
- National Council of State Housing Agencies
- American Public Power Association
- Large Public Power Council
- Association of Financial Professionals
- Association of School Business Officials International
- State Financial Officers Foundation
The legislation is opposed by two of the largest Wall Street asset management companies – Blackrock and Vanguard, and their trade association lobbyist, the Investment Company Institute. No other company or organization has expressed opposition to the legislation. Blackrock, Vanguard and the ICI originally supported maintaining a stable share price for all MMFs, but subsequently changed their views after cutting a behind-the-scenes deal with the Federal Reserve and the SEC in 2014 to support curtailing access to prime and tax-exempt MMFs in exchange for avoiding FSOC designation as SIFIs. (Footnote: see “Memorandum from ICI President Paul Stevens to the Executive Committee of the ICI Board of Governors, January 5, 2018)
As a result of the rule, assets in tax-exempt money market funds fell by 50 percent, from $260 billion in January 2016 to $135 billion today. For each $1 billion of tax-exempt money market fund assets that left the pool, 1,000 U.S. communities on average lost access to $1 million in funding. This has inflicted huge costs on municipalities in the form of higher borrowing costs and lower returns on invested cash. State and local governments, which had relied on money market funds as a source of short-term financing and as a safer place than banks to hold large seasonal cash balances, have been greatly harmed in their ability to manage their cash flows, and have been exposed to greater risks as a result. It is resulting in lost revenues that could be available to invest in schools, affordable housing, public infrastructure, and economic development.
Main street businesses lost access to capital because large corporations had to turn to banks for funding as the pool of capital in prime funds contracted by over 60 percent. The effect has been to crowd out smaller main street businesses. For each $1 billion of prime money market fund assets that left the private sector capital pool, 10,000 main street businesses on average lost access to $100,000 in funding.
The rule has increased the need for another federal bailout of the banks as the floating NAV rule reduced capacity of money market funds to make short-term loans to banks. Under the radar, the Federal Reserve Bank of New York on October 3 provided a $33.55 billion bail out to the banking system by using the market for repurchase agreements (Repos) to relieve funding pressure in money markets caused by the SEC rule.
In 2018, both Blackrock and Vanguard each spent over $2.7 million on lobbying, much of it focused on supporting legislation to prevent FSOC from designating non-bank financial companies as systemically risky, and to opposing legislation to restore stable NAV money market funds for community investments. Likewise, ICI spent over $5 million in 2018 lobbying to prevent oversight of the systemic risk practices of Blackrock and Vanguard.
- Higher Business Borrowing Costs. The $1.0 trillion flight of capital from prime money funds to government money funds put considerable upward pressure on short term borrowing rates. Most significantly, LIBOR to treasury spreads widened by 30 basis points or 0.30%, increasing the cost to corporate and consumer borrowers. In the U.S. alone, there is $5.2 trillion of corporate debt and $1.3 trillion of consumer debt indexed to LIBOR. This higher borrowing rate could be costing businesses $15.6 billion, and reducing consumers’ discretionary income by $3.9 billion, annually.
- Higher Municipal Borrowing Costs. Municipalities issue tax-exempt securities to fund the working capital needs and infrastructure projects. The 2016 SEC rules resulted in the money market-funded part of that market dropping by half. This dramatically increased borrowing costs to 50 basis points above the tax-adjusted Fed rate increases on the $130 billion remaining in tax-exempt money funds and likely much more for the $120 billion that left (which was forced into higher-cost, long-term, fixed-rate bonds). Cities and states are thus faced with higher financing costs and at the margin, must postpone or cancel infrastructure projects. This has the domino effect of hurting those communities.
- Less investment income. Historically, prime money funds yield approximately 20–30 basis points more than government funds. The SEC rules make it more difficult to invest in prime funds. As a result, most business and state and local government investors have shifted their investments out of prime funds, losing that 20-30 basis point premium. Across the $1.0 trillion that left prime funds, the economic costs to businesses is estimated to be $2-3 billion per year in lost investment income.
The backroom deal that Blackrock and Vanguard cut with the Fed and the SEC has allowed them to double in size over the past five years while avoiding regulatory oversight designed to prevent another financial crisis like the one in 2008. Since the floating NAV rule was adopted in 2014, Blackrock’s assets under management (AUM) grew from $4.7 trillion to nearly $7 trillion today. Likewise, Vanguard’s AUM grew from $2.85 trillion to $5.6 trillion. According to the Financial Times, the combined assets of just these two companies are worth more than a third of the U.S. stock market. Blackrock and Vanguard, FT notes “have engaged in an aggressive battle for growth in recent years, leaving smaller competitors in their wake and sending shockwaves through the wider investment industry.”
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