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THE IMPACT OF REGULATIONS 

ON SHORT-TERM FINANCING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

DECEMBER 8, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–113 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

December 8, 2016 ............................................................................................. 1 

Appendix: 

December 8, 2016 ............................................................................................. 33 

WITNESSES 

THURSDAY, DECEMBER 8, 2016 

Carfang, Anthony J., Managing Director, Treasury Strategies, a Division 

of Novantas, Inc. .................................................................................................. 6 

Deas, Thomas C., Jr., Chairman, National Association of Corporate Treasurers, on behalf of the U.S. Chamber of Commerce .......................................... 7 

Konczal, Mike, Fellow, Roosevelt Institute ........................................................... 9 

Toomey, Robert, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association ............................................. 11 

APPENDIX 

Prepared statements: 

Carfang, Anthony J. ......................................................................................... 34 

Deas, Thomas C., Jr. ........................................................................................ 77 

Konczal, Mike ................................................................................................... 89 

Toomey, Robert ................................................................................................. 104 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Rothfus, Hon. Keith: 

Written statement of the Coalition for Investor Choice ................................ 115 

Letter to Hon. Paul Ryan from the State Financial Officers Foundation ... 123 

Written responses to questions for the record submitted to Anthony J. 

Carfang .......................................................................................................... 125 

Written responses to questions for the record submitted to Thomas C. 

Deas, Jr. ......................................................................................................... 129 

Written responses to questions for the record submitted to Michael 

Konczal .......................................................................................................... 131 

Scott, Hon. David: 

Letter to Hon. Gwen Moore from various undersigned organizations ......... 133 

(1) 

THE IMPACT OF REGULATIONS 

ON SHORT-TERM FINANCING 

Thursday, December 8, 2016 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:30 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Royce, Neugebauer, 

Huizenga, Duffy, Hultgren, Wagner, Messer, Schweikert, Poliquin, 

Hill; Maloney, Scott, Foster, and Carney. 

Ex officio present: Representative Hensarling. 

Also present: Representative Rothfus. 

Chairman GARRETT. Good morning. The Subcommittee on Capital Markets and Government Sponsored Enterprises will now come 

to order. 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

Also, without objection, any members of the full Financial Services Committee who are not members of the subcommittee are authorized to participate in today’s hearing, although I am not sure 

we will have that. 

With that said, I will recognize myself for 2 minutes with regard 

to this committee meeting and, before I do that, actually, just to 

say we have been notified that there will be votes right in the middle of things, as is often the case here. So, in reality, what we will 

probably be doing is doing our opening statements by the members, 

a couple of members, and then going to opening statements from 

the panel. And I bet that will be just about when votes will interfere with us. So we will go on, take a break, go on recess, and then 

come back for the deep and penetrating questions that will enliven 

the discussion for the next 3 or 4 hours. Well, maybe not. 

So let me just address the matter before us as far as the hearing 

today. During the last couple of years, this subcommittee and the 

full committee have comprehensively sought to facilitate capital 

formation by considering some 40 pieces of legislation, many of 

them bipartisan legislation—actually, the majority of them I think 

bipartisan legislation. In doing so, we examined the activities of the 

SEC’s major divisions and offices and conducted oversight of the 

many self-regulatory organizations that oversee different pieces of 

capital markets. 

2 

And, today, the subcommittee meets to examine the impact of 

regulations on short-term financing in the U.S. capital markets. 

The Federal securities laws, which are the bedrock of our capital 

markets, were put in place eight decades ago to promote the transparency of security offerings and to mitigate and enforce against 

fraud in the markets. And it created the SEC to carry out this important mission. 

As this subcommittee is well aware, the SEC’s mission is what? 

It is threefold: to protect investors; maintain fair and orderly and 

efficient markets; and to facilitate capital formation. Congress and 

market participants have long understood the SEC’s mission as 

such and have recognized that the securities laws were not created 

and were never intended to be a roadblock to access to capital. 

If you want to revitalize the economy, Congress needs to promote 

investment to reduce red tape and to do so by making it easier for 

investors and businesses across the country to access capital and 

to grow. New rules must not be duplicative nor contradictory nor 

counterproductive or inspired by regulatory regimes designed for 

wholly different entities. 

And so it is clear that Main Street is feeling the impact of nearly 

hundreds of new rules heaped upon our economy over the last few 

years. And so this hearing is yet another opportunity to examine 

the impact of the Volcker rule, Basel liquidity, and capital rules, 

and other financial crisis actions are having on the capital markets 

and, specifically what we are looking at here, short-term financing. 

And so, with that, I do thank each member of the panel for coming today, and I will recognize you shortly. But at this point— 

Chairman HENSARLING. Mr. Chairman, I ask unanimous consent 

to speak out of order for 2 minutes. 

Chairman GARRETT. So ordered. 

Chairman HENSARLING. I thank the gentleman for yielding. But 

as he yields, I feel a heavy heart, but I also feel pride. I am proud 

that the chairman of this subcommittee has been my friend and 

colleague for 14 years, as has the gentleman from Texas, Mr. 

Neugebauer. And my heart is heavy in that this will be their last 

hearing with us and the last hearing that Mr. Garrett will preside 

over. Both of these fine gentlemen have fought for the cause of 

freedom and free enterprise and prosperity. They have acted with 

dignity and principles and courage. They have commanded respect 

on both sides of the aisle. With their departure, this will be a lesser 

committee and Congress will be a lesser institution. No one can fill 

their shoes or, in the case of the gentleman from Texas, no one can 

fill his boots. But people will at least follow in their footsteps. So 

I did not wish to have the moment pass without recording for the 

record the contribution of the gentleman from Texas, Mr. Neugebauer, and the contribution of the gentleman from New Jersey, Mr. 

Garrett, to this committee. 

And whatever the future holds for Chairman Neugebauer and 

Dana, and whatever the future holds for Chairman Garrett and 

Mary Ellen, know that you go with our respect, and you go with 

our blessing. You will always have permanent friends here. And 

anything that we achieve in this broader committee, please know 

it is based upon your work. We stand on your shoulders and you 

3 

will never, ever be forgotten among this group of friends. Godspeed 

and thank you. 

And I yield back. 

Chairman GARRETT. I thank the chairman and a unanimous consent to speak out of order as well at this point. But we will get to 

the panel. 

I very much appreciate that, and I echo the comments that the 

gentleman makes to our colleague and friend and leader from 

Texas. We came in about the same time, worked together with the 

chairman. 

You know, the chairman has been most gracious and has done 

something that I don’t know happens that often, has had multiple 

sort of going-away events, and so you hear nice things said each 

time. I am hoping that he is—Randy and I are both hoping that 

he is planning at least three or four more of those going-away 

things because I know, once I leave D.C., I will not hear any of 

those nice things anymore. I certainly didn’t hear them over the 

last year and a half of the campaign, so this makes up for it—sort 

of. 

But thank you very much. It is—I wasn’t going—I was going to 

go right into the meeting, actually. But I said to someone the other 

night at one of the going-away events—and I said it in jest toward 

one Member—I said: It has been an honor and a privilege to work 

with some of the most dedicated, smart, intelligent in a different 

way, committed to trying to do all they can for the people of this 

country, to lift people up in all walks of life, regardless of whether 

they support them or not in their districts, trying to do it for this 

generation and for the next generation. We have been on the same 

page for so many issues in that regard. And throughout that time, 

we have had some battles that we won, and that was fun; and we 

had some battles that we lost, and we just marked it up to what 

we had to do the next time. But we just kept on going forward. And 

I looked at my colleagues and my friends as well, knowing that, 

through it all, as scripture tells us, that you run the race, you stay 

the course, and you keep the faith. And I could not have chosen a 

better group of people to be with during these last 14 years than 

the people right here and the people who didn’t show up as well. 

And we are taking down names. 

Mr. NEUGEBAUER. Mr. Chairman? 

Chairman GARRETT. I yield to the gentleman from Texas. 

Mr. NEUGEBAUER. May I speak out of order? 

Chairman GARRETT. Absolutely. No objection. 

Mr. NEUGEBAUER. I thank the gentleman from Texas for his kind 

words as well the gentleman from New Jersey. It has been an 

honor and a privilege to serve with these two great guys and the 

ladies and gentlemen who are on the committee as well. You know, 

Scott and I have had some—heard some nice things said about us. 

And one of the things I keep regretting, though, is that my motherin-law is not here to hear those. 

But, anyway, Scott has provided great leadership on this subcommittee, and I have enjoyed serving on it with you and also the 

other projects that we worked on. 

4 

And to my colleagues on the other side of the aisle, I see several 

there that we have worked together on some issues, and so I thank 

you for the opportunity to hang out with you for a few years. 

Chairman GARRETT. And now we will have time to hang out even 

more. 

The gentleman yields. 

Mrs. MALONEY. I also ask to speak out of order. 

Chairman GARRETT. The gentlewoman is recognized. 

Mrs. MALONEY. I would like to be associated with the comments 

of the chairman and Mr. Neugebauer and in speaking about all the 

fine things about our chairman. The chairman and Mary Ellen 

have been friends of mine on a personal level. He has been a friend 

and an outstanding, dedicated, and effective public servant. We did 

not always agree, but it was never personal. And it was always an 

honest and, in some cases, fun debate. And he is devoted to his constituents and to serving this body. I will miss him. He is a fine 

Representative. It has been an honor for me to work with him in 

every way. And we did some work together. We passed some bills 

together. 

And I just feel sad that you are leaving. And I appreciate your 

friendship and your support, particularly when my husband passed 

away. I will never forget how nice you were to me. In any event, 

you have been an outstanding chairman, and it has been a privilege to work with you. I will miss you. 

Mr. SCOTT. Mr. Chairman, over here. 

Chairman GARRETT. The gentleman is recognized. 

Mr. SCOTT. We all are going to really miss you. And as you know, 

we both came in together 14 years ago, and it has been a pleasure 

working with you. I want you to know that you have made some 

very sterling contributions to the financial stability of our great 

country. It has been a pleasure serving with you as the chairman. 

I have served on this Capital Markets Subcommittee with you for 

all these years, and I really appreciate the great opportunities we 

had to cosponsor some bills together, work on amendments, and debates on the floor. And I will tell you: there is not a more acute 

mind of knowledge to understand the basic fabric and the foundation of our finance system as you. And I want you to go away 

knowing that, not only the people of New Jersey, but the people of 

this Nation are really grateful for your service. Thank you very 

much for our working together. 

Chairman GARRETT. Thank you. It has been an honor and a 

pleasure. 

And, with that, we can focus—oh. Opening statement. With that, 

I turn to the gentlelady from New York, who I will be looking forward to for now personal invitations to events in New York City. 

Mrs. MALONEY. You will get them. 

Chairman GARRETT. There we go. The gentlelady from New York 

is now recognized. 

Mrs. MALONEY. Thank you so much, Mr. Chairman. 

The title of this hearing is, ‘‘The Impact of Regulations on ShortTerm Financing,’’ and for once, we can agree: regulation definitely 

has had an impact on short-term financing markets. But this was 

entirely intended. The financial crisis revealed huge problems with 

many short-term financing markets, some of which completely 

5 

broke down during the crisis. We discovered that the largest banks 

have become overly reliant on short-term wholesale financing markets, such as the repo market, which can dry up in a heartbeat and 

suffered a massive run during the crisis. 

The point of many postcrisis regulations has been to reduce the 

banks’ reliance on unstable short-term financing, which has significantly improved the stability of the largest banks. A reduction in 

short-term financing markets was an intended consequence of financial reform. Now we have an ongoing debate about whether certain postcrisis regulations have had unintended consequences for 

some short-term financing markets, but that debate is far from settled. And I believe we need to seek compelling evidence of harm before we roll back core postcrisis protections. 

There has also been a lively debate about the SEC’s money market fund reforms, which took effect in October. These reforms were 

intended to make the pricing of money market funds more transparent and to reduce the first-mover advantage that can lead to 

devastating runs. The reforms also provided funds with tools to 

manage large-scale investor redemptions in an orderly fashion. 

In anticipation of the reforms taking effect in October, many investors moved their cash out of prime and municipal money market 

funds and into government money market funds, which we were 

less affected by the SEC’s reforms. It is true that short-term borrowing costs for corporations and municipalities have increased recently. And some commentators have attributed this entirely to the 

SEC’s rules. Most market participants believe that this increase 

has been driven primarily by the expectation of a Fed interest rate 

hike this December. In fact, the data clearly shows that corporate 

borrowing rates first started to increase shortly before the Fed 

raised rates the first time last year, which is exactly what you 

would expect if the increase was driven primarily by the Fed’s 

monetary policy, rather than the SEC’s rules. 

Moreover, while one bill has been introduced that would repeal 

the requirement in the SEC’s rule that certain funds are at floating 

net asset value or NAV, my understanding is that most investors 

who have taken their money out of prime funds have done so because of the mandatory gates and fees, not the floating NAV. 

Therefore, it is not clear to me that simply repealing the SEC’s 

floating NAV requirement would actually accomplish anything. 

Once investors get comfortable with the new rules, I believe at 

least some of this money will return to prime funds. Much of it will 

never come back, but again this was an intended consequence of 

reform. It would be very strange if the SEC’s reforms, which were 

among the most important postcrisis reforms, produced no change 

at all in the money market funds. 

So, therefore, I look very much forward to the hearing today and 

what our witnesses have to say. Thank you very much. 

I yield back, and I will miss you. 

Chairman GARRETT. Thank you, the gentlelady yields back. We 

now go to the witnesses and hopefully the message from leadership 

was wrong as far as when they are going on to a break for the 

votes. 

So we will begin—for the witnesses, you will each be recognized 

for 5 minutes. Your full testimony will be made part of the record. 

6 

There should be little lights or something in front of you to indicate 

your time. Green is for 5 minutes. Yellow, it means you have 1 

minute left remaining. And red is at the end, saying your time is 

up. 

So, at the very beginning, Mr. Carfang, welcome and you are recognized for 5 minutes. 

STATEMENT OF ANTHONY J. CARFANG, MANAGING DIRECTOR, 

TREASURY STRATEGIES, A DIVISION OF NOVANTAS, INC. 

Mr. CARFANG. Thank you, Chairman Garrett, Ranking Member 

Maloney. I am pleased to be here today. 

My name is Tony Carfang, and I am a managing director with 

Treasury Strategies. We are a division of Novantas. We are a consulting firm specializing in Treasury payments and liquidity. And 

we work with hundreds of corporations, municipalities, healthcare 

organizations, and financial institutions around the country. 

The issues we are talking about today are very important to our 

clients, and there are three—when I say the big three regulations 

that have come out of the financial crisis, are Basel III, DoddFrank, and money market fund reform. These are bold experiments. And as we all learned in high school chemistry, when you 

do an experiment, you pour the chemicals in slowly and carefully. 

What has happened in this case is all the experiments went into 

the test tube at the same time. And that test tube is America’s 

businesses and America’s consumers. 

We are now seeing the reaction and, in some cases, the uncontrolled reaction of that. For example, in the 5 years since the 

postcrisis regulation has been going into effect, there are 1,500 

fewer banks in the United States. That is more than a 20-percent 

decrease. America used to create about 150 to 170 new banks per 

year. That is an 80-year average. Since 2010, only two new banks 

have been formed in the United States. I think that gives you a 

sense of how crushing the regulations have been. 

What I would like to do today is focus on money market mutual 

funds and point out first that, in 2010, the SEC introduced a set 

of reforms to improve transparency and liquidity, and those regulations were very successful in terms of providing safety and soundness to not only money market funds but the entire financial system without impairing the utility of those funds to investors. Unfortunately, in 2014, the SEC again came out with an extended set 

of regulations that, in effect, prohibited what they called non-natural persons from investing in stable net asset value prime and 

municipal money market funds. The result of that has been for investors to exit those funds. And what we have seen is in prime 

funds—and by the way, prime funds are private sector funds; they 

invest in the commercial paper or other debt of corporations and 

financial institutions providing the day-to-day working capital for 

those organizations—assets have fallen almost 75 percent, from 

$1.4 trillion down to about $380 billion. That is hardly a scaling 

back. They have been crushed. They have been decimated. And the 

borrowers who rely on those funds for financing, where they are 

able to find credit elsewhere, have a much higher cost to that credit. 

7 

On the municipal funds, here the impact is particularly profound. We have seen a decrease of 50 percent from about $260 billion 

down to $130 billion in assets. These are the funds that finance 

municipalities, schools, hospitals, and universities. 

To give you some examples, the State of New York has seen, just this year, a decrease in funding from $39 billion down to $19 billion; California healthcare finance from $2 billion down to 1.3. The 

total decline has been $1.2 trillion. Let me point out: this money 

has moved from the private sector to the public sector. And to put 

that in perspective, the $1.2 trillion is more than the entire TARP 

program several years ago. It is more than the stimulus program, 

and it is several times more than the amount of cash we expect to 

get back from overseas if we can get corporations to repatriate. 

These are huge numbers. 

In addition to States losing financing, let me just point out the 

Metropolitan Transit Authority in New York City has seen its financing fall from $2.34 billion down to $800 million. They have lost 

a billion and a half that municipal money funds used to finance. 

Harris County, Texas, educational facilities have lost—they have 

gone from $1.1 billion down to $580 million. These are very real 

consequences. 

H.R. 4216 is designed to provide a simple fix to allow non-natural persons to again invest in stable value money market funds. 

This will restore funding—it is the stable value that is the threshold issue that makes this money funds a cash-management tool for 

corporate treasurers. Without that stable value as a source of financing, we lose a couple trillion dollars. This is all about preserving money market funds as an effective financing tool. 

Mr. Chairman, thank you very much. 

[The prepared statement of Mr. Carfang can be found on page 34 

of the appendix.] 

Chairman GARRETT. And I thank you. That is interesting. 

Next, speaking on behalf of the U.S. Chamber of Commerce, Mr. 

Deas, welcome, and you are recognized for 5 minutes. 

STATEMENT OF THOMAS C. DEAS, JR., CHAIRMAN, NATIONAL 

ASSOCIATION OF CORPORATE TREASURERS, ON BEHALF OF 

THE U.S. CHAMBER OF COMMERCE 

Mr. DEAS. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. I am Tom Deas. 

Today, I am testifying on behalf of the U.S. Chamber of Commerce 

and its Center for Capital Markets Competitiveness. I am also the 

chairman of the National Association of Corporate Treasurers. 

These organizations are fully supportive of the bipartisan efforts of 

the chairman, ranking member, and other distinguished members 

of this subcommittee to protect Main Street companies from regulations that, however well-intended, place an undue burden on job 

creators at the heart of our economy as they work every day to finance their businesses, safeguard their cash and other assets, and 

hedge risk in their day-to-day operations in the most efficient and 

effective ways as possible. 

When it comes to the needs of Main Street businesses, the Members of the House have worked together to get things done. In this 

114th Congress, you have led the charge in enacting both the 

8 

enduser margin bill and the centralized Treasury unit bill benefitting directly the enduser community. We appreciate your efforts, 

thank you. 

We support the overall goals to increase the financial markets’ 

transparency, safety, liquidity, and efficiency. However, there are 

areas where conflicting regulations compel endusers to appeal for 

relief. We are seeing compounded adverse effects from the elaborate web of new regulations imposed and so urge a study of the cumulative effects of how these rules interact to produce a greater 

impact than an analysis of them taken individually would predict. 

In the area of money market fund reform, in mid-October new 

rules affecting these money markets came into force that had the 

effect not only of taking $1 trillion out of the market that has long 

provided treasurers with a diversification away from bank time deposits for investments of temporary excess cash balances but which 

also diminished an important source of funding for treasurers seeking to issue commercial paper to fund their day-to-day needs. 

Conflicting with the importance of diversification, the Treasury’s 

rule for simplifying the tax consequences of investors having to 

track money market fund investments and share prices to the 

nearest hundredth of a cent now, along with liquidity fees and redemption gates, we instead have greater concentration, fewer funds 

as alternative, purchasing less nonfinancial enduser commercial 

paper, resulting in higher borrowing costs and greater risks of less 

liquid funding sources. 

We believe that the net stable funding ratio, also a rule proposed 

by banking regulators, must have higher—result in higher shortterm funding costs for Main Street companies. For example, it requires banks buying a company’s overnight commercial paper to 

hold reserves against that purchase in the form of significantly 

higher long-term funding for 85 percent of the balance. As an example of the need for a cumulative impact study, consider the 

interaction of money market fund reforms and the NSFR rule. The 

money fund reforms’ drive for greater liquidity has driven funds 

holdings maturing in less than a week, including bank certificates 

of deposits and commercial paper, to increase from 54 percent at 

June 30 to 68 percent at the end of November. However, the very 

structure of the NSFR is to force banks to issue their funding not 

at 1 week or less, but on a far longer term basis with higher costs 

passed on to their borrowers, Main Street companies. 

These conflicting regulatory company conflict—these conflicting 

regulatory forces will tend to increase our costs. The rules were 

adopted without an economic analysis of their implications and ultimate costs. 

To summarize, Congress was instrumental in clarifying that nonfinancial endusers should not divert capital from investments in 

their businesses to unproductive regulatory set-asides, such as the 

daily posting of cash margin for their derivative positions. However, the banking regulators have implemented rules on capital 

that banks must hold against derivative positions as well as 

against loans to endusers and other advances to them that have 

the same economic effects. 

These capital and liquidity rules create real impacts and costs on 

endusers’ ability to manage risk and access capital. This is why we 

9 

support undertaking a cumulative assessment of the impact of 

these rules on endusers. The imposition of unnecessary burdens on 

endusers, businesses, restricts job growth, decreases investment, 

and undermines our ability to meet and beat our foreign competition, leading to material cumulative impacts on corporate endusers 

and the U.S. economy. 

Thank you again for your attention to the needs of Main Street 

companies. 

[The prepared statement of Mr. Deas can be found on page 77 

of the appendix.] 

Chairman GARRETT. Great, I appreciate your testimony. 

Next, Mr. Konczal, you are recognized for 5 minutes and welcome 

to the panel. 

STATEMENT OF MIKE KONCZAL, FELLOW, ROOSEVELT 

INSTITUTE 

Mr. KONCZAL. Thank you, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. Thank for the opportunity to testify. 

My name is Michael Konczal. I am a research fellow at the Roosevelt Institute. Previously, I was a financial engineer at Moody’s 

KMV, a provider of credit analysis tools to lenders and investors. 

The 2010 Dodd-Frank Act has many important accomplishments, 

one of which is reducing the regulatory arbitrage that characterizes 

shadow banking. Here I will refer to the financial activity that follows the functions of traditional banking without exclusive banking 

regulations or access to deposit insurance or emergency lending. 

The sector is often regulated through securities law, which emphasizes disclosure over prudential regulation. One of the primary elements of shadow banking is money market funds, whose collapse 

in the aftermath of the failure of Lehman Brothers was the defining moment of the panic. 

As a legal matter, money market funds function as mutual funds 

and are regulated as such. But as an economic matter, money market funds share functions identical to bank deposits. They allow for 

investments to be liquidated at any time at par with the expectation that they will return the capital amount invested plus interest. 

This exposes them to runs. This has been covered up previously because of the ability of sponsor funds to provide capital injections. 

Yet they blur the line between these two regulatory worlds of securities and banking law. The history of these funds has always been 

tied to this regulatory blurring, as former Federal Reserve Chairman Paul Volcker recently noted: I was there at the Federal Reserve Board when these funds were born. It was obvious at the 

time that these products were created to skirt banking regulations, 

end quote. 

Since the crisis, the SEC has imposed several regulations on 

money market funds designed to increase their stability and reduce 

the likelihood of runs. The most important requires the use of a 

floating net asset value for prime institutional funds. As SEC Commissioner Daniel Gallagher noted at the time, quote: This will address the three decade old error in a nuanced and tailored manor 

to reinstate market-based pricing, end quote. 

10 

With this change, there is less of an incentive for mass withdrawal under stress conditions. There’s no cliff effect of breaking 

the buck, and it reduces the first-mover incentive. There is also an 

issue of transparency that gives investors a better understanding 

of the risk they face. 

It is worth noting previous efforts to educate investors that these 

instruments do not function as deposits and could break the buck 

had they not worked. This was attempted in both 1991 and 1996 

by the SEC with language provided in my written testimony. 

Disclosures are not a sufficient substitute for proper regulation 

and market-based pricing. Beyond this, Dodd-Frank provides for 

the graduated, consolidated level liquidity and leverage requirements from the largest financial players. These are essential for 

risk management. By itself, risk-weighted requirements are 

procyclical and can be subject to unexpected assetwide downgrades. 

Leverage requirements provide a backstop and an important complement to other regulatory capital tools. Just as equity is regulated, debt should be regulated too and ensure that the term structure of debt of a firm ensures sufficient liquidity to survive a panic 

without massive capital lender of last resort backstops. 

There are concerns that this is affecting the real economy. It is 

difficult to see actions in the real economy that would indicate this 

negative effect. According to analysts at the New York Fed, ‘‘pricebased liquidity measures—bid-ask spreads and price impacts—are 

very low by historical standards, indicating ample liquidity in corporate bond markets.’’ 

We did not see this in the survey data either. In surveys conducted just this month in—monthly by the National Federation of 

Independent Business, only 4 percent of small businesses indicate 

that their borrowing needs were not satisfied in the past 3 months. 

This number is down over the past several years. Instead, the National Federation of Independent Business’ researchers find that a 

‘‘record number of firms remain on the credit sidelines, seeing no 

good reason to borrow.’’ 

This is mirrored in the Federal Reserve survey of loan offices, 

which indicate declining credit spreads over the past several years. 

We also do not see this financing constraining corporate governance decisionmaking. If Dodd-Frank was reducing the ability of 

corporations to borrow to invest, we would expect firms to retain 

more earnings, substituting against other types of capital streams 

capable of sustaining investment. 

However, total shareholder returns on the S&P 500 set a 12- 

month record high in 2016. 2014 spending on buybacks and dividends across the nonfinancial corporate sector was larger than the 

combined net income across all publicly traded, nonfinancial U.S. 

companies for the first time out of recession. We do not see, certainly as a macro economic effect, the shifts associated with reduced financing for investments. 

Even with all this work done, experts rightfully remain concerned about destabilizing elements in the shadow banking market. 

Efforts should go further. There are several avenues that could be 

investigated. 

More broadly, important reforms remain in establishing a system 

of minimum haircuts for securities financing transitions, and revisVerDate Nov 24 2008 19:49 Mar 08, 2018 Jkt 026007 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\26007.TXT TERI
11 

iting the Bankruptcy Code’s carving out of derivatives and other financing contracts can help provide stability and reduce the potential to runs. These risks are real, and they still remain. I think it 

is important to be diligent to them as we go forward as the crisis 

recedes into the background. 

Thank you and I look forward to your questions. 

[The prepared statement of Mr. Konczal can be found on page 89 

of the appendix.] 

Chairman GARRETT. Thank you. The gentleman yields back. 

And last, but not least, from SIFMA, Mr. Toomey is recognized 

for 5 minutes. 

STATEMENT OF ROBERT TOOMEY, MANAGING DIRECTOR AND 

ASSOCIATE GENERAL COUNSEL, SECURITIES INDUSTRY 

AND FINANCIAL MARKETS ASSOCIATION 

Mr. TOOMEY. I thank you, Mr. Chairman. Chairman Garrett, 

Ranking Member Maloney, and the distinguished members of the 

subcommittee. Thank you for providing me the opportunity to testify on behalf of SIFMA and to share our member firms’ perspective on the impact of regulation on the capital markets. 

Before turning to my opening statement, though, I want to take 

a brief moment on behalf of SIFMA to thank Chairman Garrett for 

his years of service on this committee and years of leadership of 

the Capital Markets Subcommittee. We always appreciated the 

thoughtfulness with which you approached an issue. Thank you. 

Regarding the topic of today’s hearing, let me start by applauding your focus on ensuring that an appropriate balance is struck 

between regulation and growth. We believe it is time for an evaluation of the intended and unintended consequences of postcrisis reforms. Much of the regulation that has been implemented seeks to 

address key contributors to the financial crisis and has made both 

banks and the system safer and sounder. 

Recently, however, market participants have raised concerns that 

the reforms have resulted in reductions in market liquidity beyond 

what was intended, particularly for the high-quality liquid assets 

that underpin the financial system and our economy. We see the 

resiliency and depth of market liquidity as a critical objective for 

policymakers to consider. If market participants’ ability to access liquidity is impaired, particularly during stress periods, it will negatively impact functioning of financial markets with broad ramifications for the economy. Regulations that are risk-insensitive and 

regulations that target the same risk multiple times through overlapping rules may weigh particularly heavily on vital market functions. As such, we believe now is an appropriate time to assess the 

existing framework. Specifically, we recommended an assessment 

of coherence and cumulative impacts on a forward-looking basis to 

identify cases where there may be unnecessary duplication or conflicts between specific regulatory requirements and broader policy 

goals. 

A recent effort undertaken by the European Commission provides an example of the type of call for evidence or review that we 

think is both warranted and timely. The Commission specifically 

sought feedback on the impact of financial regulation on the ability 

of the economy to finance itself, and growth, unnecessary reguVerDate Nov 24 2008 19:49 Mar 08, 2018 Jkt 026007 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\26007.TXT TERI
12 

latory burdens, and interactions, inconsistencies, gaps, and unintended consequences. These are exactly the right areas of inquiry. 

For any review undertaken domestically, we would note a few 

areas for consideration. First, in looking at the full rule set in place 

today and what we expect to come on line in the near future, we 

find potential conflicts between the rules that together could have 

negative impacts. 

Second, the treatment of low-risk, high-quality assets like cash 

and cash equivalents varies depending on the rule and often does 

not reflect their low-risk or risk-free status. 

Finally, the assessment should examine the calibration of specific 

rules that are designed to serve as backstops but that actually operate as binding constraints. 

Turning to the specific focus of the hearing, I would highlight the 

importance of the short-term funding markets in the financial system. In particular, repo markets provide the necessary grease that 

allows the U.S. capital markets to remain the most efficient and 

liquid in the world. This facilitates lower cost credit to businesses, 

municipalities, and the Federal Government. 

Several significant regulations, some of which are not fully in 

place yet, have been proposed and are adopted that have a direct 

impact on the repo market and other short-term funding markets. 

While some of these impacts are clearly intentional and reflect the 

policy concern for overreliance by financial institutions on shortterm funding. SIFMA believes that the cumulative impact of these 

regulations reflect neither the risk to the financial system nor individual firms. Rules, including the supplemental leverage ratio, the 

liquidity coverage ratio, the net stable funding ratio, may impact 

short-term funding in different ways, but the overall interaction of 

these regulations is unclear. Our concern is that these potential 

conflicts will become evident during stressed environments. 

In conclusion, the time is right to provide a wholesale review of 

the impact and coherence of these requirements with a view toward 

a better balance of safety and soundness on the one hand and efficiency, liquidity, and capital availability on the other. As liquidity 

diminishes or becomes more brittle in these markets, higher costs 

of capital may be inevitable for both the government and Main 

Street. 

I thank you for your interest in this important topic and look forward to your questions. 

[The prepared statement of Mr. Toomey can be found on page 

104 of the appendix] 

Chairman GARRETT. Great. Thanks. So the Floor has called, but 

we will have time to do a couple of questions. I will start with myself. 

So it appears that there is some uniformity in most of the testimony as far as, to use your words, Mr. Toomey, some brittleness 

of the market and the tightening of liquidity. One aspect of that 

is there was a study done—I forget if it was in the testimony or 

not—by Deutsche Bank saying it estimated that dealers have cut 

down their inventory by something like 80-some odd percent, 

right—you are nodding your head—which to me, I think, in layman’s terms, that is like, in manufacturing or retail, that you are 

getting into it just in time—you are hoping to have a just-in-time 

13 

delivery at that point if what is on the shelf is way down. What 

is the reaction to the marketplace to that, as I coined it, just-intime delivery? Are they able to deal with that? 

Mr. CARFANG. Well, the just-in-time inventory means bids and 

ask spreads are wider, which means costs go up for everyone participating. 

Chairman GARRETT. So what does that mean to the layman that 

the bids are wider to Main Street as far as my borrowing costs? 

Mr. CARFANG. It means, when you are borrowing, you pay a 

slightly higher price; when you are lending, you get a slightly lower 

yield. 

Chairman GARRETT. Right. So what does that mean as far as me 

as a local small business or as a medium-sized business as far as 

my ability to expand or what have you in that marketplace? 

Mr. CARFANG. Well, at the margin, funding becomes more expensive, and at some point, you are going to decide not to do the 

project or hire the employee. 

Chairman GARRETT. And so that was not the intention, obviously, in legislation that Congress passed. 

I go to Mr. Deas on this as far as you were referring to something—oh, I know. It was on the endusers, and the intention of 

Congress here was not to have the higher requirements, reserves 

requirements there, right, to the specific endusers in that category. 

But you point out what I would sort of—I would coin a phrase an 

end run, if you will, by the banking regulators saying: Well, if Congress is saying we are not going to be able to propose those requirements over here, we are going to do it, how? As you were suggesting, over here through the banks, right, through the banking 

regulators. Do you want to speak on that again? I have 30 seconds. 

Mr. DEAS. Yes, sir. This committee was very clear in directing 

the banking regulators that they should not require endusers to set 

aside cash to margin their derivative positions. And yet, in the regulations they have imposed, they are essentially requiring the 

banks to do that. And what we focus on as endusers is the banks; 

the way we look at them, they are mere intermediaries in the system. In the end, we are the productive economy. They get the 

money from where it is generated to where it is needed. And if an 

extra cost is put on them, it is ultimately borne by us, the productive manufacturing companies of this country. 

Chairman GARRETT. I got it. So you add that to what Mr. 

Carfang was talking about this other problem, what Mr. Toomey 

was talking about as well as far as using the word ‘‘brittleness’’ to 

it and the expansion of the spreads and the cost to the system, 

right? So what is the result of that? 

Well, besides result, because we have heard the result. You are 

seeing that in the marketplace, right? 

Mr. DEAS. Yes, sir. 

Chairman GARRETT. And we are seeing occasional exasperations 

of that through the flash crash and that sort of thing, right? But 

we don’t hear that from the regulators. Treasury Secretary, the Fed 

Chair reject any notion. They have been here a number of times 

in the past. We would throw these questions out to them, and we 

say: Gee, is there a problem here? Is there a liquidity problem 

here? And they see no evil in that area. 

14 

Why is that you are seeing something—and I throw this to the 

panel—that the regulators can’t seem to be seeing? 

Mr. DEAS. Well, sir, we will see it when it comes to a tightened 

or a stressed financial market. When this kind of capital flows out 

of the market for endusers, when a trillion dollars that was in 

prime money funds, much of which—in April of 2012, money funds 

bought 40 percent of commercial paper, nonfinancial commercial 

paper. It is now, at the end of November, down to 5 percent. So 

the supply-demand has been imbalanced. When in these times, 

where markets are steady, we are not seeing so much of an effect; 

we are seeing the numbers, as I have demonstrated in my testimony. But when we get into more strained conditions, we will see 

it very much. 

Chairman GARRETT. And give credit as credit is due, as my dad 

always said, to the Fed Chair because—I mean to the SEC Chair, 

that she recognized this and saw it but would not attribute actually 

what the cause was. And I think, from most the panel here, part 

of reason why they are not attributing and she is not attributing 

the cause is because of why? We haven’t done a full study to see 

exactly what the cumulative effect was of all of these regulations. 

I know we have had all the Fed Chair and others and Treasury 

Secretary here as well, and we have always asked them: What is 

it really costing the system what you are doing? What are you really costing the system of Dodd-Frank and the 400 regulations? And 

to a man or to a woman, they can’t give an answer to that, correct? 

Mr. DEAS. Yes, sir. We would very much urge that these interactions be studied. The regulations have been looked at individually, but they don’t see the compound effect. 

Chairman GARRETT. Cumulative effect. Yes. 

Mr. DEAS. Money market funds are not just a source of shortterm investing opportunity for treasurers, but they buy our commercial paper. They finance our businesses. And when a trillion 

dollars flows out of them, we pay more to finance day-to-day operations. 

Mr. TOOMEY. So these new regulations, though, should be rolled 

back while the study is going on so that they don’t continue to do 

ongoing damage. 

Chairman GARRETT. First, do no harm. 

With that, I yield now to the gentlelady of New York. 

Mrs. MALONEY. Thank you everyone for your testimony. 

I would like to ask Mr. Konczal and Mr. Carfang a question and 

get both of your perspective on it. I was, quite frankly, struck by 

the decline of money—municipal money market funds in New York, 

the city that I represent. But my office is telling me they called the 

city and they don’t see this as a big problem, which is hard for me 

to understand. If you have a 50-percent decline, that is a pretty serious thing in my mind. 

So I would like to say that, obviously, we have seen investors 

pull out a substantial amount of money from the money market 

funds this year, and some claim that this is all due to the floating 

NAV requirement in the SEC’s rule, but the bill only deals with 

the floating NAV. But some of the investors that I have talked to 

say that the bigger problem is the gates and fees aspect of this 

SEC rule, which gives funds the ability to suspend withdrawals in 

15 

times of stress. Many people use their money market fund as a liquidity access point, and they don’t like the point that they may 

not be able to pull their money out so that is why they are pulling 

it out. 

So I would like to ask both of you: Do you think that, if we did 

away with just the floating NAV requirement, that that would 

cause investors to put all their money back into the money market 

funds, or are the gates and fees the bigger problem here? 

Mr. TOOMEY. You make an excellent point: gates and fees as well 

as the floating NAVs are all problems. I have testified to that in 

the past. The floating NAV is the threshold issue, however, because 

NAVs started to float beginning October 14. Corporate treasurers 

would have needed to change their investment policies, get board 

approval, implement systems, change their tax reporting. That was 

the threshold issue that caused the problem. Gates and fees are 

clearly a longer run problem. In a black swan event, the possibility 

of a gate clearly is a problem. We think that, if we can change that 

threshold issue on the FNAV for non-natural persons, that can 

begin the process of at least bank sweep accounts going back into 

money market funds as well as institutional investors. 

Longer term, the Commission itself I believe needs to address the 

fees and gates issue of that. But we need to get—4216 sends a signal to the Commission that this committee wants to keep money 

market funds in business, reinstitute the floating NAV, and the 

Commission itself can deal with the regulatory aspects of fees and 

gates. 

Mrs. MALONEY. Mr. Konczal? 

Mr. KONCZAL. A quick point, on the previous question, there is 

still very little evidence right now of increased bid-ask spreads in 

the corporate bond market. Research differs on this, but it is important to remember there is a distinction between what is happening right now and what could happen in a crisis. In a crisis, we 

have already seen $400 billion of institutional prime money market 

funds flow into Treasurys essentially in a very short period of time, 

in essentially less than a week. So we know what it looks like already stressed under a fixed NAV market. I do think there are 

some concerns about removing the floating NAV with keeping the 

gates and fees. I think there is an additional incentive, increased 

incentive to run under those conditions. 

We should distinguish also between an evolving credit market, 

where it is going to look a lot more like the stock market, a justin-time, as people brought up—as the chairman brought up. And, 

also, we should distinguish between liquidity and Treasury markets, which function a lot more like the stock market at this point 

with algorithmic training, where you could see some things like a 

flash crisis, but that has less to do with bid-ask spreads and a lot 

more to do with just algorithms. 

Mrs. MALONEY. Would anyone else like to comment on this question? 

Listen, we have a vote. So I have 55 seconds left, but I am going 

to yield back my time and run to make sure I don’t miss my vote. 

Thank you all for your testimony. I will be back. 

Chairman GARRETT. The gentlelady yields back. 

16 

We do have a minute left—or we have 45 seconds left in our vote, 

so we will call recess for this committee and reconvene immediately 

after the floor votes. 

The committee is in recess. 

[recess] 

Chairman GARRETT. Thank you, gentlemen. 

The meeting is called back into order, and the gentlelady from 

Missouri is recognized for 5 minutes. 

Mrs. WAGNER. Thank you very, very much, Mr. Chairman. And 

thank everyone for appearing today to discuss the impact of DoddFrank regulations as well as actions by FSOC and the Basel Committee have had on short-term financing and the U.S. capital markets. 

As Mr. Deas noted in his testimony, ‘‘liquidity is the lifeblood of 

any business,’’ and that, as I go on, ‘‘Without having ample liquidity, production comes to a halt, inventories run low, and bills are 

not paid on time.’’ I appreciate those words. 

Treasury Secretary Lew has continually refused to acknowledge 

the possibility that regulations such as the Volcker rule as well as 

other post-crisis regulations are contributing to illiquidity in certain segments of the fixed income markets. However, other government officials, including Federal Reserve Board of Governors, had 

acknowledged that these regulations may in fact be a factor. 

Mr. Deas, do you believe that Dodd-Frank, Basel III, and other 

regulations, are a contributing cause of diminished fixed income liquidity? 

Mr. DEAS. Congresswoman, yes, I certainly—it certainly is the 

case that when $1 trillion has flowed out of prime money market 

funds, which went from a position of buying 40 percent of manufacturing and other nonfinancial companies’ commercial paper in 

April of 2012, to now at the end of November, only 5 percent of 

their commercial paper, and that source has dried up, that has 

been a direct result of these changes. And it has increased the cost. 

For instance, the cost of prime money fund, the yield that they are 

paying now is 22 basis points higher than equivalent government 

money market funds for the same maturity, for 1-week maturity. 

Mrs. WAGNER. Twenty-two basis points higher. 

Mr. DEAS. Yes, ma’am. 

Mrs. WAGNER. Outrageous. What are the real world consequences besides that of reduced liquidity in the corporate bond 

markets for U.S. companies, their employees, and individuals that 

are saving for retirement, to send their kids to college? 

Mr. DEAS. Well, we have all supported the goal of greater price 

transparency. And when there is no liquidity in the corporate bond 

market, then when an industrial company comes to the market to 

issue its bonds, it doesn’t know, nor do its underwriters know, what 

is the right price. And in order to assure that they get the issue 

off successfully and there isn’t an embarrassing withdrawal of the 

issue from the market, they may well overprice it. And so they will 

price it to clear the market. 

And sometimes you get the effect of selling your house and the 

real estate agent tells you they have sold it in 1 day, you may wonder how that was priced, and that is what happens in the corporate 

17 

bond market. And that is a burden that you have to pay for the 

remaining 10 years or 30 years of the corporate bond issue. 

Mrs. WAGNER. Good analogy. What resources is the SEC or 

FSOC devoting to understanding or combatting this problem? 

Mr. DEAS. Well, we think not enough resources when it comes to 

analyzing the effect through a cumulative impact study of the 

interaction of all these forces. In some cases, they have analyzed 

the individual effects, but there is a cumulative effect and an interaction, as I demonstrated in my comments on how money funds relate to commercial paper borrowing costs for companies. And they 

haven’t studied that. And we think it would be important for this 

committee and for Congress to mandate that these regulators conduct such a study. 

Mrs. WAGNER. Thank you. And in my limited time, the EU recently undertook a call for evidence to analyze the cumulative impact of post-crisis financial regulations to identify areas where they 

have interacted in ways harmful to economic growth. In your testimony, you noted several times the need to study the effects of all 

of these rules and their interactions with one another. Do you 

think a similar initiative as the EU’s call for evidence would be valuable here in the U.S. as we transition into a new administration, 

sir? 

Mr. DEAS. Yes. I think it very much would be, as well—I mean, 

in the European community, they have specifically exempted end 

users. They have recognized that end users’ participation in these 

markets is for productive purposes, that they are not engaged in 

speculative activity. And so the burden that would be placed on a 

trader maintaining an open book for financial speculative purposes 

should not be placed on end users. And we have been much less 

consistent in the implementation of that philosophy here. So studying the actual costs would be what we would highly recommend. 

Mrs. WAGNER. Absolutely. Thank you for your testimony, for 

your presence here today. 

Mr. Chairman, thank you. I yield back. And I thank you for my 

time serving with you on this committee. 

Chairman GARRETT. I thank you. Thank the gentlelady. 

Mr. Carney. 

Oh, I am sorry. Mr. Scott. 

Mr. SCOTT. Thank you. Thank you. 

Panel, I was very seriously concerned about the health of the 

market for money market funds, when, as you know, during the financial crisis we saw funds breaking the buck. And I think you 

know what I am talking about there. Sort of money market funds 

seek to maintain a stable net asset value, or called NAV, so that 

each share in the fund is worth one dollar. But during a catastrophic event like the financial crisis, when shareholders in the 

fund all redeemed very quickly, the fund’s NAV can drop below one 

dollar, which is why they call it breaking the buck. 

Now, recently the FSOC took notice of this and the Securities 

and Exchange Commission adopted the floating NAV rule, applying 

it to non-retail investors and tax-exempt funds. The theory was 

that those funds mostly catered to the retail investor and the impact would be minimal. But it is my understanding, however, that 

the impact has been anything but stable. And what we are seeing 

18 

today is that tax-exempt funds have been very negatively impacted, 

regardless of whether those funds are serving retail or institutional 

investors. 

So I would like to ask the panel, if you all would respond and 

comment on whether you think that the Securities and Exchange 

Commission did a sufficient job at understanding the impact of this 

rule and the impact it might have on the market, or if there are 

other factors outside of the Securities and Exchange rule that may 

be contributing to rising short-term borrowing costs. 

Mr. CARFANG. Thank you, sir. 

Mr. SCOTT. You’re welcome. Mr. Carfang. 

Mr. CARFANG. I don’t think anyone, including the Securities and 

Exchange Commission, imagined that $1.2 trillion was going to 

leave. I think that exceeds everyone’s wildest worst-case scenario. 

And in that regard, you know, I think it is important to step back 

and understand what factors took place. 

In my testimony, when I talk about rates rising, I am looking at 

spreads. So the Fed rate hike, for example, last December impacted 

the markets. But what—if you look at the spread of LIBOR, which 

is the basic business borrowing costs over treasuries, that spread 

has widened. Market rate changes impact both of those identically. 

So we are actually seeing evidence of about a 25 or 30 basis point 

increase in borrowing costs over and above what the Fed rate 

changes have done. 

Mr. SCOTT. Okay. 

Mr. KONCZAL. I would— 

Mr. SCOTT. Yes, Mr. Konczal. 

Mr. KONCZAL. I would just like to—like us to remember that the 

SEC came to this decision slowly and carefully. You know, immediately after the crisis, it instituted certain kinds of reserving in liquidity issues to deal with the immediate aftermath. But then in 

conjunction with FSOC, in conjunction with international regulators, and in conjunction with many studies of the market as a 

whole, in 2014, only after those many years of study, that it did 

take this action. 

We do want to remember that we are in an environment of general increasing interest rates. You know, Goldman Sachs has predicted, you know, large deficits in the near future and which will 

obviously lead to a more quicker than normal normalization of Federal Reserve policy. So it is very difficult to disjoint what has happened in the past month from the broader macroeconomic condition, which has certainly changed. But, you know, SEC came to 

this decision very slowly and carefully after considering whether its 

initial actions were sufficient and broad agreement through FSOC 

that it was not. 

Mr. SCOTT. Do any of you feel, as some suggest, that the investors are overreacting in pulling their short-term cash out of money 

market funds that do not offer a stable NAV? That suggests that 

once investors understand floating NAV funds better, they will 

flock back in. Do you agree with this? 

Mr. DEAS. Congressman, we—the practicalities of this rule 

change requiring now to keep track of investments in money market funds down to the nearest hundredth of a cent, and to do so 

for both Federal and State income tax purposes, and to record 

19 

gains and losses if an investment is made on Tuesday and the company needs to liquidate part of that investment on Thursday to 

meet its payroll, then that is a recordkeeping burden that we 

warned the SEC companies are not prepared to fulfill. 

And within a company there are—is a competition for resources 

between departments that are engaged in profit-making activities 

and those that are engaged in compliance, and profit-making usually wins. So what happened was, money was pulled from these investments requiring this kind of recordkeeping and to the tune of 

$1.2 trillion. 

Mr. SCOTT. That is right. Very good. 

Thank you very much, Mr. Chairman. 

Chairman GARRETT. The gentleman is out of time. 

Mr. Messer. 

Mr. SCOTT. Oh, Chairman, I am sorry. 

Chairman GARRETT. Yes, sir. 

Mr. SCOTT. Thank you, Tanner. 

I would like to ask unanimous consent to include this letter to 

Ms. Moore in the record. 

Chairman GARRETT. Without objection, it is so ordered. 

Mr. MESSER. I would like to follow up on those questions. And 

I am going to start with Mr. Deas. You know, we often talk about 

it here in this committee. But in life and in public service, we are 

not just accountable for our intentions, we are also accountable for 

our results. And that’s actually—if you ask the American people, 

the results matter a lot more than our intentions. Sometimes 

things done with the best of intentions can end up with results 

that are maybe unintended but catastrophic. 

And following up on the money market reform debate we were 

just having, the floating net asset value rule, I just want to ask you 

a very direct question, again to Mr. Deas, do you think the economic benefit of the rule is worth the cost? 

Mr. DEAS. Sir, thank you for that question. I think, just to reiterate what my colleague Tony Carfang has said, we have measured 

the cost. So it is upwards of 25 or so—20 to 25 or 30 basis points 

in higher cost. We view, from the point of view of manufacturing 

company treasurers, that the financial system is a mere intermediary getting the money from where it is generated to where we 

need it. And that is an extra burden that we now have to cut some 

other costs or decrease employment in order to overcome. 

Mr. MESSER. I think that the answer is no, you don’t think it is 

worth the cost. 

Mr. DEAS. Yes, sir. I agree. 

Mr. MESSER. Mr. Carfang, I don’t know if you want to add anything to that. 

Mr. CARFANG. Well, and the increased cost that is 25 or 30 basis 

points is against $10 trillion of debt keyed off of the LIBOR rate. 

So we are talking about an increase of $30 billion of cost. And, you 

know, companies like FMC where Tom was treasurer, you know, 

aren’t even going to consider that and obviously exit. 

Mr. MESSER. Mr. Carfang, I wanted to follow up with you and 

ask this question: Do you believe—you talked about this imbalance. 

Do you think it is going to get worse in the coming months or better? 

20 

Mr. CARFANG. Well, it looks like the decline out of prime funds 

has stabilized. But as one of my colleagues told me, you know, falling off a cliff and hitting a rock and calling your fall stabilized is 

not necessarily what you want to— 

Mr. MESSER. That’s not a laughing matter, but, I mean— 

Mr. CARFANG. No, it is not happy. I don’t think it can turn 

around until we get relief on the fluctuating net asset value short 

term and then fees engaged in— 

Mr. MESSER. And once again, I think the followup is fairly common sense but still would ask you to articulate, could you expand 

on—I mean, what is the answer here? What do we need to do in 

response to this trillion dollar drop? 

Mr. CARFANG. Well, I think, first of all, you know H.R. 4216 will 

restore the floating NAV for non-natural persons. And that sends 

a message to the commission that Congress really wants to protect 

and defend the money market fund as a primary investment vehicle, as it has been for 40 years and several trillions of dollars. 

Getting the fluctuating NAV fixed for non-natural persons will 

remove the administrative barriers to corporate treasurers investing in these funds. It will also allow banks who sweep into money 

market funds, and by definition then must sweep into a constant 

net asset value fund, to pull some of their assets back in, as well 

as Roth management groups and brokers who sweep on behalf of 

both retail and corporate clients. So that begins to open the door 

for some of the money to come back. And then that would allow the 

commission, then, to go back and alter the fees and gates part of 

this. 

Mr. MESSER. Thanks. 

Mr. Deas, you look like you might have something to add. No? 

Mr. DEAS. No, sir. 

Mr. MESSER. Okay. Great. 

With that, I yield back the balance of my time, Mr. Chairman. 

Chairman GARRETT. The gentleman yields back. 

The gentleman is recognized, Mr. Carney. 

Mr. CARNEY. Thank you, Mr. Chairman. Let’s just continue this 

conversation, if we may. And I would like someone, maybe you, Mr. 

Konczal, to remind us why we got to the point of considering a 

floating NAV and what the issue there was and—so we can evaluate the action that has been taken and the costs that you question 

in terms of 20, 25 basis points. Could you remind us of how we got 

to this point? 

Mr. KONCZAL. Absolutely. The cost of the financial crisis, for instance, from the Federal Reserve Bank of Dallas, is about 10 or $15 

trillion. So money market— 

Mr. CARNEY. That is a little bit higher than what we have been 

talking about in terms of the effect of this move, which you would 

argue is, in part, just a movement of interest rates on the way up 

kind of naturally. 

Mr. KONCZAL. Absolutely. And if money market funds contributed 3 percent of that crisis, which I think would be a low estimate, suddenly you are talking about a really big wave of cost-benefit analysis. 

21 

Mr. CARNEY. And what was the issue there with respect to the 

money markets and how they performed or didn’t perform, the concerns that were raised vis--vis the breaking the buck, if you will? 

Mr. KONCZAL. Absolutely. So as economists across the spectrum 

have agreed, that the way money market funds were legislated and 

regulated as fixed NAVs is indistinguishable from bank deposits. 

So it encourages runs, encourages first mover advantage to remove 

those funds, and it— 

Mr. CARNEY. Is that actually true, though? Does that actually 

happen? Do we have the kind of runs that were—that were theorized? Does the data suggest that? 

Mr. KONCZAL. Absolutely. We saw $400 billion leave money market funds to go to treasuries, a safe asset, within—within weeks in 

the aftermath of the Lehman Brothers failure. The failure of Lehman caused the Reserve fund bank to break the buck. But the contagion was not limited to money market funds with exposure to 

Lehman. I think that is very important to remember. If it was an 

issue of just due diligence against the credit risk of one firm, we 

would have a different conversation. But the panic that spread 

across the funds as a whole led to a complete contraction, a complete collapse of commercial paper in a way far beyond anything we 

are talking about at the margins here. 

You know, there has been an express—expressed interest of Congress to avoid future bailouts. And I believe that floating NAV provides a market-based transparency and a market-based price for 

what the actual risk of these investments are when treasurers in 

other companies take them on. 

Mr. CARNEY. What about the point, I think a good one, that there 

ought to be some analysis of the effect of these regulations and how 

they interact with one another in decision-making? Do you think 

that has been done effectively or does there need to be more done 

there? 

Mr. KONCZAL. I can’t comment to the extent that there needs to 

be a formal review. But I would say that it is by—the capital requirements that we are discussing separately here, leverage ratio, 

risk-weighted assets, LCR liquidity, and TLAC, are designed to 

work together. They complement each other in very powerful and 

important ways, where risk weighting— 

Mr. CARNEY. Do they also provide more of a burden, if you will, 

a regulatory burden? 

Mr. KONCZAL. I don’t know if— 

Mr. CARNEY. In combination as opposed to on their own. 

Mr. KONCZAL. No. I believe together they actually amplify and 

make each other work better from a systemic risk point of view. 

For instance, we know risk-weighting assets are pro-cyclical. 

They—you know, they are less binding and less—less important in 

times of credit booms and credit expansions, where leverage requirements are not. You know, if you have the safest assets but 

you are funded overnight, if there is a little bit of a problem, you 

can suddenly end up in big trouble if you don’t have the liquidity 

needed to survive 2 months—or to survive 1 month as per the Bear 

Stearns rule. So I feel we want to—we do want to understand them 

as overlapping in a good way because they were designed to do 

that. 

22 

Mr. CARNEY. So what about the argument that, again sounds 

compelling to me, that there is a significant administrative burden, 

you know, in terms of keeping track of this and that, that otherwise those resources could be used for something else in a firm? 

Mr. KONCZAL. And, you know, there perhaps is low-hanging 

fruit— 

Mr. CARNEY. I mean, is there a better way to do it, I guess, is 

ultimately the question. 

Mr. KONCZAL. The issue of tax law I can’t speak to. I know the 

IRS has worked with the SEC and they can talk more. But the actual issue of the floating NAV, I think, is the crucial component, 

and it is what really defines the market-based pricing of these 

things. And it prevents the runs and dynamics that we saw in the 

crisis and we absolutely must prevent in future crises. 

Mr. CARNEY. I don’t have much time left, but, Mr. Deas, do you— 

you obviously have a different view of that. What would you highlight as the difference—the important differences? 

Mr. DEAS. Yes, sir. Just on the last point you made, the Treasury 

Department—or my colleague made, the Treasury Department did 

come out with rules to simplify the tax recordkeeping. The effect 

of those rules is to force a corporate treasurer to invest all the company’s money in a single money market fund which increases concentration and creates much higher systemic risk. 

Mr. CARNEY. So you think there—there is a better way to accomplish the same thing? 

Mr. DEAS. Well, a fixed NAV would do that. 

Mr. CARNEY. Well— 

Mr. DEAS. And it would be offset by greater reporting, visibility, 

transparency of what the fund’s holdings are so that investors can 

look at that on a daily basis and make their own choices. Some of 

these were instituted in 2010 reforms, and we think that sunshine 

is the best medicine. 

Mr. CARNEY. So with the chairman’s indulgence, so assuming a 

floating NAV. Right? So is there a better way to do that or is this 

the best way to do it, in your view? I mean, I understand you 

would go back to a fixed NAV. But I am talking about given a 

floating NAV, are there things that can be done to make it less administratively burdensome? 

Mr. DEAS. Well, the reality is with corporate systems and cash 

management systems, it takes literally months to modify those systems to keep track down to the nearest hundredth of a cent of investing the company’s funds at a floating NAV. And when we are 

asked is there an alternative to spending this money for information technology changes, the answer is, well, yes. I can buy a government money market fund. And enough yes answers were made 

so that $1 trillion left. And that money is not available for productive purposes. It is available to funds government entities being financed through these government money market funds. 

Mr. CARNEY. I tell you, I am sympathetic to the argument with 

respect to administrative costs. You know, the question gets to be, 

you know, what are the tradeoffs, you know. And I think it is 

every—it should be everybody’s objective to keep your borrowing 

costs as low as possible so that you can keep people working. And 

that is what is really most important to me and I know my colVerDate Nov 24 2008 19:49 Mar 08, 2018 Jkt 026007 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\26007.TXT TERI
23 

leagues on both sides of the aisle. And it would be nice if we could 

kind of work together and find the best way to do that, to address 

some of the issues and concerns that came out of the financial crisis and move forward in a way that is productive for job creation 

and administratively not as burdensome for firms that create those 

jobs. 

Thank you, Mr. Chairman, for your indulgence. I yield back. 

Chairman GARRETT. That was a good question. Good questions. 

The gentleman from Pennsylvania, recognized for maybe the last 

word. 

Mr. ROTHFUS. Mr. Chairman, I thank you for holding this hearing and I thank you for giving me the opportunity to join the committee just for the day to ask some questions. And I also want to 

thank you for your service and your friendship on the committee, 

your friendship to us. And you will be sorely missed. 

I am glad we are having this hearing because I have become concerned about the significant dislocation that we are seeing as a result of the regulatory changes that went into effect in October. This 

rule which forces institutional prime and tax-exempt money market 

funds to have floating NAVs has effectively nationalized the money 

market industry. One point two trillion dollars has left institutional prime and tax-exempt funds, and much of it has migrated 

to government funds and treasuries. The rule thwarts investor 

preference and effectively, in my opinion, subsidizes Fannie and 

Freddie and the Federal Government. Municipalities, universities, 

hospitals, and corporations are seeing their borrowing costs go up, 

and we can trace this directly to the dislocation caused by this rule. 

That is why I am a strong supporter of H.R. 4216 which corrects 

this problem. I understand the concerns that some members of this 

committee have raised, but in addition to the fact that money market funds are historically very secure investments, this bill makes 

clear that taxpayers will not be on the hook to bail out a failing 

fund. There is an express prohibition on that. 

Mr. Carfang, as you know, I asked Treasury Secretary Jack Lew 

about this issue at a full committee hearing in September. His response surprised me. At that point, nearly $1 trillion had moved 

in anticipation of the rule’s implementation, yet Secretary Lew said 

that we were, ‘‘not seeing dislocations in the marketplace on a 

broad basis.’’ He went on to add that, ‘‘We are not seeing problems 

arising in the market where funding needs can’t be met.’’ 

I am wondering if you could respond to Secretary Lew’s comments. 

Mr. CARFANG. Well, I would be concerned if he did see a dislocation that—this change had been telegraphed for 2 years, and the 

Treasury itself announced it was watching and stood ready for 

greater debt issuance if the markets needed the Fed to—the Treasury to step in. 

These dislocations are real. Companies are paying higher interest rates. Municipalities are losing funding from tax-exempt funds 

and having to turn to other— 

Mr. ROTHFUS. When he says funding needs can’t be met, I mean, 

is that necessarily the question? I mean, that is one of the questions. But there is also a cost associated with that. 

Mr. CARFANG. Well, sure. 

24 

Mr. ROTHFUS. You might— 

Mr. CARFANG. But there are funds available in the market but 

at a cost. I can go to my father-in-law to borrow money, but I certainly wouldn’t want to do that at his price. You know, I would 

rather borrow from, you know—you know, corporate treasurers 

need to borrow from the most deep and efficient markets, like the 

commercial paper market and the bank markets. 

Mr. ROTHFUS. In looking at the municipal context where I think 

you testified that assets and taxable funds and prime funds have 

fallen—well, let’s look at tax-exempt—fallen roughly by half. 

Mr. CARFANG. Right. 

Mr. ROTHFUS. This is funding used by municipalities, schools, 

hospitals. It stands to reason that this rule is to blame for driving 

some of the money out of these assets. Yes? 

Mr. CARFANG. That is correct. Well, as a matter of fact, the fluctuating NAV and the non-natural person restriction almost makes 

it impossible for a bank trust department to now invest in a taxexempt fund. Because a bank trust department has no way of seeing down through into the natural person/non-natural person question. 

Mr. ROTHFUS. But a natural person still gets to invest in a 

fixed—a natural person would still be able to invest in a fixed. 

Mr. CARFANG. Well, except a natural person and non-natural person is kind of a fiction. You know, it gets down to the question of 

who is making the investment decision deep down inside of an omnibus account. And the banks simply have no way of knowing that. 

Mr. ROTHFUS. If I could quickly go to Mr. Deas. In your testimony you wrote that the SEC’s rules raises heightened concerns 

about money market funds’ liquidity, stability, and overall utility. 

Can you elaborate a little bit more on the systemic risks that you 

see as a result of the rule? 

Mr. DEAS. Yes, sir. We have focused on the amount of money 

that is left, and we pointed out to the SEC several times that when 

you change the rules affecting this investment vehicle known as 

money market funds, remember that it also has been a significant 

source of financing for Main Street companies. And we have seen 

the amount of non-financial commercial paper that money funds 

buy decline from 40 percent in April of 2012 to just 5 percent at 

the end of last month. And that supply/demand imbalance has resulted in higher costs for Main Street companies. And when we get 

into a time of heightened financial crisis, then it will dry up, because money funds not only have their amounts gone down, but the 

actual number of funds has declined from 600 funds to 400 funds. 

So it is not going to be there and it will become more evident when 

we get into strained conditions. 

Mr. ROTHFUS. Mr. Chairman, I see my time has expired. If I 

could offer to the record a letter from the State Financial Officers 

dated December 1st to Speaker Ryan, and from the Coalition for 

Investor Choice to you and to the ranking member. 

Chairman GARRETT. Without objection, it is so ordered. 

And your last word apparently sparked other interest. And so 

now we turn to the gentleman from California. And Ed is recognized for 5. 

25 

Mr. ROYCE. Well, Mr. Chairman, thank you. Thank you very 

much. And I thank the witnesses on the panel for being with us 

today. 

So we are home to capital markets that are unmatched in terms 

of the size of our markets, the transparency in it, the depth, the 

resiliency, as we have seen. And they provide, really, the fuel that 

keep the largest economy in the world moving and allow for investment and development and ultimately allow for job growth. Because at the end of the day, wages per worker are dependent upon 

productivity per worker. That is dependent upon investment per 

worker, and that is dependent upon the capital markets and getting everybody into the capital markets. So it is interesting. 

The European Commission recently engaged in what they called 

a call for evidence. And that was a request that the—to the public 

for feedback on interactions, inconsistencies, and gaps, and unintended consequences created by Europe’s regulatory framework, 

created by their bureaucracy. And I was going to ask should, and 

maybe of Mr. Toomey, should U.S. regulators engage in a similar 

project as the EU’s call for evidence and maybe ask what the benefits would be of such an undertaking? 

Mr. TOOMEY. Yes. Thank you. And I think as we mentioned in 

our opening remarks, European Commission effort and the call for 

evidence provides a framework for doing this cumulative analysis 

on the effects of all these different and overlapping regulations. 

And we think particularly the parameters that the European Commission outlined, the impact on economic growth, we think is key. 

Obviously, the interactions and the inconsistencies is key to understand. And I think the ultimate output from a domestic standpoint 

is understanding how all these dispirit rules attacking and addressing different types risks, whether they are overshooting their 

policy goals to the detriment ultimately of the economy. 

So I think, basically, when we look at the European Commission 

effort, the parameters they outline are very similar to what we believe should be done. And now is a good time to do it, given that 

the rules have been in place for some time. At least some of them 

have. 

Mr. ROYCE. Well, I would also ask Mr. Deas, on the testimony 

that you submitted focused on the impact of bank capital and liquidity rules on end users and on corporate treasurers. This argument, less liquidity, can mean production comes to a halt. Less liquidity means often that the inventories run low, that the payroll 

isn’t made on time. All of which, of course, harm the people that 

rely upon these businesses and harm the economy. And I would 

just ask what could we do in Congress here to address exactly 

these concerns. 

Mr. DEAS. Congressman, thank you very much for that question. 

I would say that for you to mandate that the banking regulators 

undertake an analysis of both the individual effects but equally as 

important the cumulative effects based on their interactions of 

these different rules as they affect Main Street companies. We 

made the point and got bipartisan agreement that, for instance, requiring end users to margin their derivative positions with cash, 

which was a direct dollar-for-dollar diversion from funds that 

would otherwise be invested to grow inventory, to conduct research 

26 

and development, to buy new plant and equipment, and otherwise 

to sustain and we hope grow jobs, was something that should be 

done. And in this Congress that was done. 

But the banking regulators have taken steps that put that capital burden instead on the banks, I think, without fully appreciating that, in the end, they are intermediaries and we bear—we 

the end users and the manufacturing companies of this country 

bear those costs. 

Mr. ROYCE. You know, our chairman of this committee has a firm 

grasp on history as well as economics. And I would just, Mr. Chairman, quote Aristotle on this, ‘‘Balance in all things that are unbalanced.’’ And my fear here is that we have tipped the scales too 

much towards bureaucracy. Collective action really is needed at 

this point, because at the end of the day, bureaucracy can’t take 

all risk and regulate it out of the market. And the facts are that 

we have to keep our eye on the main function of the market and 

drive that job growth. 

But with that I will yield. And I thank you, Mr. Chairman, for 

your good leadership of this subcommittee. 

Chairman GARRETT. And I thank the gentleman from California. 

Moving up north to—oop. The gentleman from California has arrived. Then we shall—the gentleman from Maine. 

Mr. POLIQUIN. Thank you, Mr. Chairman, very much. Those of 

us that—or those of you who are here today probably don’t know 

that with the chairman’s moving on, he will be spending more time 

in the great State of Maine that I represent. And I would like to 

make it public that, Mr. Chairman, you would be so welcomed up 

in Maine with your family. You have no idea. Just bring as much 

money as you can. We need the business. And February is a wonderful time go to Maine, Mr. Chairman. And I know you know that. 

With that, you know, I am scratching my head here a little bit, 

folks. Here we have a product, money market fund product, that 

has been around for decades. And it has been used very effectively 

by not only individual investors but by institutional investors to 

manage their cash, to make sure that there is a way to finance expansion. And, of course, when businesses grow, they hire more people and they pay them more money. 

I was a State treasurer for a couple years up in Maine. And we 

used money market funds effectively, different types of funds, to 

manage our cash such that we could build a new sewage treatment 

plant in Auburn or a new bridge over the Penobscot River in Bangor, for example. So there are all kinds of opportunities to use this 

product. Now, all of a sudden, you know, government comes along 

and we have a new regulation and we see money flying from this 

product that has worked for decades well. We see players leaving 

the space. We see costs going up. And there is less liquidity in the 

market and less opportunity to grow our economy and do what we 

want and have more opportunity and more jobs for our kids. 

So my question is, Mr. Toomey, to you, please, my first question, 

is one of the concerns the SEC has and others have in this—that 

have been dealing with this issue is a run on the bank, accelerated 

redemptions. And do you have any evidence or do the folks that 

you work with have any evidence that this new rule dealing with 

market to market or floating NAV or whatever you want to call it 

27 

would have an impact in slowing down or stopping accelerated redemptions at a tough time? 

Mr. TOOMEY. I am actually not the best person in my shop to answer that question. But we can get back to you on that one. 

Mr. POLIQUIN. Thank you. 

Anybody else on the panel like to take a shot at that? 

Mr. CARFANG. Well— 

Mr. POLIQUIN. Mr. Carfang, you look like you are ready to say 

something. 

Mr. CARFANG. Well, sure. It will not stop a run. And, in fact, if 

you go back and look at what happened during the financial crisis, 

while the reserve fund broke a buck and investors fled, i.e., a run, 

that was on the Monday morning that Lehman went bankrupt. The 

run didn’t spread until it hit the entire capital market on the 

Wednesday, which was after the Federal Reserve announced a bailout of AIG. It wasn’t the reserve fund that spread to other prime 

funds. It was when the entire market collapsed. 

Mr. POLIQUIN. So what I am hearing you say, sir, is that market 

conditions, whether it be economic or capital market conditions, 

really determine investor behavior. 

Mr. CARFANG. Exactly. 

Mr. POLIQUIN. Okay. 

Mr. KONCZAL. I would like to also respond to that, Congressman. 

Mr. POLIQUIN. Please. 

Mr. KONCZAL. To the historical stability of the money market 

fund, that it is worth noting that there has been over 200 capital 

injections by sponsor funds going back to the early 1980s. These 

sponsor capital injections are, basically, the only way to handle a 

lot of the failures of these and—of these funds. And crucially, they 

are ad hoc and they are opaque to investors. So they are not even 

sure when they happen. You know, they can’t be anticipated in the 

way that it happens. 

And so, you know, if you want to talk about reducing bureaucracy of these kinds of things, market pricing strikes me as the best 

way to ensure that these funds are properly matched to investors’ 

expectations and to also decrease the possibility of a bailout. 

Mr. POLIQUIN. Mr. Konczal, let’s stick with you, if you don’t 

mind, and ask my final question in the time I have remaining here. 

We have a change in administration that is underway now. It will 

be effective as of noontime on January 20. Presumably, there will 

be a couple new commissioners on the SEC and Chair White is 

moving on at the end of the current administration. Doesn’t it 

make sense to you that we let the new SEC commissioners deal 

with this issue? 

Mr. KONCZAL. Well, the SEC has already dealt with this issue in 

2014 through a very long process of international coordination, coordination with FSOC and other regulators. There is an important 

reason they put this in. They were initially reluctant to do it, and 

they had to think about it and do a significant amount of analysis 

to do it. So it was not entered into lightly and it was not entered 

into carelessly. I feel it really does reflect something that went 

wrong in the crisis that is widely acknowledged to have gone wrong 

in the crisis. And if this is not the appropriate regulation, going 

28 

back to the regulatory environment of 2007 strikes me as a step 

backwards, not a step forward. 

Mr. POLIQUIN. Mr. Deas, would you like to comment on that with 

respect to the new administration coming in and how they will be 

populating the SEC? 

Mr. DEAS. Yes, sir. I think it should be undertaken along the 

lines of this cumulative impact study that I mentioned. And we 

have always said that sunshine is the best medicine. 

Prior to the financial crisis, money market funds did not report 

their underlying holdings except on a very infrequent basis. I think 

it was every 60 days and—or with a delay. And one of the improvements that the SEC has made is more frequent reporting of even 

daily positions. And we think this provides market participants 

enough information that they can make their own decisions when 

to trade out of a fund that is becoming more risky based on their 

analysis of that underlying data. 

Mr. POLIQUIN. Thank you all very much. 

Mr. Chairman, again, I salute you, congratulate you, and I thank 

you for your service to the great State of New Jersey, and to our 

country. Thank you, sir. 

Chairman GARRETT. And I will see you in February. 

The gentleman from California. Actually, I may be in California 

in February. That sounds like a better place to be. 

Mr. SHERMAN. That was my point. If the gentleman from Maine 

is going to convince you that that is the place you want to be in 

February, you are more gullible than I previously thought. 

Chairman GARRETT. The gentleman is recognized. 

Mr. SHERMAN. Shadow banking is an interesting phrase. Can’t 

imagine anybody being in favor of shadow banking. We want transparency and light. Shadow banking sounds dangerous. Is this term 

accurate? Where does it derive from? And is there a less pejorative 

term that would be more accurate? I will ask the gentleman from 

the Roosevelt Institute. 

Mr. KONCZAL. I will give you a little bit of a history. It comes 

out of analysis of the crisis by PIMCO and other—particularly on 

the bond side. The economist Gary Gorton wrote several books 

about it in 2009, 2010. 

Mr. SHERMAN. Well, if I was going to sell a book, I would want 

something hard hitting like Shadow Banking or the Monsters of 

Shadow Banking, the Vampires of Shadow Banking. But is this an 

accurate— 

Mr. KONCZAL. Like so many things in finance, it is tough to find 

a catchy term for it. But it is absolutely accurate. It refers to banking activities that occur outside the formal prudential banking activity. Credit lending through things that have redemption at par. 

And as such, you know, it is—evolves out of the capital markets 

historically. But basically, securities industries and— 

Mr. SHERMAN. You are saying it is limited to those circumstances 

where you are not going to a regulated depository institution but 

you expect to redeem at par. 

Mr. KONCZAL. Exactly. And I don’t want to say there is no regulations because, you know, for instance— 

Mr. SHERMAN. It is not a regulated depository institution. 

29 

Mr. KONCZAL. Absolutely. And does not have contacts for deposit 

insurance or other kinds of insurance, prevent runs, and it doesn’t 

have lender of last resort access. Those aren’t necessarily the right 

tools to deal with things like shadow banking. But it gives you a 

sense of how it has emerged in a way that creates systemic risk, 

creates panics and contagion, but doesn’t have the tools around it 

to help prevent the systemic risk. 

Mr. SHERMAN. Now, investors want to redeem at par. But, in 

fact, they are the owners of shares in a mutual fund where assets 

may be worth slightly more or might be slightly less. Now, one way 

to deal with this is to simply disguise this and tell people that their 

shares are always worth a dollar when, in fact, they are worth a 

mil more or a mil less. 

Another way for the private market to deal with this is some sort 

of insurance where a private sector entity, instead of disguising the 

fact that your investment may be worth less than par, would come 

in and guarantee that your investment would be less than par— 

would be worth full par in return for a premium that might take 

away from investors some of the up side when their investment is 

worth more than par. 

Why do we need to tell investors it is worth par when it isn’t instead of having a private sector insurance so that it really is worth 

par? I will go to—I don’t know which of you would like to respond. 

Mr. Carfang. 

Mr. CARFANG. Sure. Daily liquidity is the fundamental cash management need of corporations. And money market mutual funds 

have provided that since their institution over 40 years ago and— 

Mr. SHERMAN. I get daily liquidity on my S&P 500 fund too. But 

it may not be minute liquidity, but it is daily liquidity. But nobody 

is going to tell me that it is worth par. 

Mr. CARFANG. But what you have are ultra short investments in 

the funds that can be amortized to maturity and actually provide 

that daily liquidity of par. And, you know, this is the same way 

that Treasury and government funds operate. So, you know, this 

whole argument about separating out the private—the funds that 

deal with the private sector and municipalities from government 

funds, well, government funds operate under the same accounting 

rules as well. So it seems to me that that is a red herring and— 

Mr. SHERMAN. That may be a red herring, but it is not relevant 

to the question I asked. Why have mutual funds that cater to investors who want to make sure they get absolute par to the last 

mil, why have they not simply acquired insurance so that their assets are never less—worth less than par? Mr. Konczal. Oh, Mr. 

Deas, then— 

Mr. DEAS. Yes, sir. Well, I think in the declared policy of zero 

interest rates, which we have lifted off from very gradually, the 

cost of the insurance compared to the margin that is available after 

all the other expenses to pay for that insurance is just not going 

to be there. And so the— 

Mr. SHERMAN. Well, you do also have the up side. I mean, the— 

Mr. DEAS. But the cure will— 

Mr. SHERMAN. Just as likely to be worth a mil more than a mil 

less than par. 

30 

Mr. DEAS. But the cure will kill the patient. And the patient is 

already $1 trillion in worse shape than when this effort started, 

however well intentioned. And I agree that it would have the beneficial effect that you say, but I am questioning the cost versus that 

benefit. 

Mr. SHERMAN. So our way to assure people of par is just tell 

them it is worth par whether it is or not— 

Mr. DEAS. No, sir. What I have testified to is that to provide 

them with greater information, with daily information, and that 

sunshine is the best medicine. And corporate treasurers are paid 

every day to protect the company’s funds and will look at that information and make a wise decision on behalf of their shareholders. 

Mr. SHERMAN. I believe my time has expired. 

Chairman GARRETT. Mr. Hultgren is recognized for perhaps the 

last word. 

Mr. HULTGREN. Thank you, Mr. Chairman. And, again, I just 

want to thank you so much for your service, Chairman Garrett. 

You have been such a help to me and so many others. I just want 

to let you know that I appreciate you. I appreciate your family so 

much, and wish you all the best. And I am, again, just very grateful for your friendship and your mentoring to folks like me. So 

thank you so much. And, again, all the best to you. 

Thank you to our witnesses. Grateful that you are here. 

Mr. Carfang, I want to address my at least initial questions to 

you if I may. On page 7 of your testimony, you stated, Tax-exempt 

funds, a key source of funding for municipalities, universities, and 

hospitals, have experienced a 51 percent, or $132 billion decline 

from $260 billion to $128 billion. How much of this decline is directly attributable to the SEC’s new rules? Do you think there 

could be other factors in that? 

And then continuing on with my questions, some of my constituents have raised concerns that the imposition of a floating NAV is 

increasing the cost for tax-exempt financing. However, I have also 

heard that the liquidity fees and redemption gates are a bigger 

issue. What has your research shown on that? 

And then last, during a November hearing before the Financial 

Services Committee, SEC Chair Mary Jo White noted that the recent movements in the money market fund occurred consistent 

with their economic analysis. Chair White also testified that she 

expects that the institutional prime funds will stabilize and see a 

return of funds sometime after the October effective date. Do you 

agree with this assessment? 

That is a lot of questions. I apologize. 

Mr. CARFANG. That was a lot of questions. 

Well, the first one is what percent of the decline in tax-exempt 

funds was due to the SEC regulations? All of it. That is no question 

about it. Banks had to, for technical reasons, pull out of it because 

they simply couldn’t sweep and they couldn’t identify non-natural 

persons. 

Let’s see. The second part of your question— 

Mr. HULTGREN. Well, it was about some constituents raised concern about imposition of a floating NAV is increasing costs for taxexempt financing. But also, I have heard that liquidity fees and reVerDate Nov 24 2008 19:49 Mar 08, 2018 Jkt 026007 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\26007.TXT TERI
31 

demption gates are a bigger issue. What has your research shown 

on that? 

Mr. CARFANG. What we have testified, and we have spoken to the 

commission as well, that both the floating NAV and the fees and 

gates are key issues. And that—that should not have been imposed 

the way they have been. The floating NAV is the threshold issue, 

though, because there are a number of mechanical and administrative reasons why a number of organizations have to move their 

money out. 

So, you know, with the 4216, that actually informs the SEC that 

it is the intention of Congress to protect and defend and restore 

money market funds. That can be an immediate fix. And then the 

fees and gates, which are an issue, can be dealt with longer term. 

Mr. HULTGREN. Okay. Let me ask you quickly here. Do you believe the SEC and other members of FSOC should conduct an analysis and see what systemic risk could be posed by the decrease of 

liquidity in our bond market? To your knowledge, has the FSOC or 

any member agency conducted any analysis of the systemic risk 

that could result from a lack of liquidity in the corporate bond market due to misguided regulatory initiatives like the Volcker rule or 

Basel III? 

Mr. CARFANG. Oh, I—I think the rules what—they dry up liquidity in the market. They depress trading. They reduce dealer inventories. So as a result, there is less price discovery and there is less 

economic efficiency all the way around. And, you know, a theme I 

am hearing is that, you know, the investors in these prime funds 

don’t understand the valuation or what is going on in the daily liquidity. Frankly, that is an insult to corporate treasurers all over 

America. These are sophisticated folks who know exactly what is 

in these funds and understand the risks and make their judgments 

based on that. 

Mr. HULTGREN. Okay. Thank you. 

Quickly in my last minute, Mr. Toomey, you note in your testimony that repo transactions play a vital role within the financial 

system and underpin the functioning of the capital markets. You 

further describe the repo market as the grease that allows the U.S. 

capital markets to remain the most efficient and liquid in the world 

so that businesses, municipalities, and the Federal Government 

can access needed credit at a lower cost over time. 

There seems to be a great deal of misunderstanding about the 

repo market by prudential regulators and others. I wonder if you 

could explain quickly further the importance of the repo market. 

Mr. TOOMEY. Thank you. And quickly on the repo market, it indeed—it manages to move securities and cash around the system 

quickly and safely. In particular, take the example of a market 

maker. It allows a market maker to both source securities to service its clients, as well as provide a venue for short-term cash that 

may need to be invested on a short-term basis. So all of that provides grease, lubricant for the overall financial system. Allows liquidity to thrive in the cash markets because cash market participants can always source securities in the repo market. So I think 

that important piece is sometimes missed, and it really does underlie all our cash markets. 

Mr. HULTGREN. Thank you. Thank you all. 

32 

Chairman, again, thank you so much. And I yield back. 

Chairman GARRETT. The gentleman yields back. 

And with that, seeing no other speakers, I guess I will just conclude with two things. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And on a personal note, I guess this is my last hearing, my last 

speaking and what have you. So I will end—and it is apropos that 

I come in on a hearing where the hearing topic is the impact of regulations on the economy, which I guess is why I came to—one of 

the reasons why I came to Washington in the first place, to figure 

out why we were doing so many regulations in Washington and the 

negative effect that it has on people back at home. 

So it has been an honor to be able to be here in this House of 

Representatives and to be in this committee, and to be actually a 

chairman of a subcommittee that is so interesting and so significant to this country. It has been an honor to know all the folks who 

are on this committee, to both now and have left the committee 

over the years, that we should remember them as well. It has been 

an honor to have all the folks behind me and next to me, my committee designee. But a member of our committee, Brian and Kevin, 

and then all the rest here who have been working with us assigned 

to the committee over the years have been really—I will say the 

appropriate word, it has been neat working with all of you, and it 

is really fun on the sometime very—what some people might say 

boring issues. But I think the members of this committee find them 

fascinating and extremely important and profoundly significant to 

this country. 

So I guess I will just say: Wish you all well, as people say to me. 

As they don’t know what I am doing in the future, I don’t know 

what you guys are all going to be doing in the future either. So I 

wish you well in what is going to be an exciting time for this country where I see in the public opinion polls there is a huge wave of 

optimism going forward. So I am optimistic for all of you folks as 

well, both here, behind me, next to me, and in front of me, the people who come and testify before this committee as well. Optimistic 

for the future, what we can do—what you all can do for the country. 

And I am also pleased—and she didn’t want me to introduce her 

or anything else—that my wife Mary Ellen could be with me on 

this last day as well. 

Thank you, and the committee is adjourned. Thank you, and God 

bless. 

[Whereupon, at 11:55 a.m., the hearing was adjourned.] 

(33) 

A P P E N D I X 

December 8, 2016 

34 


26007.001

Testimony of Anthony J. Carfang, Managing Director 

Treasury Strategies, a division ofNovantas, Inc. 

December 8, 2016 

U.S. House Subcommittee on Capital Markets 

and Government-Sponsored Enterprises. 

Good morning Chairman Garrett, Ranking Member Maloney, and members of the 

Committee. It is an honor to be invited to testify at today's hearing: The Impact of 

Regulations on Short-Term Financing. This is a timely hearing that goes to the heart of 

the health of the U.S. economy and I am pleased to be able to contribute to the 

discussion. 

I am Anthony J. Carfang, a managing director of Treasury Strategies, a division of 

Novantas, Inc. We are a leading Consultancy in the area of treasury management, 

banking, payments and liquidity. Our clients include large and medium-sized 

corporations, and financial institutions as well as state and local governments, hospitals 

and universities. 

I am here today on behalf of the hundreds of businesses, state and local governments and 

financial institutions to whom we consult. 
35 


26007.002

Overview 

Let me first state that Treasury Strategies and our clients fully support well-thought-out 

efforts to improve economic efficiency and to reduce the likelihood of another systemic 

failure. We advocate pro-growth measures that stabilize and strengthen the financial 

system. The regulatory objectives of improving accountability and transparency, 

reducing systemic risk, ending "too big to fail," protecting consumers and putting an end 

to taxpayer-funded bailouts are laudable. We applaud you for tackling such important 

issues. 

However, we feel strongly that several recent financial regulations such as Dodd-Frank, 

Basel Ill, Money Market Fund regulations and many more, both alone and in concert 

with each other, have triggered regulatory and compliance cost burdens that radiate 

through the economy. Ultimately, this is choking the U.S. economy and paralyzing 

American businesses and financial companies that had nothing at all to do with the 

financial crisis. 

It is in this context that I frame my testimony today. 
36 


26007.003

Adverse Impact of Post-Crisis Regulations 

The rollouts of Dodd-Frank and its Volcker Rule, Basel III, and Money Fund Regulations 

are still ongoing. Most are in the midst of a phased implementation, so the full impacts 

and chain reactions of unintended consequences are only beginning to be felt. Yet we are 

already seeing a contraction in the availability of financial services and transaction 

services. Below is a partial listing of dislocations we at Treasury Strategies are already 

seeing; we learn of new restrictions and prohibitions almost weekly: 

• There are 1,489 fewer banks today than when Dodd-Frank was passed. U.S. 

banks have decreased from 6,829 to 5,340 since 2010. The loss of nearly 1,500 

commercial banks over six years has numerous consequences, some of which are 

less consumer and business choice, higher borrowing costs and less access to 

credit. 

• Only two new banks have been chartered in the six years since 2010. In the 

ten years prior to the 2008 crisis, the FDIC averaged 157 new bank charters per 

year. Going back to the earliest FDIC statistics in 1934, there was never a year in 

which the FDIC chartered fewer than 15 new commercial banks. That is, until 

2010, when it chartered only five and only two since then. Again, this dearth of 

new banks stifles innovation as well as reduces choice and competition for 

businesses and consumers. 

• SEC regulations that went into effect in October 2016 have crippled the market 

for private sector and municipal money market mutual funds (MMFs). The 

regulations contain a number of provisions which make these funds less attractive 

to investors. The result has been a $1.1 trillion dollar shift of capital out of the 

private sector and into government funds, limiting capital availability and 

raising borrowing costs for America's businesses and municipalities. 
37 


26007.004

• Basel III is changing the profit and balance sheet dynamics of banks, essentially 

penalizing deposits. To comply, some banks must discourage deposits by 

charging higher fees or paying lower interest. 

• Basel III is also requiring banks to hold a much higher proportion of government 

securities instead of traditional business loans. Many are restricting credit to all 

but the highest quality borrowers. As a result, many companies and 

municipalities are faced with higher borrowing costs or unable to borrow at all. 

The really perverse consequence is that such borrowers go "off the grid" entirely 

to unregulated or underground lenders. 

• Many banks, to comply with Basel III's liquidity plank, are cutting back on 

issuing lines of credit to their customers. Since most companies rely on these 

backup lines for emergency liquidity, their alternative is simply to hold more idle 

cash on their balance sheet. That sidelines productive capital and also impairs 

economic efficiency. 

• The combination of the Volcker Rule and increased capital requirements results in 

financial institutions scaling back their market making activities. This results in 

wider bid/ask spreads and ultimately less liquidity in the market. There have been 

sporadic liquidity black holes in which markets completely freeze up or prices 

gyrate wildly such as the U.S. Treasury flash crash. A study by Deutsche Bank 

estimates that dealers have cut their inventories by as much as 80%. 

• The higher costs of hedging risk because of the Volcker Rule and other DoddFrank provisions are leading some businesses to not hedge at all. This means 

some businesses no longer have protection from cost gyrations in their supply 

chain and actually take on more risk. All that has been accomplished is to shift 

risk and made it less visible. 

• Virtually all regulations discussed in this testimony require financial institutions 

and businesses to hold more government securities. These requirements hide 

4 
38 


26007.005

under names like "collateral," "high quality liquid assets,'' "liquidity buffers," 

"segregated funds," "risk retention" and other euphemisms. The net effect, 

however, is to remove productive capital out of the real economy and leave it 

stranded in government securities. A recent Treasury Strategies report, 

Collateral Scarcity: An Approach To Preventing Market Stress From Becoming 

Contagion, actually warns of a pending collateral shortage that could seriously 

exacerbate risk in times of financial stress. 
39 


26007.006

Money Market Funds (MMFs) 

A significant case in point 

Our paper, "Dissecting the Financial Crisis, a Two Year Flight to Quality," dispels the 

myth that MMFs were a primary culprit in the 2008 financial crisis. We show that a 

rolling crisis unfolded beginning in 2007 in the real estate and asset backed commercial 

paper markets. Later that year it spread to the enhanced cash funds market and made its 

way to the auction rate securities market. Finally, several GSEs required support. In all 

these cases, assets fled those markets and went into Prime MMFs as the last bastion of 

safety. On September 15, after the Reserve Primary Fund 'broke the buck', asset 

outflows were contained. Not until September 17, the morning after the NY Federal 

Reserve Bank announced its shocking $85 billion rescue AIG, did the panic begin in all 

financial markets. Even then, Prime MMF assets did not drop below their mid-2007 precrisis levels. Rather than a cause of the financial crisis, Prime MMFs were actually a 

shock absorber. See Attachment A. 

In 20 l 0, as part of its overall response to the financial crisis, the SEC successfully 

enacted liquidity and transparency requirements for money market mutual funds 

(MMFs). These requirements improved resiliency through several subsequent market 

stress events such as the European debt crisis and the U.S. debt downgrade of20!1 and 

the debt-ceiling impasse of2013. 

However, despite this success, the commission went much further and proposed 

extensive additional rules in 2014 for implementation in October 2016. Unfortunately, 

some of the additional regulations significantly reduced utility for investors who are not 

"natural persons" and have crippled Prime and Municipal MMFs. 

Under the new regulations, "non-natural persons" such as corporate treasurers and 

institutional investors are prohibited from investing in Prime or Municipal MMFs that 

have a stable net asset value. Instead, to receive a stable net asset value, they would have 
40 


26007.007

to invest in Government or Treasury funds. That $1 stable net asset value (NA V) has 

been the primary driver of investor utility since MMF inception over 40 years ago. The 

"floating" NA V effectively kills the money market fund as a cash management vehicle. 

• The new regulations make impractical and non-operational distinctions between 

"natural persons" and "non-natural persons" which push large investors out of 

Prime and Municipal MMFs and into Government/Treasury MMFs, thereby 

taking capital out of the private sector. 

• The new regulations impose onerous accounting and recordkeeping activities on 

de minimis daily fluctuations for corporations and institutional investors, but 

exempt their investments in Government/Treasury MMFs. 

Thus, all investors other than "natural persons" are forced to leave any stable value, 

dollar per share, Prime or Tax-Exempt money market fund. The resulting exodus is now 

more $1.1 trillion. 

In addition to the floating NA V, the new regulations also stipulate that all Prime and 

Municipal money funds impose liquidity fees or exit gates under certain high market 

stress scenarios. These two restrictions also greatly diminish investor utility. 

Consider the following Treasury Strategies analysis: 

• Prime funds, a key source of funding for corporations and banks, have seen a 

74% or $1.04 trillion decline, since January 2015, from $1.41 trillion to $0.37 

trillion on December!, 2016. 

• Tax exempt funds, a key source of funding for municipalities, universities and 

hospitals, have experienced a 51% or $132 billion decline, from $260 billion to 

$128 billion. 

• These assets have moved into Government and Treasury money funds, which 

combined have grown by $1.16 trillion in assets since January 2015. This 

amount is almost identical to the amount that has exited Prime and Tax Exempt 

funds. 
41 


26007.008

1,800 

1,600 

1,400 

1,200 

1,000 

800 

600 

400 

200 

0 

Total Assets ($B) 

Prime Money Funds 

~ l-.-

' ' \ 

l 

~Lf'liJ')li11.J11J11.Jj\O\O...C\O\O\O 

~~~"7'~~"7'"7'~~~'("7' U,.O'-'t::bOtJU,.CJ-.Cb.O"-'U 

2)~~~.';!ot:3~~~.';!252) 

300 

Total Assets ($B) 

Tax-Exempt Money Funds 

200 r-· ·~ 

lO:r ~l.{')l.I')L/")1./')l.f) 

.,...-!~~~~~ 

. ~ u..o~cbn~ 

2)~~~.';!25 

L(')\0\0\0\.0\0\0 

~~'7'7'7~'7 

wtl)6.§gfot~ au.~-~ o 

To put that in perspective, the $1.1 trillion that has left the private sector in the past 

several months is: 

• More than the expected increase in infrastructure spending now being proposed 

in Washington 

• Much more than the several hundred billion dollars of overseas U.S. corporate 

cash that is targeted for repatriation 

• Greater than the entire T ARP program of 2008 

• More than the stimulus program of2009 

Simply stated, the new SEC regulations on MMFs have created a drag on the U.S. 

economy as large as any of the highest profile economic stimulus programs to date. 

Reversing some elements of these regulations as proposed in the bipartisan H.R.4216, 

The Consumer Financial Choice and Capital Markets Protection Act, cosponsored by 

Rep. Gwen Moore (D-WI), Steve Stivers (R-OH), and many others, could have a 

profound economic impact exceeding all those listed above. 

Municipal MMFs and Infrastructure Investments 

The problem is particularly acute in the municipal market where MMFs have historically 

provided 70%- 80% of the short-term funding needs of state and local governments, 
42 


26007.009

hospitals, secondary schools and universities. Borrowing costs have skyrocketed as fund 

assets have been halved. Municipalities recently borrowing at less than 0.05% are now 

paying ten times as much (0.50%) since the beginning of2016, even though there have 

been no Federal Reserve rate increases this year. Alternatives such as bank borrowing, if 

available, are even more expensive. 

This raises the costs for infrastructure projects and eliminates some projects at the 

margin. Current federal plans to expand infrastructure investments will require state 

and local governments to seek funding from the capital markets. Yet the pool of 

available capital has been halved. H.R.4216 will help increase that pool of available 

funding. 

Attachment B (Maintaining Municipal Funding Access) describes the specific impact of 

these most recent MMF regulations on municipal finance. Municipalities in almost all 

states are impacted. For example, as of the end of2015, Municipal MMFs were providing 

$39.3 billion in funding for NY municipalities. By October 31, 2016, that number 

plunged by 50%. $19.8 billion in funding dried up for NY municipalities, who had to 

replace that debt at higher rates, if indeed it could be replaced. 
43 


26007.010

The states shown below have experienced the largest drop in funding from Municipal 

MMFs. 

Tax·f-xempt Money Fund Holdings ofShort·Term Municipal Debt ,. Top 12 States ($B), 

Source: CraneData.com, December 2016 

NY CA TX MA IL FL PA Nj IN OH NC Ml 
44 


26007.011

At the local level, hundreds of issuers have seen their funding from Municipal MMFs 

evaporate. They have likely replaced that funding with higher cost debt from banks or 

other sources. In some cases, infrastructure projects may have been delayed or cancelled. 

Capital Markets Impact of MMF regulations 

As stated earlier, Prime MMF assets have declined by over $1 trillion since the 

regulations were announced. Prime funds invest in corporate commercial paper, asset 

backed securities and short-term bank debt. Since assets in Prime MMFs have been 

decimated, corporate borrowers have had to look elsewhere to fund working capital, 

payroll and capital investments. This has put enormous pressure on the entire global debt 

market. 

UBOR is the global reference interest rate. Approximately $7-10 trillion of mortgages, 

auto loans, business loans and other debt is based on LIB OR. 

As assets moved out of Prime and Municipal funds and borrowers sought funding 

elsewhere, LIBOR increased by 25 basis points over its historical spread against U.S. 

treasury securities. This increased the borrowing costs for businesses and consumers by a 

similar amount, which translates to $25 billion per year in additional interest cost. 

Clearly, this is a drag on economic growth. 

II 
45 


26007.012

Furthermore, the International Swaps and Derivatives Association estimates that over 

$300 trillion of derivatives are indexed off LIB OR. Business who thought they were 

hedged against interest rate risk and currency risk learned that some of their hedges were 

ineffective. Simply put, the $1 trillion flow from private sector funds to government 

funds has the double barreled negative impact of increasing borrowing costs and 

increasing business risk. 

3MT·Bills vs 3M UBOR (%) 

1.00 T""''"""""""""~···-·-···········-··········~·······~·~~··········~ ... ~.,,, .• , ... . 

0.80 -! ,,,., •. , .......................... ~ .•• ,.,,.,., ......................... , ... ,e;~.: ........... . 

0.60 

OA·O +··-··"················-·······:11··········-·""""''"" 

0.20 ~~~::::::::::::: 

0.00~~-..""'¥'~~ 

1.00 ·r-~ .. -·~·~·--""~!!! . .1::.!:!!!!-i~~~.!~~U!I.L. •• ~~~ 

0.80 .J ....................................... , ..................................... · ••··• .•. SJL. 

0.60 +~····--·-·--~-~·--··~·--~---~·-~ 

().40 +···""'"""'""'"'--"'""'""""''"""'"'"'""' 

0.20 +-···~~··-··---· 

0.00 -~~J:,~-

12 
46 


26007.013

Impact of MMF regulations on repatriation of overseas cash 

U.S. corporations currently hold significant amounts of cash overseas. Plans are being 

made to invite that cash back onshore to spur economic growth. Cash that could be 

repatriated is estimated at several hundred billion dollars. 

Clearly, businesses will be encouraged to deploy that cash into U.S. growth and 

expansion. However, the most efficient channel for immediate private sector investment, 

Prime MMFs, is unattractive to investors because of the new regulations. Corporate 

treasurers are likely to sideline that cash in Government/Treasury MMFs until their 

expansion plans roll out. 

It is quite ironic that the economic growth objective of repatriating corporate cash should 

be constrained by these new regulations. Money that was stranded in foreign 

jurisdictions will now be stranded in government securities. Either way, the U.S. 

businesses and consumers lose. 

Impact of MMF regulations on systemic risk 

The rationale of the 20 l 0 MMF reforms was to improve the safety and soundness of the 

financial system- which they did. Prime and Municipal MMFs proved themselves quite 

resilient by successfully weathering the European debt crisis and the U.S. Treasury debt 

downgrade in 2011, the debt ceiling impasse of2013, the U.S. Treasury and Swiss Franc 

flash crashes of2014, and 2015 and Brexit in 2016. The 2010 MMF reforms passed the 

test with flying colors over and over again. 

Yet the additional MMF regulations implemented in October 2016 have proven to be a 

bridge too far. $1.18 trillion has fled the market. Another way to view this is that the 

market has lost a $1+ trillion shock absorber. This is yet another irony in which overregulation to limit systemic risk has actually increased it. 

13 
47 


26007.014

Summary 

Recent financial regulations such as Dodd-Frank, Basel III, Money Market Fund 

regulations and many more, both alone and in concert with each other, have triggered 

regulatory and compliance cost burdens that radiate through the economy. Ultimately, 

this is choking the U.S. economy and paralyzing American businesses and financial 

companies that had nothing at all to do with the financial crisis. 

Some of the unintended consequences include: 

• Impaired market liquidity 

• Higher costs and less certainty for borrowers 

• Reduced access to credit for businesses 

• Reduced access to capital for state and local governments 

• Reduced capacity for economic growth 

Well-thought-out efforts to mitigate the adverse consequences of these regulations and 

restore the smooth flow of capital in the U.S. economy are essential. 

We strongly encourage Congress to put America's businesses back on the right track by 

allowing/restoring the free flow of capital. That means instituting protection for those 

businesses, municipalities and financial institutions that had nothing to do with causing 

the crisis. 

One place to start is to dial back the most recent MMF regulations, which have caused 

$1.1 trillion in assets to flee the private sector. Legislative proposals such as the 

bipartisan H.R.4216, The Consumer Financial Choice and Capital Markets Protection 

Act, cosponsored by Rep. Gwen Moore (D-WI), Steve Stivers (R-OH), and many more 

arc required to restore the efficient flow of capital that makes America's capital markets 

the broadest and deepest in the world. These are small but important steps to ensure that 

Main Street businesses, municipalities and banks have access to the growth capital that 

they and their customers require. 

14 
48 


26007.015

I appreciate the opportunity to appear today on behalf of Treasury Strategies and our 

hundreds of business, municipal and financial services clients. 

Respectfully, 

Anthony J. Carfang, Managing Director 

Treasury Strategies, a division ofNovantas Inc. 

312-443-0840 

tony carfang@treasurystrategies.com 

15 
49 


26007.016

Appendix A 

Dissecting The Financial Collapse of 2007-2008 

A Two-Year Flight to Quality 

17 
50 


26007.017

Dissecting The Financial Collapse of 2007-2008 

A Two-Year Flight to Quality 

May 2012 

Considerable resources are being expended to develop new regulations to prevent a 

repeat of the 2008 financial crisis. It is vital these new regulations are appropriately 

focused to encourage liquid money markets during any future period of financial stress. 

In support of that aim, Treasury Strategies (TSI) has prepared this analysis of the money 

markets prior to, during, and following the financial crisis that peaked in mid-September 

2008. 

Much of the analysis of the financial crisis repeats the myth that a run on money market 

mutual funds (MMFs) was a proximate cause of the financial crisis. We believe this is 

incorrect and misdirects focus away from more significant causal factors. In fact, a $1.2 

trillion run on non-MMF asset classes had already occurred during the 15 months 

preceding the chaos of mid-September 2008. 

Close examination of asset flows for the week of September 15 shows the firestorm was 

not triggered by the failure of MMFs, as is being widely cited. The firestorm was actually 

triggered by the surprise, late-night $85 billion government rescue of AI G. 

On the morning of September 15, Lehman Brothers declared bankruptcy. That evening, 

aware of AIG's Lehman exposure, all three major rating agencies nonetheless issued 

investment grade ratings on AIG. Thus the 9 p.m. 

September 16 surprise $858 rescue of AIG sent global markets into a tailspin. Investors 

were shocked, not only by the sudden collapse of AIG but also by the fact that all three 

rating agencies had been completely wrong, just 24 hours earlier. Hence, they assumed 

problems lurked around every corner. 

That AIG rescue announcement panicked investors around the world, who then 

immediately fled all non-government guaranteed asset classes for the safety of 

government securities/government guarantees. 

To further illustrate the distortions perpetuated by current conventional "wisdom," we 

note that the U.S. government guarantee of MMF holdings was capped at September 

19, 2008 levels. Yet over the following weeks, investors poured $250 billion additional, 

non-guaranteed assets into MMFs, including $170 billion into prime funds. Thus, at a 

time the government was insuring virtually all corporate bank deposits, investors were 

choosing non-guaranteed prime MMFs instead! 1 

Given the failures of various other asset classes, the widespread market chaos during 

this period, the flight to quality into MMFs, and the fact that 2010 MMF regulatory 

changes have already strengthened an already strong asset class, we must certainly 

question the fixation on pillorying MMFs and demanding they be further overhauled. In 

fact, MMFs have proved to be one of the most resilient asset classes throughout the 

financial breakdown. 

1 In light of the flows into MMFs at this time, it is worth noting that MMF sponsors did not ask for or want the 

government guarantees. See ICI's commentary "MONEY MARKET FUNDS IN 2012", February 27, 2012. 

I~ 
51 


26007.018

Background 

The collapsed housing bubble triggered a tsunami that hit the shores of the general 

money markets in early 2007. From that time until markets were calmed by massive 

government intervention in late 2008, most money market asset classes experienced 

considerable stress. Investors sought progressively higher ground as problems 

escalated, with hundreds of billions of dollars fleeing riskier assets and moving to safer 

territory. 

By the time the markets calmed at the end of 2008, several asset classes were 

decimated. The asset-backed commercial paper market experienced outflows of $487 

billion, structured investment vehicles declined $400 billion, enhanced cash funds 

declined $225 billion, and financial commercial paper fell $49 billion. In addition, $330 

billion was frozen in illiquid auction rate securities. 

By December 2008, investors seeking the higher ground had moved $1.05 trillion into 

government and treasury MMFs, $170 billion into prime MMFs, $225 billion into insured 

bank demand deposits, and $176 billion into bank time deposits. 

In evaluating how the crisis unfolded, it is helpful to dissect the collapse into three time 

periods, to consider significant market events and their impacts on money market 

instruments and asset movements. 

• Phase 1: Pre-Crisis (June 2007- early September 2008) 

• Phase 2: Collapse (mid-September 2008 - mid-October 2008) 

• Phase 3: Stabilization (late October 2008- December 2008) 

I~ 
52 


26007.019

Phase 1: Pre-Crisis {June 2007 -September 2008) 

This time period was bookended by stress in the asset-backed commercial paper 

(ABCP) market, which started in June 2007, and the failures of Fannie Mae and Freddie 

Mac in September 2008. 

Aggressive lending practices and the collapse of the housing bubble began to manifest 

themselves in the general money markets during this period. Most of the defining events 

were well-telegraphed credit events. They played out in the form of prolonged runs from 

the impacted asset classes, which were primarily commercial paper and enhanced cash 

funds2

. In addition, there was an unanticipated liquidity-driven freeze of the auction rate 

securities market. 

Asset-Backed Commercial Paper 

As the housing crisis spread, in June 2007 the ABCP market faltered and experienced a 

prolonged run. This market peaked at $1.2 trillion in assets on August 8, 2007. 

Following major asset downgrades, assets declined by $432 billion (-37%) during the 

first phase of the crisis. 

Asset-backed Commercial Paper Outstanding 

($Millions) 

Source: Federal Reserve 

Structured Investment Vehicles (SIVs) 

These complex debt instruments provided very high returns by making highly leveraged 

investments. Many SIVs ultimately defaulted, were repurchased by their sponsors, or 

simply unwound. According to the Financial Times3

, total assets fell from a high of $400 

billion in July 2007 to virtually zero (-100%) by early 2009. 

2 For a description of the three types and two durations of runs, see Appendix A. 

3 Hughes, Jennifer. "Completion of SIV asset disposal near." Financial Times, 7 July 2009 

20 
53 


26007.020

Enhanced Cash Funds 

Enhanced cash funds (also called ultra-short bond funds) peaked at $250 billion in 

November 2007 and experienced a prolonged run down to $25 billion (-90%) during this 

first phase of the crisis. The run in this asset class was triggered when a GE-managed 

fund went from a fixed to floating NA V in November 2007 and then subsequently failed 

to maintain a $1 NAV. 

Auction Rate Securities 

Auction rate securities (ARS) gathered assets up to a peak of $330 billion in February 

2008. Then, following several failed auctions, the entire $330 billion 

ARS market froze (-1 00%) and has been slowly liquidating since that time. 

Other Events 

Several market events contributed to the prolonged run on various money market 

categories in this timeframe. 

• Failure of a Bear Stearns real estate hedge fund {6/2007) 

• Countrywide Financial rescue (1/2008) 

• Bear Stearns rescue (3/16/2008) 

• Indy Mac Bank failure (7/13/2008) 

• Fannie Mae and Freddie Mac failure (9/8/2008) 

It is important to recognize that these failures developed over time, with their underlying 

credit difficulties having been clearly understood by the market. With the exception of 

the unanticipated ARS freeze, market participants were well aware of impending 

problems at Bear Stearns, Countrywide, Fannie Mae, etc. 

Phase 1: Summary 

21 
54 


26007.021

*$330 billion in assets were frozen/illiquid. 

Phase 2: Collapse (September 2008 -October 2008) 

The market events and failures of multiple asset classes during Phase 1 culminated in 

collapse during the week of September 15, 2008. 

The prolonged run, already underway for some time, built and accelerated until it 

became a firestorm run across the whole financial system - a flight to quality. This 

continued until October 14, 2008 when the government intervened with an unlimited 

guarantee on all non-interest-bearing bank deposits. 

Market Events Accelerate 

One week following the bailout of Fannie and Freddie, rapid-fire shocks roiled the 

markets: 

• Bank of America bailed out Merrill Lynch (9/14/2008) 

• Lehman Brothers declared bankruptcy (9/15/2008) 

• Federal Reserve lent JPMorgan $138 billion to assist Lehman (9/15/2008) 

• Washington Mutual was downgraded and experienced a $16 billion run 

(9/15/2008) 

• Reserve Fund lost $785 million on Lehman CP, broke the buck 

(9/15-16/2008) 

• Unexpected Federal Reserve $85 billion bailout of AIG (9/16/2008, 

9 p.m. EST) 

Market Surprises and Flight to Quality 

The first phase of the crisis was characterized by prolonged runs on asset classes that 

were experiencing widely known credit-quality distress. The market digested these 

difficulties with equanimity. However, this second phase was distinctly different, and far 

more dangerous, because it was essentially the result of two seismic surprises: 

• The government's decision to not rescue Lehman Brothers 

• The shocking late-night bailout of AIG at 9 p.m. EST Tuesday, which was not 

anticipated by the marketplace. 

Indeed, the panic-fueled firestorm run out of virtually all non-government-insured asset 

classes and into insured deposits and securities reached a momentous stage on 

Wednesday, September 17, 2008. 

The Federal Reserve's announcement of the $85 billion AIG bailout completely 

blindsided the market Although there had been market rumors of AIG problems, on 

Monday evening Standard & Poor's issued an "A-" long-term rating and an "A2" shortterm rating on AIG. On Tuesday evening, the Fed initiated the first of three AIG bailouts 

or restructurings. That bailout announcement shattered the markets, shaking investor 

confidence in virtually all investments. They continued their flight to quality by moving 

into government securities and government-guaranteed instruments. 

21 
55 


26007.022

The "Run" on Bank/Financial Commercial Paper 

Events during this phase, such as the collapse of Merrill Lynch, Washington Mutual, 

Lehman Brothers and AIG, led to a run on financial commercial paper of $221 billion. 

Financial Commercial Paper Outstanding 

($Millions} 

Source: Federal Reserve 

The "Run" on MMFs 

There has been much spirited debate on the role of MMFs in the crisis. Specifically, it 

has become conventional wisdom that MMFs are susceptible to runs as evidenced by 

their asset levels during this time period. However, the data tell a different story. 

Market Total Assets of MMFs 

($MUIIon>} 

Source: The Investment Company Institute 
56 


26007.023

It is a challenge to find any widespread run occurring on the MMF asset class during any 

time period. That being said, there are different subclasses of MMFs for both retail and 

institutional investors, primarily prime MMFs and treasury/government MMFs. Prime 

MMFs invest largely in short-term commercial paper and other instruments. 

Treasury/government MMFs invest solely in T-bills and government securities. 

Of these subclasses, the data reflect the flight to quality that was underway within MMFs 

during this time period. 

Retail Prime MMFs 

($Millions! 

Source: The Investment Company Institute 

As shown above, retail prime MMFs saw a slight 3% reduction in assets during this time 

period. Meanwhile, retail government MMFs experienced the flight to quality and 

increased assets of 40% during this same period. 

The Investment Company Institute 

Retail Gov't MMFs 

($Millions) 

Source: 

24 
57 


26007.024

The sophisticated investors within the institutional segment undertook a similar, albeit 

more pronounced, flight to quality. 

Institutional Prime MMFs 

($Millions) 

Source: The Investment Company Institute 

In the above graph, we see the Phase 1 inflow of assets followed by the pronounced 

reduction of assets as investors fled to quality during the week of September 15, 2008 

fueled by the panic of the AIG bailout. This flight to quality is apparent in the graph 

below. Investors did not reject MMFs as an asset class, but rather sought the highest 

ground possible and moved into government MMFs. 

Institutional Gov't MMFs 

($Millions) 

Source: The Investment Company Institute 

:.5 
58 


26007.025

A detailed breakdown of the events of the week of September 15 provides further 

evidence that panic due to the unexpected bailout of AIG was the trigger for investors to 

flee to the highest quality instruments available (those instruments with implied or explicit 

government guarantee). 

As the following table clearly illustrates, on September 15 and 16, institutional prime 

MMFs had total outflows of just over $50 billion from the Reserve Fund and $50 billion 

from all other prime funds. This was a fairly well-contained, credit-driven event Some 

prime funds experienced no net redemptions at all over these two days. 

However, financial markets skidded into a total liquidity collapse after the surprise 

AIG failure. Over the next two days following the failure of AIG, prime MMFs saw 

more than $200 billion of outflows. 

Institutional Prime MMF Assets 

Dates Change In lnst. 

(2008) PrimeMMF Market Events 

Assets ($8) 

8/28-9/12 (1) Fannie & Freddie fail- estimated cost $2008 

Merrill Lynch rescued 

Run on WaMu of $16.48 

9/15 (61)* Lehman Brothers fails as Fed guarantees $1388 

Reserve Primary Fund halts redemptions 

S&P rates AIG "A-" long-term and "A2" short-term 

Reserve Primary Fund "officially" breaks the buck 

9/16 (37)* with $785M loss on Lehman 

After the market closes, AIG requires $858 bailout 

9/17 (130} 

9/18 (94) 

Several government safety nets implemented 

include commercial paper support and a 

9/19 (25) temporary, limited MMF guarantee program 

Goldman Sachs and Morgan Stanley apply to 

convert into bank holding companies 

9/22-12/31 +132 Cash inflows above the guarantee level 

*Includes approximately $54B in redemptions from investors in the Reserve Primary Fund 

The climactic week of September 15 ended with the government instituting several 

measures to support the commercial paper market It also instituted the Temporary 

Guarantee Program, temporarily insuring money fund investors at their September 19 
59 


26007.026

investment levels. MMF investments beyond investors' September 19 levels were 

excluded from the guarantee program4 

Phase 2 Summary 

Market events catapulted the prolonged run on the financial system to a firestorm run, as 

investors continued their flight to quality. 

Assets as of Assets as of Change ($8) %Change 9110108 ($8) 10/15/08 ($8) 

lnst. MMFs 

Prime MMFs 2,15~ 1,725 (428 (20% 

Treas/Gov 

MMFs 90E 1,359 454 50% 

Commercial Paper 

~ ABCP 677 (65) (9% 

Bank/Finance CP 588 (221) (27% 

Non-Financial CP 205 188 (18) (8% 

Bank Deposits 

Demand Deposits 292 321 30 10% 

Large Time 

Deposits 2,121 2,066 (55) (3% 

Other Instruments 

~ Enhanced Cash 25 25 -

Auction Rate Sec. *0 *0 - SIVs 0 0 - 0 

*$330 billion in assets were frozen/illiquid. 

4 Commercial paper support measures and the Temporary Guarantee Program had a single identical aim, 

according toM. L. Fein, which was not to shore up a "run" in MMFs. Fein argues, "The Fed's liquidity 

facilities and related regulatory actions that ostensibly benefited MMFs in reality were designed to support 

banks and the bank commercial paper market and that the bank commercial paper market was the source of 

systemic risk, not MMFs." See "SHOOTING THE MESSENGER: THE FED AND MONEY MARKET 

FUNDS," April 2, 2012. 
60 


26007.027

Phase 3: Stabilization (October 2008- December 2008) 

The depth of the Phase 2 panic is underscored by the number of ways the government 

actively intervened in the markets. Some of the many programs instituted in the fall of 

2008 include5

: 

• Fed lends JPMorgan $138 billion to assist with Lehman Brothers debt 

(September 15) 

• Fed rescues AIG with $85 billion loan (September 16) 

• Fed increases swap lines with other central banks by $180 billion (September 18) 

• Fed establishes ALMF program to support money fund purchases of asset-backed 

commercial paper (September 19) 

• Washington Mutual closed, assets acquired by JPMorgan (September 25) 

• Treasury institutes TGP which guaranteed investor holdings of MMFs at 

September 191evels (September 19) 

• Goldman Sachs and Morgan Stanley convert to bank holding companies with 

discount window access (September 21) 

• Fed doubles currency swap lines to $620 billion (September 29) 

• SEC eases accounting mark-to-market rules for banks (October 3) 

• TAF, the collateralized lending program, expanded to $900 billion (October 6) 

• Fed begins CPFF for CP (October 7) 

• IRS declares a cash repatriation tax holiday (October 7) 

• Federal Reserve begins paying banks interest on their reserve balances (October 

8) 

• Second AIG bailout $37.8 billion (October 8) 

• Wells Fargo purchases Wachovia (October 12) 

• Fed removes all caps and provides unlimited currency swap lines to the Bank of 

England, the ECB and the Swiss National Bank (October 13) 

• FDIC guarantees all demand deposits, without limitation (October 14) 

• Fed removes all caps and provides unlimited currency swap lines to the Bank of 

Japan (October 14) 

• Initial $250 billion of the $700 billion TARP program rolled out (October 14) 

• FDIC guarantees all senior debt of U.S. banks and bank holding companies 

(October 14) 

MMIFF established for direct purchase of up to $540 billion of commercial paper 

and bank COs to prop up those markets. This amount greatly exceeds total 

withdrawals from commercial paper-based money market funds (October 19) 

New York Fed lends $50B to two foreign banks, Irish-German Depfa Bank and 

Belgium's Dexia Bank (November 4) 

• Third AIG bailout, an additional $40 billion (November 1 0) 

• Second round of Citigroup support at $20 billion (November 24) 

• T ALF provides $200 billion to support retail and small business asset-backed 

commercial paper (November 25). Increased to $1,000 billion on February 10, 

2009 

• Fed announces program to purchase direct obligations of housing-related GSEs 

(November 25) 

• General Motors and Chrysler bailouts announced (December 19) 

5 See Appendix B for acronym definitions. 
61 


26007.028

During this period of dramatic rescues and bailouts, hundreds of billions flowed into 

several asset classes, including prime MMFs, Treasury/government MMFs, insured bank 

deposits and financial commercial paper. 

Inflow of Assets to Guaranteed Bank Deposits 

On October 14, the FDIC expanded its insurance guarantee to cover unlimited noninterest-bearing bank deposits. During this phase, bank demand deposits grew by $230 

billion (72%) to a total of $551 billion. 

Source: Federal Reserve 

Demand Deposits 

($Millions} 

The inflow into demand deposits was somewhat offset by an outflow of large time 

deposits, which decreased by $148 billion during this period. 
62 


26007.029

Source: Federal Reserve 

large Time Deposits 

($Millions} 

30 
63 


26007.030

Inflow of Non-Guaranteed Assets into Institutional Prime MMFs 

As one reaction to the market panic of Phase 2, the Treasury established the Temporary 

Guarantee Program (TGP) for MMFs. TGP guaranteed any investments in MMFs at 

September 19, 2008 levels. New assets invested after this date were excluded from this 

program and therefore not guaranteed. 

Institutional Prime MMFs 

($Millions) 

A = Phase 1 B = Phase 2 C = Phase 3 

Source: The Investment Company Institute, Treasury Strategies 

Despite the fact that incremental investments were not guaranteed, institutional investors 

increased their holdings in prime MMFs. These sophisticated investors were fully aware 

that new MMF investments were not guaranteed, and that other fully guaranteed options 

were available (i.e., bank demand deposits). This testifies to the value investors place 

on MMF instruments. 

31 
64 


26007.031

Phase 3 Summary 

Assets as of Assets as of Change ($8) %Change 10/15/08 ($8) 12/30/08 ($8) 

lnst.MMFs 

Prime MMFs 1,725 1,875 151 9% 

Treas/Gov MMFs 1,359 1,473 114 8% 

Commercial Paper 

ABCP 677 705 28 4% 

Bank/Finance CP 588 714 125 21% 

Non-Financial CP 188 181 (7 (4% 

Bank Deposits 

Demand Deposits 321 551 230 72% 

Large Time 

Deposits 2,066 1,919 (148) (7% 

Other Instruments 

Enhanced Cash 25 25 - 0% 

Auction Rate Sec. *0 *0 - 0% 

SIVs 0 0 - 0% 

*$330 billion in assets were frozen/illiquid. 
65 


26007.032

Conclusion 

The financial crisis fueled by the housing market collapse reverberated throughout the 

overall money markets. The failure of some very prominent institutions was widely felt 

and many asset classes experienced runs or failed altogether as a result. 

A prolonged, credit-driven run took hold in mid-2007 as the housing tsunami cascaded 

across all asset classes. During this first phase, investors moved deliberately but 

without panic to higher ground. Excepting the surprise auction rate securities freeze, 6 

major events of this period unfolded slowly, and problem institutions were well 

recognized in advance of their ultimate failures. 

Then, two unanticipated shocks hit on successive days and triggered a firestorm run on 

all non-government guaranteed asset classes. First, the U.S. government abruptly 

reversed its very visible policy of supporting large distressed financial institutions. In a 

move that stunned the markets, it allowed Lehman Brothers to fail. 7 

Secondly, on the following evening while the markets were closed, the U.S. government 

reversed course again. While Lehman Brothers had been allowed to fail days earlier, 

the NY Fed that night announced an $85 billion bailout of AIG. This unexpected failure 

and its unprecedented magnitude shook the very foundations of the markets. 

The next morning, investors ran for the high ground en masse, moving hundreds of 

billions of dollars into government and treasury MMFs, insured bank deposits, and 

government securities. They sold virtually everything else. 

By year-end, with a mind-boggling list of support programs, bailouts, and guarantees, 

markets began to calm. When the dust settled, the crises that had begun in June 2007 

had led to huge shifts of liquid assets. The ABCP, SIV, enhanced cash and auction rate 

securities markets were decimated. More than $1 trillion flowed into 

treasury/government MMFs during this time. An additional $600 billion flowed into 

government-guaranteed bank demand deposits, non-guaranteed prime MMFs, and large 

time deposits. 

6 Treasury Strategies long insisted these should not be classed as cash or cash equivalents. The freeze 

was a surprise to investors, yet this was recognized as an asset class deserving close scrutiny. 7 The Reserve Fund, with 1.2% of its assets in A-rated Lehman commercial paper, was collateral damage to 

this policy change. Although Reserve "broke the buck", every other MMF holding Lehman paper maintained 

their$1 NAV. 
66 


26007.033

Overall 

Crisis 

Summary 

*$330 

billion in 

assets were 

frozen/illiqui 

d. 

lnst.MMFs: 

Prime MMFs 

Treas/Gov MMFs 

Commercial 

Paper: 

ABCP 

Bank/Finance CP 

Non-Financial CP 

Bank Deposits: 

Demand Deposits 

Large Time 

Deposits 

~~:~~ments: Enhanced Cash 

Auction Rate Sec. 

S!Vs 

Recommendation 

Assets as of 

6/27107 ($8) 

1,705 

427 

1,173 

763 

196 

326 

1,743 

250 

330 

400 

Assets as of Total Change %Change 12/30108 ($8) ($8) 

1,875 170 10% 

1,47 1,046 245% 

705 (469) (40% 

714 (49 (6% 

181 (15 (8% 

551 22E 69% 

1,919 176 10% 

25 (225) (90% 

0* (330)* (100% 

0 (400 (100% 

We encourage regulators to carefully consider the precise sequence of events as the 

crisis unfolded. This time period reveals a great deal about how much stress the 

markets could systematically digest and at which point the cumulative impacts became 

overwhelming. One point in particular stands out: the unprecedented and unanticipated 

AIG collapse, triggered by losses on Lehman credit default swaps, is the single 

proximate event that triggered a firestorm run on all money market asset classes. For all 

intents and purposes, that event divided the markets into just two asset classes: 

anything guaranteed by the U.S. government and anything that was not. During 

September 2008, investors wanted out of the latter and in to the former. 

This point- along with the failures of various other asset classes, the widespread market 

chaos during this period, the flight to quality into MMFs, and the fact that 2010 MMF 

regulatory changes have already strengthened one of the most resilient asset classes 

throughout the financial breakdown - should guide regulators in their evaluations of 

asset classes and considerations of regulatory change. 

34 
67 


26007.034

Appendix B 

Maintaining Public Sector Funding Access 

35 
68 


26007.035

Maintaining Public Sector Funding Access: 

The Importance of Preserving Money Market Mutual Funds (MMFs) 

New MMF regulations that were implemented in October of this year are having major 

negative consequences for issuers and borrowers of debt held by money market funds. 

Specifically, Tax-Exempt MMFs (TE MMFs) are closing and assets are leaving. This is 

drying up a very important municipal financing conduit. 

As TE MMF close (or shorten their maturities), municipalities have fewer buyers for their 

debt. Even when they are able to place issues with the remaining TE funds, due to the 

shortened maturity structure, they are less able to lock in rates and more subject to 

weekly rate resets. This increases volatility and adds to their borrowing costs. If they are 

not able to place their issues with TE MMFs, only two options are available. They must 

tum to other lenders that have higher transaction costs or charge higher rates or they must 

defer or cancel infrastructure, educational!healthcare facilities or other municipal 

projects. 

This paper will show the following, all of which demonstrate the negative impacts on 

municipal financing of new MMF regulation: 

• Massive amounts of assets are leaving from Tax-Exempt MMFs 

• Borrowing rates for Municipal borrowers have increased dramatically 

• Managers that use TE funds on behalf of their customers are exiting those funds 

Between December 2016 and December 2016 around $120 billion left TE MMFs, a 

decline of nearly 50%. Since TE MMFs provide a significant amount of financing to 

municipal borrowers, the short-term market for municipal debt is significantly smaller. 

This has led to a massive spike in borrowing rates- from less than 0.05% to 0.50%. 

Without Tax-Exempt MMFs, municipalities will be forced to seek even higher cost 

borrowing like bank credit, or reduce their short-term capital consumption. Projects in 

infrastructure, healthcare, education and government services will be impacted. 

36 
69 


26007.036

I. TE MMF assets declined by 50% in the months leading up to 

implementation of new regulations 

MMFs have historically been an important holder of short-term municipal debt. As of 

December 2015, they provided over $250 billion of short-term funding to municipalities 

by purchasing their short-term debt instruments. By December 2016, TE MMFs were 

just barely half of that number and a quarter of pre-crisis levels in June 2008. Figure I 

shows the precipitous decline in TE MMF assets in 2016 prior to the implementation of 

new regulations in October. 

Figure /.Tax-Exempt Money Fund Asset Levels ($B). 

Source: CraneData.com, Treasury Strategies (December 2016) 

300 

200 

100 

0 ..,. ..,. ll1 lfl ll1 ll1 lfl ll1 til ll1 til ll1 til ..-< ..-< ..-< ..-< ..-< ..-< ..-< ..-< ..-< ..-< ..-< ..-< ..-< "' ..-< "' ..-< "' ..-< "' "' "' "' "' "' "' "' "' "' 'Z .... .... .... .... .... ,-; ..-< .-< ";' :> u C: J:, ,;. ,;. :>. C: ;:; On b. .:. :> u C: J:, ,;. :>. C: -5 On b. .:. :> u 0 "' "' "' "' 0.. "' ::l ::l "' u 0 (l) "' (l) "' 0.. "' "' u 0 (l) 

z Q - ""- :::£ <t: :::£ -- <t: Vl 0 z Q ~ ""- :::£ <t: :::£ .2.---~ Vl 0 z Q 

Figure 2 shows the large Tax-Exempt MMF investments in municipal debt of highly 

populated industrial and economic centers including New York, California, Texas, 

Massachusetts, Illinois, and Florida. It also shows the severe decline in these investments 

in 2016, with each of those states experiencing a 35% to 50% decline in the months 

leading up to the new regulations. 

37 
70 


26007.037

Figure 2. Tax-Exempt Money Fund Holdings ofShort-Term Municipal Debt- Top 12 States ($B). Source: 

CraneData.com, Treasury Strategies (November 2016) 

$50 

$' $40 

"' ::;; $30 Q. 

·g $20 

;E $10 

$0 

NY CA TX MA IL FL PA NJ IN OH NC M! 

IIIDec-15 IIIIOct-16 

The reach ofTE MMFs is even more striking when viewed in light of population. These 

funds represented over $700 for every man, woman and child in the U.S in December 

2015, or up to $2,000 per household. The asset losses in TE MMFs translate to a decline 

of up to $700 to $1,000 per capita in the states that were most impacted. 

The impact of these declines is geographically diverse. The per capita effects are just as 

pronounced in Alaska, Wyoming and Missouri as they are in New York and California, 

as shown in Figure 3. 

Figure 3. Tax-Exempt Money Fund Holdings of Short-Term Municipal Debt-· Top 12 States by Assets Per Capita, 

Source: CraneData.com, U.S. Census (November 2016) 

5 $2,500 

·~ $2,000 

u iii $1,500 Q. 

;;; $1,000 Q. 'g $500 

·;:: 

~ $0 

NY AK MA WY NV CT CA MS IN CO Nj IL 

IIIDec-15 liiOrt-16 

38 
71 


26007.038

Figure 4 shows the impact of these asset outflows to important municipal issuers in the 

states of Texas, California, and New York. Many of these specific issuers have seen a 

decline in their debt held byTE MMFs over 50%, and some have seen much higher 

declines. Combined, the MTA and Port Authority in New York City have seen declines 

in excess of $1.8 billion. 

Figure 4. Impacts to Tax-Exempt Money Fund issuers in TX, CA and NY ($MM) 

Source: Cranedata.com, Treasury Strategies (Novemher 2016} 

II. Municipal borrowing rates have increased dramatically 

As TE MMFs assets have diminished and waves of funds have closed, municipal 

borrowers have had to pay increasingly high rates to secure financing. Figure 5 shows 

that the SIFMA Index of municipal short term borrowing has jumped from under 5 basis 

points at the beginning of 2016 to over 50 basis points at the end of October. This greatly 

increases the borrowing costs for municipalities, university and hospitals. Since most 

debt resets on a weekly basis, borrowing costs on existing debt has increased by over tenfold for many borrowers. 
72 


26007.039

1.00 

0.90 

0.80 

0.70 

0.60 

0.50 

0.40 

0.30 

0.20 

0.10 

0.00 --

Figure 5. SIFMA Municipal Swap Index Rates ("A>), 

Source: SJFMA (December 2016) 

f 

1"- 1 -r-.,......-r 

A I 1 

I 

I \..... 

A/ 

Municipal borrowing rates have also jumped from being significantly lower than other 

short-term rates to being positioned in-between one-month and three-month LIBOR. This 

represents a significant market disruption because many municipal debt instruments have 

traditionally been closer to over-night and seven-day rates due to weekly rate resets. 

Another sign of this disruption is the yields that yields on TE MMFs have also increased 

significantly in this period compared to other money fund types. TE MMFs are 

traditionally the lowest yielding money fund due to their tax advantages, credit quality 

and short portfolios. Figure 6 shows that in the second half of 2016, TE MMF yields 

increased dramatically to be the highest yielding fund type for a brief period of time. As 

of October 31, 2016, only Prime Institutional funds offered higher yields. 

40 
73 


26007.040

0.40 

0.35 

Figure 6. Seven-day Money Fund Yields ("/o). 

Source: Cranedata.com, Treasury Strategies, December 2016 

-Prime lnst -Tax Exempt lnst -Govt lnst 

41 
74 


26007.041

Ill. Managers using TE funds on behalf of their customers arc exiting 

As they formulated the new MMF rules, regulators believed Tax-Exempt MMFs were 

held almost exclusively by retail investors. This was important, because the new rules 

were aimed at what are commonly called institutional funds- those used by corporates, 

institutions and trusts (called non-natural persons). 8 

The thinking was that if these non-natural persons did not invest in Tax-Exempt MMFs, 

then TE funds would see little impact, and municipal finance would be unharmed. 

However, this key assumption is incorrect. Not only are significant portions of TaxExempt MMFs held by non-natural persons, but the business is already adjusting in 

ways that will hurt municipal borrowers. 

To delve into this issue, we conducted a two-part examination: 

• First, we had discussions with managers from six of the largest U.S. tax-exempt fund 

companies that collectively represent 60% of all such assets. 

• Second, to validate those findings, we surveyed 21 financial intermediaries that invest in 

TE MMFs, including nine of the 50 largest U.S. banks. 

Fund Managers 

From discussions with fund managers, we have estimated that non-natural persons hold a 

material portion- at least 30% to 50%- of TE MMF assets. Only one manager thought 

its fund had less than 30% institutional ownership. 

Fund managers tell us they expect that virtually all such non-natural person investors in 

Tax-Exempt funds to leave. Reasons given range from operational difficulties to 

investment policy restrictions, driven primarily by the new regulations. As the new rules 

force such investors to exit, Tax-Exempt MMF asset levels will shrink and many funds 

will close. 

Figure 11. Estimated TE Mli1F Assets Held by Institutional Investors, Source: Treasury 

Strategies Interviews of Top Fund Managers, February 2016 

Fund Manager 

# 1 30% 

#2 35% 

#3 15% 

#4 45% 

#5 50% 

#6 30% 

8 Non-natural persons include entities such as partnerships, LLCs, irrevocable trusts, corporations, and institutions 

42 
75 


26007.042

Financial Intermediaries 

Information from Financial Intermediaries (Fis), who direct customer investments into 

Tax-Exempt MMFs, also paints a troubling picture for the future of these funds. TaxExempt MMF usage by Fls is likely to plummet. 

According to Fls, non-natural persons account for almost two-thirds of the assets that 

they place in Tax-Exempt MMFs. Many Fis plan to cease offering Tax-Exempt Funds to 

any client, due to the complexity, difficulty and risk of determining which clients are 

natural versus non-natural investors. For others, the new rules make it impossible to 

continue offering Tax-Exempt funds to customers as an option on their sweep platforms. 

Accordingly, Fls will fully or substantially eliminate their use of Tax-Exempt MMFs on 

behalf of their customers. 

This is a double-edged sword for municipal finance. First, lower investment in TaxExempt MMFs translates directly to reduced outlets for municipal borrowing. Secondly, 

at these significant levels of asset reduction, many TE funds will fall below efficient 

operating levels, and will close entirely- a trend we have already noted is underway. 
76 


26007.043

IV. Conclusion 

New SEC rules that change how MMFs function are having many unintended 

consequences. One such consequence now manifesting itself is a material reduction in 

the short-term credit avaihible to municipal borrowers whose debt is held by Tax-Exempt 

MMFs. As recently as December 2015, Tax-Exempt MMF assets exceeded $250B. As of 

December 5, 2016, they are now under $130B. 

These changes have also lead to a dramatic increase in the borrowing costs. Many 

municipalities have seen borrowing rates increase by ten-fold in 2016. They are also 30-

day and 90-day rates for debt that resets on a weekly basis and is 100% callable on 

demand. 

Without Tax-Exempt MMFs, municipalities will be forced to seek even higher cost 

borrowing options like bank credit, or reduce their short-term capital consumption. 

Neither of these options bode well for the US economy and tax payer. 
77 


26007.044

Statement of the U.S. Chamber of Commerce 

ON: The Impact of Regulations on Short-Term Financing 

TO: House Committee on Financial Services, 

Subcommittee on Capital Markets and Government 

Sponsored Enterprises 

BY: Thomas C. Deas, Chairman, National Association of 

Corporate Treasurers on behalf of the U.S. Chamber of 

Commerce Center for Capital Markets Competitiveness 

DATE: December 8, 2016 

1615 H StreetNW I Washington, DC 120062 

The Chamber's mission is to advance human progress through an economic, 

political and social system based on individual freedom, 

incentive, initiative, opportunity and responsibility, 
78 


26007.045

The U.S. Chamber of Commerce is the world's largest business federation, 

representing the interests of more than 3 million businesses of all sizes, sectors, and 

regions, as well as state and local chambers and industry associations. The Chamber is 

dedicated to promoting, protecting, and defending America's free enterprise system. 

More than 96'% of Chamber member companies have fewer than 100 

employees, and many of the nation's largest companies arc also active members. We 

are therefore cognizant not only of the challenges facing smaller businesses, but also 

those facing the business community at large. 

Besides representing a cross-section of the American business community with 

respect to the number of employees, major classifications of American business--e.g., 

manufacturing, retailing, services, construction, wholesalers, and finance-are 

represented. The Chamber has membership in all 50 states. 

The Chamber's international reach is substantial as well. We believe that global 

interdependence provides opportunities, not threats. In addition to the American 

Chambers of Commerce abroad, an increasing number of our members engage in the 

export and import of both goods and services and have ongoing investment activities. 

The Chamber favors strengthened international competitiveness and opposes artificial 

U.S. and foreign barriers to international business. 
79 


26007.046

Testimony before the Subcommittee on Capital Markets and Government 

Sponsored Enterprises 

U.S. House Committee on Financial Services 

"The Impact of Regulations on Short-Term Financing" 

Thomas C. Deas,Jr. 

U.S. Chamber of Commerce Center for Capital Markets Competitiveness 

December 8, 2016 

Chairman Garrett, Ranking Member Maloney, and members of the 

subcommittee: 

Thank you for the opportunity to testify at this important hearing focusing on 

financial regulation and its impact on short-term financing. I am Thomas C. Deas, Jr., 

recently retired vice president and treasurer of FMC Corporation and current 

Chairman of the National Association of Corporate Treasurers ("NACT"), an 

organization of treasury professionals from several hundred of the largest public and 

private companies in the country. I am testifying today on behalf of the U.S. 

Chamber of Commerce ("Chamber"). The Chamber is the world's largest business 

federation, representing the interests of more than three million businesses of all sizes, 

sectors, and regions. NACT fully supports the Chamber's many important efforts to 

assure that financial regulations do not unduly burden Main Street companies whose 

treasurers are working every day to finance their businesses, safeguard their cash and 

other assets, and hedge risks in their day-to-day operations in the most efficient and 

effective ways possible. 

There is no question that liquidity is the lifeblood of any business. Without 

having ample liquidity, production comes to halt, inventories run low, and bills are not 

paid on time. The cyclical nature of many businesses places significant importance on 

the availability of short-term financing so that they can operate efficiently and without 

disruption. For decades, the U.S. commercial paper market has been the most 

efficient, cost-effective short-term fmancial market utilized by corporate treasurers to 

meet their day-to-day funding requirements. In addition, access to short-term lines of 

credit from fmancial institutions and healthy capital markets for corporate debt 

continues to play an important role in helping corporations of all sizes manage their 

expected and unexpected financing needs. 

We have been clear in our support of the important legislative and regulatory 

objectives to increase transparency in fmancial markets and to strengthen their safety, 

liquidity, and efficiency. Unfortunately, with the onslaught of new fmancial 

regulations since the fmancial crisis, we have seen the implementation of requirements 

affecting Main Street companies that often conflict with those objectives. The 
80 


26007.047

markets for short-term borrowing have tightened, resulting in more volatility, ·wider 

spreads, and higher rates. Corporate treasurers have faced increasing difficulty 

managing liquidity without tying up productive capital or incurring additional 

substantial financing and hedging costs. 

Several regulatory initiatives have or will have significant negative effects on 

short-term financing. In many cases these regulations interact in ways not fully 

understood at inception, producing a greater negative effect than might be predicted 

from an analysis of the rules individually. In some cases, an economic analysis was 

not done during the rulemaking process leaving stakeholders with an inability to 

provide informed commentary. Additionally, we believe that the interaction of bank 

capital and liquidity rules with other rules, like money market mutual fund refonn, 

calls for an analysis for how these rules interact amongst each other and what the 

collective and individual unforeseen consequences are. We reiterate our call that 

agencies follow the Administrative Procedure Act and similar statutes, like the Riegle 

Community Development and Regulatory Improvement Act, to publish an economic 

analysis during the rulemaking process and allow stakeholders to comment on that 

analysis. Additionally, in this case, we also believe that there must be a careful analysis 

of the cumulative effect these rules have on the financial markets when taken together 

to assure they meet the cost-benefit tests required under present law. To highlight 

two areas critical to short-term fmancing, let us consider money market fund reform 

that has contracted the commercial paper market and the proposed net stable funding 

ratio rule affecting the amount of capital banks are required to hold aside against loans 

and other advances they make to Main Street companies. 

Money Market Fund Reform 

In July 2014, the Securities and Exchange Commission ("SEC") fmalized new 

rules for money market mutual funds that came into force October 14, 2016. The 

Chamber together with many corporate treasurers expressed significant concerns 

during the rulemaking process that these changes would have far-reaching 

consequences on the ability of corporate treasurers to raise short-term capital and 

manage cash. As we-and others--exhaustively detailed during the rulemaking's 

comment period to the SEC, the requirement for the net asset value ("NA V") to float 

and be reported to the nearest hundredth of a cent significantly complicates 

investments in prime money market funds by corporate treasurers and government 

fmance officers. It introduces an element of uncertainty and recordkeeping 

complications that are not present in stable N1\ V funds. 

The floating NAV requires treasurers to keep track of gains and losses for 

federal and state income tax purposes whenever they buy money market fund shares 
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26007.048

at one price and sell them at another in the routine redemption of their investment. 

The Department of the Treasury issued a regulation permitting investors in a single 

money market fund to simplify calculation of their gains and losses. 1 However, as has 

often happened amid the post-flnancial crisis flood of regulations, an unintended, and 

indeed undesirable, consequence ensued. The flnancial crisis certainly highlighted the 

need for treasurers to assure, as an absolute requirement, diversification of funding 

sources, as well as investment alternatives. The tax simplification for money market 

fund floating NA V investments, however, is only available for investments in a single 

fund-tending to increase the concentration of investments, producing consequendy 

higher risk. 

Of perhaps even greater consequence, however, are the new rule's liquidity fee 

and redemption gate provisions, which represent significant deterrents for corporate 

treasurers and other institutional investors from participating in institutional prime 

funds. There is significant concern that redemption gates may limit liquidity during 

periods of market stress. As discussed earlier, ensuring liquidity is an absolute 

requirement for corporate treasurers. Additionally, the potential imposition of 

liquidity fees also presents uncertainty and a potential loss of principal, a great risk to a 

treasurer's responsibility to assure adequate funding of day-to-day operations and to 

safeguard the corporation's assets. Thus, this provision, which is inherent in 

institutional prime funds, is a major deterrent for corporate cash being invested in 

prime funds. Instead of stabilizing money funds against a potential run, the 

application of the SEC's fmal rule seems to be raising heightened concerns about 

MMF's liquidity, stability, and overall utility. 

Prime funds arc important for corporate treasurers not only as a flexible 

alternative to bank time deposits for investments of temporary excess cash balances, 

but also because they have been important providers of short-term funding by buying 

commercial paper notes issued by many corporations to meet their daily funding 

requirements. However, as the graph below shows, in the year running up to the 

October 14, 2016, implementation of the new MMF regulations, fund purchases of 

corporate CP declined signiflcandy. 

1 See Department of the Treasury, Internal Revenue Service; Afethod of Accounting for Gains and Losses on Shares in 

Money Market Funds; Broker Returns with Respect to Sales of Shares in Money Market Funds, 91 Fed. Reg. 44,508 (Jul. 

8, 2016), available at htrps://www.gpo.gov /fdsys/pkg/FR-2016-07-08/pdf/2016-16149.pdf. 
82 


26007.049

20% 

18% 

16% 

14% 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

MMF Holdings of Corporate CP as a Percent of 

Total Non-financial CP Outstanding 

I I I I I I I I I I 

Concerns about investors fleeing prime money market funds have proven true. 

Assets in prime money market funds have fallen over $1 trillion to a mere $376 

billion2 since the rule was finalized. The outflow of funds accelerated over the 

summer in anticipation of the implementation in October, which led prime funds to 

invest in instruments that had a shorter duration (see chart below). The increasing 

reluctance to hold instruments such as commercial paper and municipal debt that 

matured beyond the October 14, 2016, compliance deadline resulted in a significant 

drop in demand for high-quality, short-term debt instruments. Additionally, the 

outflow of funds from prime money market funds has resulted in spreads widening by 

20 to 25 basis points for prime funds compared to government funds. This quantifies 

the penalty for Main Street companies at the expense of relatively lower government 

funding costs. 

2 See «Money .Market Fund Assets-Dec. 1, 2016," Investment Company Institute, available at 

https://y.•\vv..·.ici.org/research/stats/mmf/mm 12 01 16. 
83 


26007.050

2,100,000 

1,900,000 

1,700,000 

1,500,000 

$Millions 1,300,000 

1,100,000 

900,000 

700,000 

500,000 

300,000 

--Total CP Outstanding -us Prime MMF Assets 

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 

Number of Money Market Funds 

No. of Funds 

650 

600 

5SO 

500 

450 

400 

10/12 02113 06/13 10/13 02/14 06/14 10/14 02/15 06/15 10/15 02/16 06/16 10/16 

Source: SEC 

The supply-demand imbalance, as well as the continued closing of institutional 

prime funds (sec chart above) has forced companies and municipalities to pay higher 

borrowing rates to fund working capital and other short-term needs. This has been 

especially true for treasurers issuing 90-day commercial paper in October to obtain 

funding beyond the year end, faced with the October 14'h MMF new rules 

implementation (see chart below). 
84 


26007.051

-Tier 1 CP • 30 Oay Maturity -Tier 1 CP • 90 Oay Maturity 

1.00% ,. ....... -·-···-·······----·-··--·~·------~·-·--·~----··-···---···--··-·····---·-

0.90% +----.. ··-------·--·------~-~---·-~-----------·-··-·-·-

0.80% +----·------·--·--·--·-------------

0.70% +-·-·-··-----····-···-·---·--·--------·-·-·-··-·------··-·---··-· 

0.60% 1------~---------~--·--·-

Rate (%) 0.50% +··--····-···-······-·-····-···-····-··-···········-···········-· 

MD% ·+--·-------.. -------·-

Money market fund reform has indeed added additional burdens to corporate 

treasurers to manage liquidity efficiently. Thus, we support legislative efforts that ease 

the economic burden on Main Street businesses to manage liquidity through 

affordable short-term financing and unrestricted access to cash investments and 

commend the sponsors of I·LR. 4216 that have taken a step forward in this regard. 

Net Stable Funding Ratio 

The Chamber believes that the Federal banking regulators' proposed net stable 

funding ratio ("NSFR'') rule does not take into account its dramatic impacts on 

corporate end-users. Specifically, the NSFR structurally discourages banks from 

investing in corporate debt and further restricts end-users' ability to hedge by 

increasing the cost of risk management, thus impacting the short-term financing 

markets and sidelining productive uses of capitaL 

The NSFR's treatment of corporate debt could hinder end-user capital raising 

efforts. The NSFR does not adjust for the maturity of end-user-issued debt when 

determining a dealer's required stable funding and would restrict liquidity in the 

corporate debt markets by requiring dealers to raise 50-85% long-term funding to 

support their inventory, which would discourage market making. End-users rely on 

market-based funding and the liquid markets for corporate bonds and commercial 
85 


26007.052

paper. As we prepare for the Federal Reserve's move to increase short-term rates and 

the yield curve moves up and steepens in anticipation of higher future short- and 

long-term interest rates, these effects will be exacerbated. 

To cite a real-world example of the costs and diminished liquidity from these 

rules, corporate treasurers issuing commercial paper to balance their daily funding 

requirements at times are faced with a same-day payment that they identify too late in 

the day to place with an end-investor in the market. Often their bank commercial 

paper dealer will take the paper overnight for its own account and fund-out the 

requirement the next day. The NSFR rules require the bank to hold 85% of that 

overnight funding as long-term funding-at a cost over ten times the overnight 

amount. Ultimately this liquidity will no longer be available to end-user treasury 

departments. Accordingly, the federal banking regulators should carefully consider 

the impact of the NSFR's 50-85% long-term funding requirements on end-users. 

Additionally, we also have concerns related to the add-on costs associated with 

derivative liabilities. For example, requiring dealer counterparties to provide required 

stable funding for 20% of the negative replacement cost of derivative liabilities 

(before deducting even for variation margin posted in cash) is a clear example of the 

direct burdens affecting end-users' ability to mitigate risk efficiently. The costs to 

hedge are likely to be passed on to end-user companies in the form of increased fees 

or transaction costs, less favorable terms, and collateral requirements.3 Moreover, 

many have questioned why this 20% "add-on" is necessary and how it was developed, 

as it was not included in previous proposals from the Basel Committee on Banking 

Supervision. In fact, the European Union ("EU") has moved forward with a lower 

charge to reflect these concerns, placing U.S. companies and the U.S. financial 

institutions supporting them at a disadvantage relative to their EU competitors. 

We believe that the Federal banking regulators would have avoided this unfair 

penalization of corporate treasurers and potential damage to our economy had they 

conducted and published economic analysis for public review and comment, as 

required under the Administrative Procedure Act and other similar statutes. In 

particular, the federal banking regulators are required under the Regulatory Flexibility 

Act ("RFN') and the Paperwork Reduction Act ("PRA") to conduct an assessment of 

the economic effect of regulations on small business and consideration of less 

burdensome alternatives. The PRA requires assessment of the paperwork burden on 

small entities and ways to reduce or mitigate it. In addition, those regulators are 

subject to the Small Business Regulatory Enforcement Fairness Act ("SBREFA"). 

3 A January 2015 study of the OTC derivatives market by Oliver Wyman concluded that the NSFR's treatment of OTC 

derivatives would require an additional $500 billion in long-term funding, generating $5-8 billion in incremental costs to 

the industry, with a cost increase of 10-15% for derivatives transactions. 
86 


26007.053

Among other things, the portion of SBREF A known as the Congressional Review 

Act states that rulemaking agencies must submit to GAO, and make available to each 

house of Congress, "a complete copy" of any cost-benefit analysis prepared for a final 

rule for which such an analysis is performed.4 Other statutes, like the Unfunded 

Mandates Reform Act ("UMRA"), require the OCC to conduct economic analysis, 

and the Federal Reserve has vowed to abide by similar requirements under Executive 

Order 13563.' 

Finally, and as we have repeatedly noted in our comment letters to the Federal 

banking regulators, the Riegle Community Development and Regulatory 

Improvement Act ("Riegle Act," 12 U.S.C. §4802(a)) requires a rigorous economic 

analysis that has not been performed here. In particular, the Riegle Act mandates that 

"[i]n determining the effective date and administrative compliance requirements for 

new regulations that impose additional reporting, disclosure, or other requirements on 

insured depository institutions, each Federal banking agency shall consider, consistent 

with the principles of safety and soundness and the public interest-(1) any 

administrative burdens that such regulations would place on depository institutions, 

including small depository institutions and customers of depository institutions; and 

(2) the benefits of such regulations." 

Need for Cumulative Impact Study 

An inherent conflict of regulatory objectives further demonstrating the need 

for an analysis of cumulative impacts can be seen in money market fund regulations 

and the NSFR Proposed Rule as they affect bank funding and ultimately the cost for 

funding of Main Street companies. The SEC's rules aiming for greater liquidity for 

money market funds to meet short-term redemptions drove their investment holdings 

maturing in a week or less at November 28, 2016, to 68%, up from 54% at June 30, 

2016. Many of these Ml"\fF investments have been bank certificates of deposit and 

bank commercial paper. Additionally, the NSFR rules force much greater reliance on 

long-term funding for banks. Taken together, the decline in money market prime 

funds' ability to buy short-term bank paper, and the NSFR rules mandating higher 

cost long-term funding for banks, must in the end result in higher short-term funding 

costs for Main Street companies. The costs compared to the benefits of these moves 

have not yet been fully determined. 

'5 U.S.C. 801(a)(l)(b)(i)) 5 See Board of Governors of the Federal Reserve System, Statement of Policy Regarding Expanded Rulemaking 

procedures, 44 Fed. Reg. 3957 (1979) and letter from Scott Alvarez, General Counsel of the Federal Reserve, to Nicole 

Clowers, Director of Financial !vfarkets and Community Investment of the General Accountability Office. 
87 


26007.054

A bipartisan effort by Congress, supported by a majority of the members of 

this committee, clarified that end-users should be exempted from clearing any 

uncleared margin requirements to preserve end-users' ability to hedge their 

commercial risks effectively.6 The Federal banking regulators should respect 

Congressional intent and modify the NSFR Proposed Rule to eliminate any potential 

impact on nonfinancial corporates to the extent that the Proposed Rule contradicts 

the value of congressionally mandated exemptions. While the Proposed Rule does 

not undo these exemptions, the consequences of the proposal would not be isolated 

to covered companies, which would pass on costs of the funding requirements to 

end-users. 

Conclusion 

We believe the legislative intent of the Dodd-Frank Act was not to make it 

exceedingly difficult for corporations to manage their short-term financing and 

liquidity needs. In fact, Congress specifically exempted nonfinancial corporations 

from having to use their own capital for unproductive purposes in other contexts, 

such as the mandatory margining of derivatives transactions. Sidelining productive 

capital through regulatory requirements diverts funding from investment in business 

expansion and ultimately costs jobs. Moreover, Congress felt it unnecessary to 

include additional reforms for money market funds in the Dodd-Frank Act as the 

SEC had already enhanced regulations under its Rule 2a-7 in 2010. 

As a result, we strongly urge you to direct financial regulators to conduct a 

study of major regulatory initiatives for cumulative impacts on all financial 

institutions, their customers, and economic growth, which is a key recommendation in 

our 2017 agenda ReJtartinf the Growth Linrine: A Pian to Reform America\ Capital Marke!J. 

In fact, a recent survey from the U.S. Chamber of Commerce underscores the 

need to examine our financial services regulatory structure. The Chamber's Financing 

Growth: The Impact ~(Financial Regulation report asked more than 300 corporate fmance 

professionals, including CFOs and treasurers, to report on the impact of financial 

services regulatory reform on the availability and cost of the products and services 

most crucial to the growth of Main Street businesses. 

One key finding from the report includes the fact that access to credit remains 

their top concern. However, more than three-quarters of American companies of all 

sizes believe that the cumulative effect of financial regulations adopted over the past 

six years is making it harder for them to access the financial services they need. In 

6 See 7 U.S.C. § 2(h)(7); 7 U.S.C. § 6s(e)(4). 
88 


26007.055

addition, 79% of respondents indicate that they arc affected by changes in financial 

services regulation, resulting in 39% of respondents absorbing higher costs and 19% 

delaying or cancelling planned investments. 

Consequently, the larger point, which I know this Subcommittee appreciates, is 

that the new money market mutual fund and bank structural and capital regulation 

threatens to impose undue burdens on corporate end-users. The indirect but 

potentially even more onerous regulation of end-users through bank capital and 

liquidity requirements serves to pass on substantial new costs to corporate end-users. 

In sum, without a robust fl!lancial services system that can provide short-term 

fl!lancing, our nation cannot sustain adequate economic growth. Regulatory efforts to 

ensure financial stability must be accompanied by equally vigorous, data-driven 

analysis to make certain that Main Street companies continue to have access to the 

fl!lancial services they need. And, as in the case with the NSFR a failure to conduct 

rigorous economic analysis as required by law can result in unfair and harmful 

penalization of regular activities by nonfl!lancial corporations and other end users 

outside of the financial system. As a result, Congress must examine the consequences 

stemming from regulatory initiatives, like money market mutual fund reform and the 

NSFR, and ensure that there continues to be affordable access to short-term credit 

and other financing needs. 

Thank you and I am happy to address any questions you may have. 
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26007.056

TESTIMONY OF 

MICHAEL KONCZAL 

ROOSEVELT INSTITUTE FELLOW 

BEFORE THE SUBCOMMITIEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES COMMITIEE ON FINANCIAL 

SERVICES 

ON 

"THE IMPACT OF REGULATIONS ON SHORT-TERM FINANCING" 

DECEMBER 8th, 2016 

1 
90 


26007.057

Introduction 

ROOSEVELT 

INSTITUTE 

REIMAGINE THE RULES 

Chairman Garrett, Ranking Member Maloney and members of the 

Subcommittee, thank you for the opportunity to testify. My name is Michael 

Konczal, and I'm a research fellow at the Roosevelt Institute, where I lead our 

project on reforming the financial sector. Previously, I was a financial engineer at 

Moody's KMV, a leading provider of quantitative credit analysis tools to lenders, 

investors, and corporations. The Roosevelt Institute is the non-profit partner of 

the Franklin Roosevelt Presidential Library. Inspired by the legacy of Franklin and 

Eleanor Roosevelt, the Roosevelt Institute reimagines America as it should be: a 

place where hard work is rewarded, everyone participates, and everyone enjoys 

a fair share of our collective prosperity. We believe that when the rules work 

against this vision, it's our responsibility to recreate them. 

The financial crisis showed us that the rules of the financial system weren't 

sufficient to prevent a crisis. It also showed us that while the financial system had 

become bigger and more profitable, making a greater contribution to inequality, it 

had also become less efficient than it was 100 years ago. Our goal is to identify 

the rules that will create a financial system that works for everyone in the 

economy. 

2 
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26007.058

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, the 

primary legislative response to the 2008 financial crisis, is the first step toward 

this goal, and has had many important accomplishments in this regard. It has 

increased stability among the major banks, with risk-weighted capital at the 

largest banks doubling since the crisis, alongside major improvements in liquidity, 

leverage, and stress-testing requirements. Advancements in single-point-of-entry 

technique by the FDIC will help ensure a failing financial firm can be eliminated 

without extensive panic and contagion. Dodd-Frank has also brought 

transparency and competition to the derivatives markets, where 75 percent of 

index credit default swaps and 53 percent of interest rate derivatives now trade 

through swap execution facilities. 1 And it has centralized consumer protection 

functions, previously dispersed among nearly a dozen different agencies, in the 

Consumer Financial Protection Bureau, whose supervision and enforcement 

work has brought $11.7 billion in relief to consumers.2 

One of the major drivers of the financial crisis was a panic in short-term capital 

lending markets, a group of entities known as "shadow banking." Here we refer 

to shadow banking as financial activity that follows the function of traditional 

banking, especially creating credit by funding long-term and illiquid assets with 

short-term, runnable, liquid debt that acts like deposits. What distinguishes these 

activities is that they do not have explicit banking regulations or access to deposit 

insurance or emergency lending from the Federal Reserve. Often they are 

regulated through securities law, which emphasizes disclosures and enforcement 

over systemic, prudential regulations.3 

1 Financial Stability Oversight Council. "2016 Annual Report." 2016. 2 Consumer Financial Protection Bureau. "Consumer Financial Protection Bureau: 

Enforcing federal consumer protection laws." July 2016. 3 Gorton, Gary B. Slapped by the invisible hand: The panic of 2007. Oxford University Press, 

2010. 

3 
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26007.059

One of the primary elements of the shadow banking market is money market 

mutual funds, or money market funds (MMFs), whose collapse in the aftermath of 

the failure of Lehman Brothers was a defining moment for the panic. The reform 

of MMFs is thus an essential part of Dodd-Frank. Substantial progress has been 

made so far, but reforms to the short-term lending markets can and should go 

further. 

Money Market Funds 

Money market mutual funds are a class of mutual funds that invest in short-term 

debt instruments, including commercial paper, Treasuries, repurchase 

agreements, federal funds, and certificates of deposits. They are registered 

under the Investment Company Act and regulated pursuant to rule 2a-7 under 

the Act. They pay a dividend reflecting short-term interest rates, are redeemable 

on demand (considered a cash equivalent on bank balance sheets), and seek to 

maintain a stable net asset value (NAV). These features of MMFs stem from two 

important exemptions the SEC introduced in 1983. MMFs are allowed to value 

their securities using "amortized cost," which allows them to value their securities 

at cost plus premiums and discounts, as well as the "penny-rounding" method of 

pricing, which allows them to absorb normal volatility by rounding to the nearest 1 

percent (I.e. one penny of a dollar). This combination of liquidity, stability, and 

payments makes them an attractive investment vehicle, but it also subjects them 

to destabilizing runs.4 

The growth of MMFs since the late 1970s has been rapid. Their size peaked at 

$3.8 trillion immediately before the crisis before falling rapidly and leveling off at 

$2.7 trillion now. 

4 For background see: Securities, U. S., and Exchange Commission. "Money Market Fund 

Reform; Amendments to Form PF." (2013). 

4 
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The features that distinguish MMFs from other investment vehicles also make 

them act just like commercial banks prone to runs, as we experienced during the 

financial crisis. However, they are not regulated like banks. Indeed, regulatory 

arbitrage has been built into MMFs since the beginning. 

Money Market Funds as Regulatory Arbitrage 

As a legal matter, MMFs function as mutual funds and are regulated as such. But 

as an economic matter, MMFs share functions identically to bank deposits. They 

allow for investments to be liquidated at any time at par, with the expectation that 

they will return the capital amount invested plus interest. They also invest in 

wholesale credit markets, and have no ability to recover value lost through 

defaults by retaining earnings. They blur the line between these two regulatory 

worlds of securities and banking law.5 

The history of MMFs has always been tied to this regulatory arbitrage. They 

originated as a way of working around Regulation Q, a Depression-era limitation 

5 Armour, John, et al. "Principles of Financial Regulations." Oxford University Press, 2016. 

5 
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on the interest rates banks could charge. As former Federal Reserve Chairman 

Paul Volcker has recently noted, "I was at the Federal Reserve [Board] when 

[MMFs] were born. It was obvious at the time that these products were created to 

skirt banking regulations. The first of these Funds to require a bailout by a 

corporate parent in order to avoid 'breaking the buck' was in 1980."6 

Others noted that MMFs potentially violated the then-active Glass-Steagall 

prohibition on securities firms engaging in banking activities. Glass-Steagall 

prohibited securities firms, such as a MMFs, from engaging "at the same time to 

any extent whatever in the business of receiving deposits subject to check." 

Researchers at the time noted this "crack" between securities firms and deposit 

banking, though Congress and regulators ultimately took a passive stance 

toward the growth of MMFs.7 

Congress and regulators did not take it upon themselves to regulate MMFs under 

a prudential regulatory umbrella suitable for banking activities, but instead left the 

SEC as their primary regulator. The SEC's tools primarily consisted of mandates 

and disclosures, yet these tools turned out to be insufficient to deal with runs and 

the financial crisis. 

History of Runs in Money Market Funds 

This institutional setup created the conditions for massive runs on MMFs during 

the financial crisis. This risk had been covered up previously because of the 

ability of MMFs' sponsor funds to provide funds to backstop losses, amounting to 

a de facto capital injection and backstop. 

6 Paul Volcker, Comment Letter to the SEC 2-3, Feb. 11th, 2011. 7 John A. Adams, Money Market Mutual Funds: Has Glass-Steagall Been Cracked?, 99 

BANKING L.J. 4, 11 (1982): 4. 

6 
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This backstop has been a consistent feature of the MMF landscape since their 

growth, unique among mutual funds. There have been at least 11 financial 

events that have required fund sponsors to provide support, occurring in 1989, 

1990,1991,1994,1997,1999, and 2001, with researchers recording over200 

instances of such support.8 

It was only a matter of time until there was a loss significant enough that MMFs' 

sponsors funds couldn't backstop the losses. When Lehman declared bankruptcy 

on September 15, 2008, the MMF Reserve Primary Fund held 1.2 percent of the 

fund's total $62.4 billion assets in Lehman. That morning the fund had $10.8 

billion in redemption requests. State Street, the custodial bank, stopped an 

existing overdraft facility previously designed to help meet those requests, within 

hours. Investors requested an additional $29 billion throughout the rest of that 

day and the next. 

After the Primary Fund "broke the buck," MMFs with no known Lehman exposure 

experienced runs. This interconnectedness and contagious panic spread rapidly 

across MMFs. Within a week, investors in prime MMFs withdrew $349 billion, 

with that headed for funds invested in Treasuries. Those funds had to turn people 

away. This panic, in turn, dramatically increased the costs of short-term 

borrowing, which disrupted payments and companies dependent on commercial 

paper markets.9 

8 See: Securities, U. S., and Exchange Commission. "Money Market Fund Reform; 

Amendments to Form PF." (2013), and Financial Stability Oversight Council. Proposed 

Recommendations Regarding Money Market Mutual Fund Reform. 2012. 9 Financial Crisis Inquiry Commission, and United States. Financial Crisis Inquiry Commission. 

The financial crisis inquiry report: Final report of the national commission on the causes of the 

financial and economic crisis in the United States. PublicAffairs, 2011. 

7 
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Removing Floating NAV Would Increase Systemic Risk and Reduce 

Transparency 

In subsequent years, the SEC has imposed several regulations on MMFs 

designed to increase their stability and reduce their likelihood of runs. The most 

important rule, imposed in 2014, requires prime institutional MMFs to use a 

floating NAV instead of a stable one. 

H.R. 4312 would remove the floating NAV requirement required of both 

institutional prime and institutional municipal MMFs that emerged out of the 

SEC's 2014 rule-writing. This is a move in the wrong direction, reducing 

transparency and increasing the threat of a systemic panic by returning to the 

regulatory regime that existed before the crisis. 

First, it's important to understand why a floating NAV will help reduce the risks of 

a financial panic. With a floating NAV, there is less incentive for mass 

withdrawals under stressed conditions. There is no "cliff effect" of breaking the 

buck that comes from the penny-rounding rule. A floating NAV greatly reduces 

the first-mover incentive, as there is no moment at which investments are 

redeemable at par and then they are not. Indeed, regular, small fluctuations 

would make investors less likely to panic. A floating NAV also increases fairness: 

Losses are mutualized, rather than concentrated among fate movers while firstmovers receive their investments at par. 

There is also an issue of transparency. A floating NAV will give investors a 

clearer understanding of the risks they face and the movements in the MMF's 

portfolio. Investors have an opaque understanding of both the assets themselves 

as well as the support they could receive from their sponsors, leading to an 

expectation of stability and at-par withdrawal that may be unfounded. A floating 

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NAV makes it clear that investors will bear losses, rather than hope for ad hoc 

capital interjections by the sponsoring funds or bailouts from the government. 10 

Redemption Gates and Fees Aren't a Sufficient Reform 

There is also the issue of retaining liquidity fees and redemption gates without a 

floating NAV. While the fees and gates structure can help mitigate risks faced in 

times of stress with a floating NAV, without one they are just as likely to increase 

the incentives to run. Knowing that gates on redemptions are potentially in play, 

investors could run even faster to remove their funding in times of stress. These 

important tools for preventing runs work best alongside, rather than as a 

replacement for, a floating NAV. 

Disclosures Won't Work to Prevent Money Market Systemic Risk 

H.R. 4216 has a provision that tries to educate investors that these instruments 

do not function as deposits and their investments are subject to losses. H.R. 

4216 requires that "[n]o principal underwriter of a redeemable security issued by 

a money market fund nor any dealer shall offer or sell any such security to any 

person unless the prospectus of the money market fund and any advertising or 

sales literature for such fund prominently discloses such prohibition against direct 

covered federal assistance." 

This approach defined much of the SEC's regulatory response to MMFs in the 

1990s. The SEC has, at several times, adopted rule-making that emphasized 

that depositors remain at risk for runs and losses. 

1

° Financial Stability Oversight Council. Proposed Recommendations Regarding Money Market 

Mutual Fund Reform. 2012. 

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In 1991, the SEC "[r]equire[d] the cover page of [MMF] prospectuses, and fund 

advertisements and sales literature, to disclose prominently that an investment in 

a [MMF] is neither insured nor guaranteed by the U.S. Government and that 

there is no assurance that the fund will be able to maintain a stable per share 

[NAV]." 

In a 1996 amendment, the SEC "acknowledges that none of its rules can 

eliminate completely the risk that a [MMF] will break a dollar as a result of a 

decrease in value of one or more of its portfolio securities. Thus, in adopting 

these amendments, the [SEC] is prescribing minimum standards designed not to 

ensure that a fund will not break a dollar, but rather to require the management of 

funds in a manner consistent with the investment objective of maintaining a 

stable [NAV]."11 

Neither of these measures were sufficient to prevent the crisis of 2008, either in 

exposure to Lehman or in the panic that followed across MMFs immediately 

afterward. Disclosures are not a sufficient substitute for prudential banking 

regulations. 

Liquidity is Not Stopping the Economy 

There are many concerns about capital market liquidity weakening the economy 

and future growth. However we do not see this in bond market liquidity 

measures. According to analysts at the New York Fed, "price-based liquidity 

measures-bid-ask spreads and price impact-are very low by historical 

standards, indicating ample liquidity in corporate bond markets." It is not clear 

whether or not there is a liquidity problem within the capital market in general. 

11 56 Fed. Reg. 8113 (Feb. 27, 1991) and Release 21,837 (Mar. 28, 1996), at 25, as reprinted in 

Barr, MichaelS., el al. "Financial Regulation: Law and Policy." Foundation Press. (2016) 

10 
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Experts disagree on how the capital markets are evolving in response to the 

trauma of the crisis. Also the relationship between reduced liquidity in bond 

markets and overall corporate investment is complicated and not straightforward. 

However these do not matter for the real economy, because any potential 

reduced liquidity isn't showing up in measures that would affect corporate 

decision-making.12 

Access to Finance Is Not Stopping the Economy 

Part of the reason for these new measures and other concerns about short-term 

funding is the idea that lack of finance is holding back the recovery and further 

expansion of the economy. This lack of finance is understood to be the result of 

Dodd-Frank, especially its requirements on capital and liquidity. Yet there is no 

indication that financing is a constraint on the economy. 

We do not see this in the survey data. In surveys conducted by the National 

Federation of Independent Business (NFI B), only 2 percent of small businesses 

indicate financing and interest rates are the single most important problem they 

face. Only 4 percent of small businesses indicate their borrowing needs were not 

satisfied in the past three months, a number that has trended downward since 

2011. Instead, the NFIB's researchers find that "record number of firms remain 

on the 'credit sidelines', seeing no good reason to borrow."13 This is mirrored in 

the Federal Reserve's Senior Loan Office Survey on Bank Lending Practices; 

there has been a continued reduction of overall spreads in recent years in 

commercial and industrial loans. 14 

12 Adrian, Tobias, et al. "Has US Corporate Bond Market Liquidity Deteriorated?." Liberty Street 

Economics (2015). 13 NFIB Small Business Economic Trends, William C. Dunkelberg, Holly Wade, October 2016 14 "Senior Loan Officer Opinion Survey on Bank Lending Practices Chart Data." Federal 

Reserve Board. Accessed 6 Dec. 2016. 

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We also do not see this financial constraint in corporate governance decisionmaking. The corporate governance literature gives us a hierarchy of substitutable 

funding options for businesses looking to expand, usually a range from retained 

earnings to borrowing to issuing equity. If Dodd-Frank were reducing the ability to 

borrow, we would expect firms to retain more earnings. However, total 

shareholder returns for the S&P 500 set a 12-month record high in March 2016 at 

$974.6 billion, with those companies also sitting on a record $1.347 trillion in 

cash. 15 In 2014, spending on buybacks and dividends was larger than combined 

net income among all publicly traded non-financial U.S. companies for the first 

time outside of a recession. 16 Total shareholder payouts in 2014 were more than 

$1.2 trillion, while money moving from investors to businesses in the form of 

IPOs and venture capital was less than $200 billion. As a result, for every dollar 

invested in the real economy by finance, six dollars are taken out. 17 

Estimates by Goldman Sachs also indicate that that if $200 billion were 

repatriated as part of a corporate tax holiday, $150 billion would be used for 

stock buybacks. Jim McCaughan of Principal Global Investors notes, "I don't 

think availability of funds has been a jar issue for U.S. capital investment."18 

Whether or not we should be worried about these trends, they clearly indicate 

that financing is not blocking expansion. 

This also isn't relevant for declining rates of entrepreneurship and small-business 

formation. The trend toward declining entrepreneurship is a decades-long 

phenomenon, going back to 2000 and perhaps even the 1980s. Rates of 

15 Mahmudova. Anora. "U.S. companies spent record amount on buybacks over past 12 

months." Marketwatch, 22 June 2016. 16 Brettell. Karen. et al. "The Cannibalized Company." Reuters, 16 Nov. 2015. 17 Mason, J. W. "Understanding Short-Termism." Roosevelt Institute. (2015) 18 Wigglesworth, Robin. "Where will corporate America's overseas cash pile go?" Financial 

Times, 5 Dec. 2016. 

12 
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entrepreneurship are closely linked with business cycles; studies have found that 

unemployment leads to weaker labor market fluidity, 19 while areas with the 

weakest labor market fluidity correlate with the weakest wage growth, pushing 

towards demand-side, rather than supply-side, factors?0 Newer research shows 

recessions cause fewer business formations that also have lower rates of 

survival, yet capital intensity is not associated with startup firm survival, implying 

access to capital is not the driver.21 

Money Market Mutual Funds: What More Can Be Done? 

Even with the work done, experts rightfully remain concerned about the 

destabilizing elements in the shadow banking markets, with MMFs remaining a 

specific concern going forward. The floating NAVis a step in the right direction to 

bring greater transparency and resilience to this market, but policymakers must 

consider additional efforts to ensure that MMFs don't precipitate or amplify a 

future crisis. Avenues for future reforms of MMFs that require future investigation 

include: 

-Require all MMFs and their close substitutes to publish a floating NAV and be 

subject to appropriate liquidity buffers. This incremental recommendation of the 

Volcker Alliance also suggests eliminating the ability of assets with less than 60 

days to be accounted with amortized cost.22 

19 Molloy, Raven and Smith, Christopher L. and Trezzi, Riccardo and Wozniak, Abigail, 

Understanding Declining Fluidity in the U.S. Labor Market. FEDS Working Paper No. 2016-15. 

Fo16) ° Konczal, Mike, and Marshall Steinbaum. "Declining Entrepreneurship, Labor Mobility, and 

Business Dynamism: A Demand-Side Approach." Roosevelt Institute. (2016) 21 Moreira, Sara. "Firm Dynamics, Persistent Effects of Entry Conditions, and Business Cycles." 

Fo15) 

2 "Unfinished Business: Banking in the Shadows." The Volcker Alliance, Dec. 2016. 

13 
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- Regulate all MMFs as specialized "narrow banks." MMFs engage in all the 

activities of credit intermediation, yet do not have the same regulatory umbrella 

as traditional banking. MMFs that wish to continue offering bank deposit services, 

such as withdrawals on demand at par and a stable NAV, should reorganize as 

special-purpose banks, with prudential regulations as well as some level of basic 

insurance and access to lender-of-last resort facilities to prevent runs.Z3 

Meanwhile, further regulations and actions are needed to ensure shadow 

banking overall poses less systemic risk to the financial markets. Such potential 

actions include: 

- Establishing a system of "minimum haircuts" for securities financing 

transactions, such as repos, reverse repos, securities lending and borrowing, and 

securities margin lending. These transactions are important for capital markets, 

but they also hold the danger of creating panics and fire sales. These haircuts 

would require the posting of additional margins to lenders, which in turn would 

reduce leverage across the shadow banking sector.24 

- Reform the bankruptcy code to revoke the repurchase agreement safe harbor 

rule. Currently, bankruptcy carves out repurchase agreements and derivative 

contracts from the Chapter 11 bankruptcy process, making them not subject to 

the automatic stay that normally prevents runs. Many academics believe this 

carve-out, established in the Bankruptcy Abuse Prevention and Consumer 

Protection Act of 2005, was a major driver of the growth of these financial 

instruments and played a role in the sudden collapse of Lehman Brothers.25 

23 Gorton, Gary, and Andrew Metrick. "Regulating the shadow banking system." Brookings 

Papers on Economic Activity 2010.2 (2010): 261-297. 24 Tarullo, Daniel K. Thinking Critically about Nonbank Financial Intermediation: a speech at the 

Brookings Institution, Washington, DC, November 17, 2015. No. 879. 2015. 25 Kathryn Milani. "Reining in the Shadow Banking System." Roosevelt Institute. 2016. 

14 
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- More aggressively use the Federal Reserve's balance sheet to crowd out 

private-sector maturity transformation. As Robin Greenwood, Samuel Hanson, 

and Jeremy Stein argue, "a plentiful supply of central-bank liabilities-e.g., 

interest-bearing reserves or overnight reverse repurchase agreements (RRP)-

can reduce the economic incentives for private-sector intermediaries to engage 

in excessive amounts of maturity transformation." Much of shadow banking is 

dependent on institutional needs for short-term, informationally-insensitive. 

money-like instruments, and the Federal Reserve is better positioned than the 

shadow banking sector to provide this market need.26 

Conclusion 

Thank you for the opportunity to appear at this hearing. I look forward to your 

questions. 

26 Greenwood, Robin, Samuel G. Hanson, and Jeremy C. Stein. "The Federal Reserve's 

balance sheet as a financial-stability tool." Designing Resilient Monetary Policy Frameworks for 

the Future," Jackson Hole Symposium: Federal Reserve Bank of Kansas City. 2016 

15 
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sifma· 

Invested America 

Written Testimony of Mr. Robert Toomey 

On behalf of the Securities Industry and Financial Markets Association 

before the U.S. House of Representatives 

Committee on Financial Services 

Subcommittee on Capital Markets 

Hearing entitled "The Impact of Regulations on Short-Term Financing" 

December 8, 2016 
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Chairman Garrett, Ranking Member Maloney, and distinguished members of the 

Subcommittee, thank you for providing me the opportunity to testify on behalf of the Securities 

Industry and Financial Markets Association (SIFMA) 1 and to share our members' perspective on the 

impact of regulations on the capital markets broadly and the short-term funding markets more 

specifically. SIFMA applauds this Committee's focus on ensuring that an appropriate balance is 

struck between regulation and growth through an evaluation of the intended and unintended 

consequences of the post-crisis reforms. Much of the regulation that has been implemented seeks 

to address key contributors to the financial crisis and has made both banks and the broader financial 

system safer and sounder through new heightened prudential standards and higher and better quality 

capital, leverage and funding rules. In addition, the Basel Committee, the Financial Stability Board, 

and several U.S. regulators continue to seek additional reforms that have yet to be fully implemented 

and whose effects are not yet baked into the system or the cost of capital. 

It is often noted by this Committee that the U.S. financial markets are characterized by their 

unparalleled size, depth, dynamism, diversification, and resiliency. Our capital markets allow the 

Federal government, state and local governments, corporations and investors quick and efficient 

access to financing. Moreover, the depth and liquidity of U.S. secondary markets, particularly the 

fixed income markets, permit those entities to access capital and credit with greater availability at a 

lower cost over time. 

1 SIF~L\ is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose 

nearly 1 million employees provide access to the capital markets, raising over $2.5 t.rillion for businesses and 

municipalities in the U.S., serving clients with over $20 trillion in assets and managing more than $67 trillion in assets for 

individual and institutional clients including mutual funds and retirement plans. SIFI\{A, with offices in New York and 

Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFl\L\). For more 

information, visit http://www.sifma.org. 

2 
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Policymakers have clearly stated that many of the post-crisis reforms were designed to solve for 

what they saw as too little capital, lax underwriting standards and excess market liquidity that was 

insufficient during periods of credit stress. But recently, market participants and observers have 

raised concerns that the reforms may have resulted in reductions in market liquidity beyond what 

was intended, particularly for the high-quality liquid assets that underpin the financial system and our 

economy. 

We see the resiliency and depth of market liquidity as a critical objective for policymakers and 

market participants alike. Again, the depth and liquidity of U.S. capital markets is among the primary 

reasons it leads the world in size and use, and to great benefit to the broader economy. If market 

participants' ability to access liquidity is impaired, particularly during stress periods, it will negatively 

impact functioning of financial markets with broad ramifications for the general economy. Indeed, 

this is what we experienced in 2007-2008 when markets froze, particularly short-term markets, 

putting severe funding pressure on both the private and public sector. Regulations that are riskinsensitive, and regulations that target the same risk multiple times through multiple rules, weigh 

particularly heavily on low-risk assets. While the broad contours of the new capital and liquidity rules 

have been known for some time, the implementation phase is just gathering force and indeed, some 

rules remain to be proposed and finalized. 

Assessment of the Regulatory Framework Needed 

As such, we believe now is an appropriate time to assess the coherence of the existing framework, 

and the degree to which overlapping rules target the same risks. We are thus recommending an 

assessment of coherence and cumulative impacts, on a forward-looking basis, to identity cases where 

there may be unnecessary duplication or conflicts between specific regulatory requirements and 

broader policy goals. Such an assessment could identity opportunities to add liquidity back to the 

3 
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market without adversely affecting the safety and soundness of individual banks or of the overall 

financial system. In tins testimony, we identify potential, but not exhaustive, areas of concern. 

First, we believe that the impact of risk-insensitive ruies on client trades that are designed to reduce 

risk is inconsistent with the policy objectives of capital and prudential reguiations. 

Second, in looking at the fuii rule-set in place today and what we expect to come online in the near 

future, we find duplications and inconsistencies between the rules that together could have negative 

effects. 

Third, and related to our first point, the treatment of low-risk, high-quality assets like cash and cash 

equivalents varies depending on the ruie and often does not reflect their low-risk or risk-free status. 

Finally, the assessment should exan1ine the calibration of specific mles that are designed to serve as 

backstops but that actually operate as binding constraints. 

Where new regulations such as the leverage ratio and Net Stable Funding Ratio (NSFR) interact with 

other rules and changes in market structure to further reduce market liquidity, users of financial 

services couid be prevented from achieving their investing, capital-raising or risk-management goals, 

undermining the critical role of capital markets in the economy. While it has been observed that the 

average size of trades has shrunk during the implementation of the post-crisis regulatory reform 

package, indicating less immediacy of execution and higher execution costs in most asset classes, 

investors have shown an ability to absorb some of the execution risks in day-to-day markets. 

However, under the new ruies they may not be able to transact effectively in stressed markets, when 

the need to sell is acute and delays can drive sharper price dislocations. 

4 
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Impact of Regulation on the Repo Market 

Short-term funding markets play an essential function in the financial system. Indeed, as we have 

noted most recently in our comment letter on the proposed Net Stable Funding Ratio, "[r]epo 

transactions play a vital role within the financial system and underpin the functioning of the capital 

markets, including the market for U.S. Treasury securities, collateral management and money 

markets."0 Repo markets provide the necessary grease that allows the U.S. capital markets to remain 

the most efficient and liquid in the world so that businesses, municipalities and the Federal 

government can access needed credit at the lowest cost over time. A well-functioning repo market 

decreases the overall cost of borrowing and provides a mechanism for the efficient management of 

short-term cash and collateral requirements.' 

Investors rely on the repo market as an essential part of their activities. Reverse repos are a safe way 

to invest cash, while repos allow investors to finance inventory, enhance yield in a safe and proven 

manner and quickly generate cash needed for redemptions. 

Several significant regulations, some of which are not fully in place yet, have been proposed and/ or 

adopted that have a direct impact on the repo market and other short-term funding markets. While 

some of these impacts are clearly intentional and reflect a policy concern for overreliance by 

financial institutions on short-term funding, we believe that as a result of the cumulative impact of 

these regulations, the repo market is being impacted in ways that do not reflect either the risk to the 

financial system or to individual firms. 

2 SIF1lA with other trade associations comment letter on NSFR Proposed Rule, August 5, 2016. available at 

htt:p://,vww.sifma.org/issues/item.aspx?id=8589961839 

3 A robust repo m.1.rket aids in limiting settlement fails by pro'\iding a ready supply of securities to market participants to 

alleviate short supplies or operational issues that may occur from time to time. 

5 
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Given the overall importance of the repo tru~rkets to the cash markets, particularly the markets in 

ftxed income securities, as a source of securities and as a repository for short-term investable cash, 

constraints on the liquidity in the rcpo market constrain liquidity in the cash markets to the ultimate 

detriment of the users of capital markets-the Federal government, municipalities and businesses 

both large and small. 

Other rules, while not directly targeting the reliance of finns on short-term funding, will also have an 

impact on these markets by creating demand for a liquid repo market at the same time regulations 

are causing market participants to limit repo intermediation. Each of these rules may impact the 

short-term funding markets in different ways but the overall interaction of these regulations-and 

thus any unintended consequences for efficient capital formation-is unclear. Indeed, the aggregate 

impact of these reforms can be far greater than the intended impact of the individual reforms. These 

aggregate impacts can result in less access to credit, and higher costs for corporates, governments, 

and investors, impeding economic growth. 

Within the short-term funding markets, and in response to the ftnancial crisis, much has been done 

to improve resilience and lessen systemic risk. Reforms in the tri-party repo market, for example, 

eliminated over 95'Yo of the significant intraday credit that was being extended by the clearing banks 

to dealer firms. This development lessens the risk that the market poses to the broader financial 

system. Individual firms, heeding the lessons of the financial crisis, improved risk management 

practices and recognized the need to diversity funding sources and to provide for a variety of 

maturities for repo transactions, thus lessening reliance on overnight funding. 

Publicly available data illustrates the changing size and profile of the repo market, both in reaction to 

changes in prudential regulation and through the adoption of changed risk management practices. 

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Aggregate repo volumes in the U.S. have contracted significantly since 2008: Federal Reserve data 

shows that aggregate daily repo volumes in the U.S. have contracted from $3.9 trillion in 2008 to 

$2.4 trillion in 2014.' In addition, the mix of collateral subject to outstanding repos has changed, 

with a larger portion of non-Treasury securities now making up the collateral mix-' 

Supplementary Leverage Ratio 

The financial crisis of 2008-2009 revealed weaknesses in the prudential framework for banks. As 

previously noted, international and U.S. bank regulators along with the Congress have sought to 

strengthen this framework through a number of initiatives. There is widespread agreement that 

prudential reforms put in place following the financial crisis, aimed at both capital and liquidity, have 

helped create a system that is now more resilient and better able to withstand shocks. 

While addressing some of these weaknesses through a revision to the risk-based prudential 

framework, policymakers also focused on strengthening the leverage ratio. The Supplementary 

Leverage Ratio (SLR) was first proposed in the U.S. in 2012 and finalized in 2013. U.S. banks 

subject to the SLR began disclosing and reporting ratios in 2015, and must be compliant by 2018. 

Broadly speaking, the SLR seeks to create a prudential back-stop to the enhanced risk-based capital 

requirements. The ratio, in summary, contains two measures: a numerator that represents the tier 1 

capital of the institution and a denominator that represents total exposures. Total exposures for 

purposes of the SLR includes on-balance and off-balance sheet assets, including repo-style 

4 See Global financial markets liquidity study, PwC, (August 2015), available at htt;p://"rww.pwc.com/gx/en/financialserviccs /pu b1icadons /assets I global-financial-market -liquidity-study.pdf 5 See OFR Working Paper, "Do Higher Capital Standards _c\lways Reduce Bank Risk? The Impact of the Basel Leverage 

Ratio on the U.S. Triparty Repo Market.'' Meraj Allahrakha,Jill Cetina and Benjamin Munyan (November 2016) (OFR 

Paper): " ... [rlollowing the 20 l2 introduction of the [SLRJ, broker-dealer affiliates of [bank holding companies] 

decreased their repo borrowing but increased their use of rcpo backed by more price-volatile collateral." 

7 
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26007.078

transactions. Notably, the SLR does not risk weight the assets in the exposure measure. Thus, the 

measure included in the exposure denominator treats all assets the same for SLR requirements. For 

instance, Treasury securities and cash are treated the same as unsecured loans and other more 

volatile securities. 

While the SLR is intended to be a backstop measure to risk-based requirements, for many 

institutions it may become the binding constraint. This has implications for the smooth functioning 

of the short-term funding markets, particularly tbe repo market for U.S. government securities. As 

noted, the SLR is not risk-based and the calculation includes exposures for all repo transactions and 

makes no distinction between repos (and other financings) involving U.S. Treasury securities and 

those involving other assets. This creates two significant issues for the repo market: (1) it results in 

higher capital costs for dealer intermediation in the Treasury repo market; and (2) incentivizes for 

the substitution of Treasury repos with repos using collateral with a higher risk proflie. 

The SLR has sharply increased the cost for use of a bank's balance sheet in a traditional matchedbook repo arrangement. On a typical repo trade, a bank/ dealer may lend cash to a counterparty 

who secures the loan \Veith Treasuries. The Treasuries may then be financed by the bank/ dealer 

through another repo at a, usually, lower financing rate. If a counterparty fails, the position can be 

liquidated with very low risk to the bank/ dealer because it is almost fully secured or over-secured by 

cash or safe Treasuries. The SLR makes this important sequence of transactions significantly more 

expensive from a capital perspective. For the largest U.S. banks, the SLR now requires 6% capital 

for all assets regardless of risk. 6 Safe Treasuries and cash are subject to the same capital treatment as 

less safe assets. As a result, intermediaries in the repo market for Treasuries generally a low 

6 We include the impact of the U.S. G-SIB surcharge as implemented in the U.S. which also measures reliance of shortterm wholesale funding such that a banking organization that engages in a large number of matched-book repos which 

have a higher G-SIB surcharge. 

8 
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margin business would have to require profits for Treasury repo that would be comparable to 

transactions in riskier assets. Dealers associated with banks subject to the SLR thus have hard 

balance sheet constraints that may limit the ability to intermediate some repo classes.' 

Liquidity Coverage Ratio 

The Liquidity Coverage Ratio (LCR) has led to an additional stress on liquidity in the repo market by 

imposing requirements on subject institutions to have on hand sufficient high quality liquid assets 

(HQLA) to weather a short-term (30 days) liquidity stress event. Thus, demands for HQLA, in 

particular U.S. Treasury securities, '"ill increase because of the LCR. Further, during a market stress 

firms can be expected to hoard HQLA to meet liquidity requirements and not make such securities 

available in the repo market, adding additional liquidity pressures. Finally, demand for HQLA from 

banks and dealers will compete with money market funds, particularly government-only funds. 

These funds have increased significantly in size since the implementation of recent money market 

reforms and will add to demand pressures in an environment where, due to other requirements, repo 

supply may be diminishing. 

Net Stable Funding Ratio 

The proposed NSFR would further unduly add costs to safe matched-book activities. Under the 

NSFR proposal, repos and reverse repos would be subject to asymmetric treatment in that shortterm funding from financial sector entities received by a subject ent-ity is assigned 0 percent 

Available Stable Funding (ASF), whereas short-term lending to financial sector entities by a subject 

entity is assigned a 10 or 15 percent Required Stable Funding (RSF) factor (depending on the quality 

of the assets underlying the repo transaction and whether the subject entity has rights of 

7 Sl± OFR Paper 

9 
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rehypothecation with respect to the underlying assets). Thus, the proposed rule would require a 

subject entity to hold stable funding against a repo book that is perfectly matched, effectively 

imposing yet another tax on these transactions, even though the repo market for U.S. Treasuries and 

related assets should be considered low risk. Elimination of the asymmetrical treatment of the two 

legs of the matched transactions would alleviate this additional pressure on this low risk activity. 

Volcker Rule 

Finally, the Volcker Rule, with its limits on proprietary trading, exerts further liquidity pressure in 

the cash markets. SIFMA has long held the position that the Volcker Rule was a solution in search 

of a problem and that it did not address issues identified in the financial crisis. SIFMA members 

have implemented the Volcker Rule requirements, including the restrictions on proprietary trading, 

over the last several years. Implementation challenges remain as firms continue to put in place 

policies and procedures that would recognize the distinction between prohibited prop trading and 

permitted market making activities. We believe the approach to market making adopted by the Final 

Rule is complex and may make it difficult for firms to distinguish between permitted and proscribed 

activities. Thus, firms may limit their intermediary activities even more to ensure overall compliance 

with the prop trading restrictions. 

In addition, implementation of the Volcker Rule over the last few years has indicated the need for a 

more coordinated approach to regulatory cooperation, particularly with respect to regulatory 

interpretations and supervision. A more transparent and cooperative regulatory /interpretive 

oversight regime would aid firms as they become compliant and limit the doubts that may cause 

further pull back from needed customer activity. 

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Conclusion 

The short-term funding markets remain vitally important to the efficient functioning of our capital 

markets. In response to lessons learned from the financial crisis and regulatory prescriptions, the 

repo market has shrunk and firms' reliance on short-term wholesale funding has been reduced. 

However, through overlapping and non-risk sensitive rules regulators may be impinging on valuable 

liquidity and efficiencies tbis market provides and lessening liquidity in the cash markets. That is 

why it is essential that an assessment of the cumulative impact and interaction of these rules is 

undertaken to ensure harm is not being done to this crucial market. 

Through the leverage ratio requirements firms are facing clear and rigid limits on the size of their 

balance sheets and this inelasticity, particularly with respect to safe U.S. Treasury securities and cash, 

will limit important dealer intermediation. Indeed, we are seeing these impacts now as the size of 

the repo market decreases and the mix of collateral changes. Further pressures on Treasury repo 

include requirements to hold HQLA --a requirement which will create further significant pressures 

during stressed situations -- recent changes to the money market rules which create more demand 

for U.S. Treasury repo, and the proposed NSFR which imposes yet another tax on safe matched 

book Treasury repo activity. 

\XI e believe that given the experience and market data from the introduction of these new 

approaches, the time is right to provide a wholesale review of the impact and coherence of these 

requirements with a view towards moving towards a better balance of safety and soundness with 

efficiency, liquidity and capital availability. As liquidity diminishes or becomes more brittle in these 

markets, higher costs of capital may be inevitable for both the government and Main Street. 

11 
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COAliTION 

Preserving tlfoney ~\1arket Fwtd\·for Puh!ic !r!fiustnic/urc bn·e_,fment and Economic Growth 

The Honorable Scott Garrett 

Chairman 

Subcommittee on Capital Markets and 

Government Sponsored Enterprises 

Washington, DC 20515 

December 8. 2016 

The Honorable Carolyn Malone) 

Ranking Member 

Subcommittee on Capital Markets and 

Government Sponsored Enterprises 

Washington, DC 20515 

Dear Chairman Garrett and Ranking Member Maloney: 

On behalf of the Coalition for Investor Choice, I ask that the following comments be submitted 

for the record oftoday's Subcommittee hearing entitled "The Impact of Regulations on ShortTerm Financing." Thank you for your willingness to hold this hearing, which covers a topic that 

is critical to economic growth, job creation and the efficient functioning of our capital markets. 

The Coalition for Investor Choice represents the interests of nearly 250 national, state and local 

entities and financial professionals who arc issuers, borrowers and investors that support 

bipartisan legislation in Congress that will allow all investors to continue to use money market 

funds on a stable net asset value (NA V) basis. A list of those entities and financial professionals 

is attached, and their letters of support can be found at 

www.protectinvestorchoice.com/participants. 

While my comments are focused narrowly on an amendment adopted by the Securities and 

Exchange Commission (SEC) to rule 2a-7 regarding the regulation of money market funds, the 

impact of that amendment has reverberated broadly throughout the short-term funding markets. 

As you know, among the amendments to rule 2a-7 adopted by the SEC in July 2014 is a 

requirement that any money market fund, other than a fund investing only in U.S. government 

securities, which is available to investors who are so-called "non-natural persons" must transact 

using a fluctuating, or "floating" net asset value (NAY) instead of a stable $1 per share. During 

the rulemaking process, many of the organizations represented in our coalition expressed 

concerns that the rule would have far reaching consequences on the ability of non-financial 

businesses to raise short-term capital and manage cash. In particular, they warned the SEC that a 

floating NA V would not provide an incremental benefit to market stability but would, instead, do 

irreparable harm to money market fund investors, issuers and borrowers. That is exactly what 

has come to pass. 

As of the rule's October !4, 2016 implementation date, over $1.15 trillion has exited nongovernment money market funds, leaving the private sector and moving into Treasury and 

Government funds. As a result. LIBOR has spiked to its highest level since the financial market 

Coalition For investor Choke,_ Inc. - 1025 Connecticut Ave.; NW, Suite H}(}(}l W'ashington, DC 2003-6 202.828.1216- www.protcctinvcstorcboicc.com 
116 


26007.083

2 

crisis, as have rates on short-term municipal debt Prime funds, a key source of funding for 

corporations and banks, have seen a 72% drop from January 2015 while tax-exempt funds, a key 

source of funding for municipalities, universities and hospitals, have experienced a more than 

50% decline over the same period. In turn, private sector borrowing costs have risen by tens of 

billions of dollars, and municipal short-term borrowing has increased on average from under five 

basis points at the beginning ofthe year to as high as 75 basis points today. 

[nits July 20!4 final rule, the SEC argued that applying a floating NAV to just a subset of 

money market funds was needed to address an "incremental incentive to redeem" as a result of a 

first mover advantage inherent in a stable NA V fund, and to reduce the potential for unfuir 

investor dilution. But nowhere in the release did the SEC cite or provide an analysis suggesting 

that this "incremental" bene tit was worth the cost of destroying the utility of prime and taxexempt money market funds for institutional investors and with it, nearly $1.2 trillion in private 

sector capital and tens of billions more in lost interest income as businesses and other institutions 

are unable to benefit from market rates of return on their short-term cash investments. In 

essence, the SEC's effort to prevent a run on money market funds actually resulted in the largest 

run on prime and tax-exempt funds since those products were created over 40 years ago. 

There are those who rightfully point out that virtually all of the assets that have left prime and 

tax-exempt funds have moved into Government and Treasury funds, thereby maintaining this 

important cash management tool tor institutional investors. It is heartening for the money fund 

industry, which has expended significant resources lo meet the new requirements by the 

implementation date, that investors did not convert their prime and tax-exempt money market 

fund investments into bank deposits, and the fund companies will continue to earn the 

management fees needed to recoup those costs. But this is oflittle consolation to the public and 

private sector users of money market funds that no longer have access to low cost financing 

provided by money market funds, or a convenient and safe tool for obtaining market returns on 

the short-term management of money. 

H.R. 4216 would preserve the stable net asset value (NA V) for all money market fund investors~ 

and restore an investment and short-tenn financing: option that has been indispensable to 

economic growth and public infrastructure investment. It holds the SEC accountable for 

conducting realistic cost-benefit analysis by codifying Congress' intent that the SEC engage in 

appropriate day-to-day regulation while maintaining the utility of this important product to the 

investor. We urge the Members of the Subcommittee to support this important legislation. 

Thank you for the opportunity to provide the perspective of issuers, borrowers and investors on 

this important issue. 

Sincerely, 

11/W?-~ 

Vincent Randazzo 

Executive Director 

Coalition for Investor Choice, Inc. 

Attachment: Supporters ofH.R. 4216/S. 1802 
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26007.084

3 

SUPPORTERS OF H.R. 4216/S. 1802 

National Organization.~ 

American Association of Metropolitan Water Agencies 

Association of Financial Professionals 

Association of School Business Officials International 

National Association of Corporate Treasurers 

Public Finance Network: 

• Government Finance Officers Association 

• National Association of Countres 

• U.S. Conference of Mayors 

• National League of Cities 

• International City/County Management Association 

• National Association of Health and Educational Facilities Finance Authorities 

• International Municipal Lawyers Association 

• National Council of State Housing Agencies 

• American Public Power Association 

• Large Public Power Council 

State Financial Officers Foundation 

US Black Chambers, Inc. 

Alabama 

Alabama Associated General Contractors 

Alabama Road Builders Association 

Alabama State University 

American Council of Engineering Companies of Alabama 

Jason Reeves, Mayor, City Troy, Alabama 

Joint Engineers Council of Alabama 

Alabama League of Municipalities 

Todd Strange, Mayor, City of Montgomery. Alabama 

Young Boozer, Alabama State Treasurer 

League of Arizona Cities and Towns 

California 

California Housing Finance Agency 

Greater Los Angeles African American Chamber of Commerce 

Colorado 

Eagle County Board of Commissioners 

Florida League of Cities 
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26007.085

Pinellas County Housing Finance Authority 

Idaho 

Ron G. Crane. Idaho State Treasurer 

Bill Cunningham, Member. Illinois State Senate 

Chicagoland Chamber of Commerce 

City of Chicago 

Daniel J. Cronin, County Board Chairman, DuPage County 

Deborah Conroy, Member, Illinois House of Representatives 

Jim Durkin, Minority Leader, Illinois House of Representatives 

John M. Cabello, Member, Illinois House of Representatives 

Kelly Burke, Member, Illinois House of Representatives 

Kimberly A. Lightford, Assistant MaJority Leader, llhnois State Senate 

Metropolitan Mayors Caucus 

Michael E. Hastings. Member, Illinois State Senate 

Michael Frerichs, Illinois State Treasurer 

Michael J. Zalewski, Member, Illinois House of Representatives 

Natalie Manley, Member, Illinois House of Representatives 

Pat McGuire, Member, Illinois State Senate 

South Suburban Mayors & Managers Association 

Southwest Conference of Mayors 

State University Annuitants Association 

Tom Cullerton, Member, Illinois State Senate 

William D. Bums, Chicago City Council 

lst Source Corporation 

Association of Indiana Counties 

Hoosier Trust Company 

Indiana Association of Cities and Towns 

Indiana Chamber of Commerce 

Indiana County Treasurers' Association 

Massachusetts 

Bill Carpenter, Mayor, City of Brockton 

Boston City Council 

City of Boston 

City of Cambridge 

Deborah B. Goldberg, Massachusetts State Treasurer 

IBEW Local I 03 of Greater Boston 

James M. Cantwell, Member, Massachusetts House of Representatives 

Jon Mitchell, Mayor, City of New Bedford 

Joseph Connolly, Norfolk County Treasurer 

Kevin Merz, Treasurer/Collector, Ipswich, Massachusetts 

Kimberley Driscoll, Mayor, City of Salem 

Marc Waldman, Treasurer, Town of Wellesley 

Massachusetts Chamber of Commerce 
119 


26007.086

Massachusetts Housing Fmance Agency 

Massachusetts Municipal Association 

5 

New England Regional Counctl of Carpenters. Local 275 

Thomas J O'Brien, Treasurer, County of Plymouth 

Thomas P. Koch, Mayor, City of Quincy 

Worchester Chamber of Commerce 

Michigan 

Michigan Association of Counties 

Minnesota 

Association of Minnesota Counties 

Mississippi 

Lynn Fttch, Mississippi State Treasurer 

Missouri 

Missouri Association of Counties 

Missouri Health and Educational Facilities Authonty 

Sylvester "Sly" James, Jr, Mayor of Kansas City, Missouri 

NewJersev 

County of Hudson Administrator 

J. Christian Boll wage, Mayor, City of Elizabeth 

New Jersey Association of Counties 

New York 

Kenneth W. Jenkins, Legislator 16th District, Westchester County 

Mark Schroeder, Comptroller, City of Buffalo 

Medaille College 

Queens Chamber of Commerce 

Queens Economic Development Corporation 

Richard C David, Mayor, City of Binghamton 

Rochester BUt! ding and Construction Trades Council 

Seamen's Society for Children and Families 

Sean M. Ryan, Member, New York State Assembly 

Ttmothy M. Kennt.>dy, Member, New York State Senate 

Town of Cheektowaga 

Village of Williamsville 

North Carolina 

Duke Energy Corp, 
120 


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6 

Ohio Council of Port Authoriues 

Armond Budish. County Executive, CuyahO!,'ll County 

Bill Bias. Treasurer, Athens County 

Board of Commissioners, Franklin County 

Board of Commissioners, Lake County 

Bud Zappitelli, Fiscal Officer, New Albany Plain Township 

CecilTIJOmas, Member, Ohio State Senate 

Charlie Adkins, County Commission, Athens County 

Chris Burnham, President, Development Finance Authority of Summit County 

Chris Chmiel, County Commissioner, Athens County 

County Commissioners Association of Ohio 

County Treasurers Association of Ohio 

Daniel Horrigan, Mayor, City of Akron 

Denise Driehaus, Member, Ohio House of Representatives 

Development Finance Authority of Summit County 

Dominic Paretti, Board of Education, Columbus City Schools 

Dorsey Hager, Executive Secretary-Treasurer, Columbus/Central Ohio Building and 

Construction Trades Council 

Ed Leonard, Treasurer, Franklin Ohio 

Eddie Parks. President, AFSCME Retirees Subchapter I 08 

Edna Brown, Member, Ohio State Senate 

Eric Dean, Finance Director, City of North Royalton 

Fred Strahom, Minority Leader, Ohio House of Representatives 

Heather Bishoff, State Representative, Ohio House of Representatives 

!BEW Local No. 8 

Inter-University Council of Ohio 

International Brotherhood of Electrical Workers Local972 

Jack Cera, State Representative, Ohio House of Representatives 

Janine Boyd, Member, Ohio House of Representatives 

Joe Schiavom, Minority Leader, Ohio State Senate 

Kathy Hecht, Auditor, C1ty of Athens 

Kenny Yuko, Member, Ohio State Senate 

Lennie Wyatt, Prestdent, United Food and Commercial Workers Union Local 75 

Lenny Eliason, County Commissioner, Athens County 

Unda Bolon, County Treasurer, Columbiana County 

Lou Gentile, Member, Ohio State Senate 

Martm J. Sweeney, Member, Ohio House of Representatives 

Mary Jo Hudson, Member, Columbus Board of Education 

Matthew A Szol!osi, Executive Director, ACT Ohio- Affiliated Construction Trades 

Miami University ofOhw 

Michael Sheehy, Member, Ohm House of Representatives 

Nan Whaley, Mayor, City of Dayton 

Ohio Council of County Officials 

Ohio Municipal League 

Paul Worley, County CommJssJoner, Adams County 

Paula Hicks Hudson, Mayor, City of Toledo 

Pete Gerken, County Commissioner, Lucas County 

Roetze! & Andress 

Scott Hammond, Business Manager, Sheet Metal Workers Local 24 
121 


26007.088

Scott Schertzer, Mayor, City of Marion 

Sprinkler Fitters Local 669 

Steve Patterson, Mayor, City of Athens 

7 

Ted Linscott, President, Southeastern Ohio Central Labor Council 

The MetroHealth System 

Ohio Council of Port Authorities 

University of Cincinnati 

University of Toledo 

William J. Roth, Jr., Mayor, City ofFatrlawn 

Youngstown State University 

Association of Oregon Counties 

Pennsylvania 

Pittsburgh Chamber of Commerce 

Bill Peduto, Mayor, City of Pittsburgh 

Federated Investors, Inc. 

Frank, Gale, Bails, Murcko & Pocrass, P.C 

John Weinstein, Treasurer, Allegheny County 

Mon Valley Progress Council, Inc. 

Mon Yough Area Chamber of Commerce 

Penn State University 

Pennsylvania Manufacturers Association 

Regional Learning Alliance 

Rich Fitzgerald, County Executive, Allegheny County 

University of Pittsburgh 

University of Pittsburgh Medical Center 

Wilson College 

City of Dallas 

City of Houston 

Douglas Athas, Mayor, City of Garland 

Harris Health System 

Institute for Policy Innovation 

Lower Colorado River Authority 

Mesquite Independent School District 

Texas Association of Business 

Texas Conservative Coalition: 

• Sen. Don Huffines (SD 16- Dallas), 

• Rep. Rodney Anderson (HD I 05 - Grand Prairie), 

• Rep. Cindy Burkett (HD I 13 ·Sunnyvale), 

• Rep. Giovanni Capriglione (HD 98- Southlake)" 

• Rep. Jeff Leach (HD 67- Plano). 

• Rep. Ron Simmons (HD 65- Carrollton) 

Texas Municipal League 

Texas State University System 
122 


26007.089

Trinity River Authority of Texas 

University of Texas System 

Virginia 

8 

Bill Carrico, Senior Member, Virginia State Senate 

Charlottesville Regional Chamber of Commerce 

Clty of Virginia Beach 

Danville Pittsylvania Chamber of Commerce 

Dominion Resources, Inc. 

George Mason University 

George Mason University Foundation 

Greater Richmond Chamber of Commerce 

Hampton Roads Chamber of Commerce 

Loudoun County Chamber of Commerce 

Lynchburg Regional Business Alliance 

Old Dominion Electric Cooperative 

Prince William Chamber of Commerce 

Roanoke Regional Chamber of Commerce 

Ron Villanueva, Member, Virginia House of Delegates 

Virginia Chamber of Commerce 

Virginia Transportation Construction Alliance 

West Virginia 

Parkersbur<J·Marietta Buildmg and Construcuon Trades Council, AFL-C!O 
123 


26007.090

December I, 2016 

The Honorable Paul Ryan 

Speaker ofthe House 

United States Capitol 

Washington, D.C. 20515 

Dear Mr. Speaker: 

As you work to complete the legislative activity of the 114'" Congress, we ask that you include in that 

process the expeditious enactment of f-l.R 42! 6, the Consumer Financial Choice and Capital Markets 

Protection Act. This bipartisan legislation, and its counterpart in the Senate (S. 1802, sponsored by Senator 

Pat Toomey) would address the significant unintended consequences of a Securities and Exchange 

Commission (SEC) rule which is undermining business and public infrastructure investment, and crimping 

state and local government finances. 

As members of the Stale Financial Officers Foundation (S!'OF), we are dedicated to developing, 

implementing and promoting conservative, fiscally responsible ("pro-growth") public policies. Those 

policies include maintaining efficient, low cost financing provided by money market funds, and 

maintaining access to a convenient and safe tool for obtaining market returns on cash in the management of 

public money. 

Unfortunately, both of those objectives have been severely undermined by an SEC rule adopted two years 

ago, which went into effect six weeks ago. It requires institutional prime and tax-exempt money market 

funds to be offered only with a floating net asset value (NA V). Under this rule, only funds investing solely 

in U.S. government securities or offered only to certain retail investors who are "natural persons" may 

continue to usc a stable NAV. This rule has led to a run on prime and tax-exempt money market funds, 

causing more than$ I .2 trillion to no longer be available for business and public infrastructure investment. 

As a result, short-term interest rates have risen to their highest levels since the financial crisis, issuers of 

commercial paper have seen their cost of borrowing more than double, and issuers of municipal debt and 

their borrowers have all seen their cost of short-term financing rise from, in some cases, below live basis 

points last November to nearly 80 basis points today. 

At the same time that the rule has caused our cost of short-term borrowing to rise dramatically, it has also 

driven down our investment income. As a result of the floating NAV rule, yields on prime money market 

funds are double that of government funds, but state and local governments arc unable to benefit from those 

market rates of return on their short-tenn cash investments. This is reducing our projected revenue, making 

it more difficult to fund public services. 

Even though the implementation date of the SEC rule has passed, the negative impacts persist as 

institutions continue to pull their investment~ out of prime and tax-exempt money market funds, leading to 

more fund liquidations and less private capital for our communities and businesses. Enactment of H.R. 

4216 and S. 1802 is urgently needed to address this artificially created financial crisis caused by overregulation and a failure by the SEC to conduct realistic cost-benefit analyses. 

We look forward to working with you, alongside the new Administration, to advance conservative, progrowth economic policies. Enactment ofB.R. 4216 and S. 1802 would be a welcome step in that direction. 

P.O. Box 9584 "' Mission. KS 66201 "' (866) 816-0873 "' www.statclinancialofficcrs.com 
124 


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Sincerely, 

Derek Kreifels, President 

State Financial Officers Foundation 

Idaho Treasurer Ron Crane, Vice Chair 

State Financial Officers Foundation 

Arizona 

~ Treasurer Jeff DeWit 

Colorado 

~-4.--- Treasurer Walker Stapleton 

~ £1. ,{;/rJ.rll 

Indiana Treasurer Kelly Mitchell 

tza;,._ 8J{ 

Kentucky Treasurer Allison Ball 

~<~ Nevada Controller Ronald Knecht 

South 

~~ Carolina Treasurer Curtis Loftis 

Wyoming Treasurer Mark Gordon 

Mississippi Treasurer Lynn Fitch, National Chair 

State Financial Officers Foundation 

.-{~~""~ 

North Dakota Treasurer Kelly Schmidt, Past Chair 

State Financial Officers Foundation 

Arkansas 

d~·lk4-- Treasurer Dennis Milligan 

Ktn1/ [dz;j Kansas Treasurer Ron Estes 

1~c;l ~ Maine Treasurer Terry Hayes 

oJ/\./\r 

Nevada Treasurer Dan Schwartz 

c2Wil~ South Dakota Treasurer Richard Sattgast 

P.O. Box 9584 "' Mission. KS 66201 "' (866) 816-0873 "' www.statefinancialofficers.com 
125 


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February 2, 2017 

QUESTONS FOR THE RECORD 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

Hearing entitled "The Impact of Regulations on Short-Term Financing" 

Thursday, December 8, 2016 

Thank you for the opportunity to supplement testimony from the hearing. In this 

letter, I address the specific question from Representative Rothfus regarding the 

recently implemented Money Market Fund (MMF) regulations and also fill in 

some blanks from the original hearing. 

Overview 

New regulations which went into effect on October 14 will NOT achieve 

their stated objective of preventing bailouts and maintaining market 

stability, since most money market assets are not subject to the rule. 

The entire treasury and government MMF market, Local Government 

Investment Pools, retail MMFs of all types, and bank short term 

investment funds are all exempt. Of all the investors in the marketplace 

and all the investment options available (tens of trillions of dollars), the 

rule singles out just one segment- "non-natural persons" investing in 

Prime Funds and Tax Exempt Funds for draconian regulation. 

Prime money funds (PMMFs) are a key source of funding for the private 

sector. Both banks and corporations have relied upon Prime MMF 

funding for decades. Tax Exempt funds (TEMMFs) are a key source of 

funding for municipalities, universities and hospitals. 

$1.17 trillion or73% of the market has left PMMFs. $130 billion or 50% of 

the market has left TEMMFs. So the rule essentially eradicated the 

part of the market it tried to "improve", while leaving far larger 

segments of the market unaddressed. 

One especially onerous part of the regulation prohibits the use of 

standard accounting methods (amortized cost) for funds with non-natural 

persons as investors. It was this broadly accepted accounting principal 

which enabled funds to maintain a constant net asset value (CNAV) of 

$1.00 per share to investors. Because of this prohibition, the institutional 

Prime and Tax Exempt MMFs must now float their net asset values. 

Reinstating amortized cost accounting for all MMF investors, both 

natural persons and non-natural persons, is such an obvious and 

benign remedy for the deleterious $1.3 trillion market shift we have just 

experienced, that it should be done immediately. Amortized cost 

accounting is an accounting principal used by almost all banks, almost all 

corporations and most other investors including all Treasury MMFs and 

all Government MMFs for their own portfolios. 
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Institutional investors are sophisticated, NOT confused 

The underlying notion behind the regulation is that the $1.00 CNAV 

causes Prime and Tax Exempt MMF investors to be confused between 

MMFs and bank deposits. That is simply ludicrous. These institutional 

investors are sophisticated financial professionals, corporate treasurers, 

institutional money managers, and managers in bank trust departments. 

There is absolutely no evidence they are confused between MMFs and 

bank deposits. 

If they were confused, why would they not also be confused about 

government and Treasury MMFs, which continue to be priced the same 

way Prime Funds were? The fact that the SEC chose not to include 

government and treasury funds under the regulation, after their purported 

study, is evidence in and of itself that the SEC concluded there is no 

confusion at all among these investors. 

Similarly, if the floating NAVis needed for increased transparency, it 

makes no sense that this should be applied only to institutional funds and 

not retail funds as well. Again, there is absolutely no evidence that 

institutional investors are less sophisticated than retail investors 

and require such protection. 

Regarding the floating NAV making it less likely for an investor to redeem 

in a stress situation, and why this would also not be a relevant point for 

retail investors: not only are we unaware of any such evidence, we see 

evidence to the contrary. In a 2014 whitepaper, Treasury Strategies 

presented a comprehensive game theory analysis of investor behavior. 

It concluded that neither a floating NAV or fees and gates provide 

disincentive for mass withdrawals during financial stress. 

Tax Exempt MMFs support long-term infrastructure projects 

Municipal debt is issued to finance long-term infrastructure projects. 

Many project financing bonds are issued as serial bonds with maturities 

across an entire term spectrum, so part of every issue may be short-term 

and thus MMF eligible. 

As long-term bonds approach their maturity dates, they become shortterm, and are thus also eligible investments for MMFS. 

From a working capital perspective, municipalities regularly issue Tax 

Anticipation Notes (TANs) and other short-term obligations to meet their 

working capital needs. 

Thus, MMFs support both the short- and long-term financing needs of 

municipalities. The damage done by this new rule is of great concern to 

2 
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26007.094

municipalities, cutting financing previously provided by MMFs in half and 

raising its cost. 

Administrative requirements of the new regulations 

It is logical to ask if the administrative burdens of the new regulations can 

be addressed to reduce their negative impact. The answer is no. These 

burdens are a direct result of the floating NAV, which requires accounting 

and system changes, not only by intermediaries who operate the funds, 

but also by the investors. 

Our 2012 study examined the operational consequences of potential 

MMF regulation changes. We concluded then that although fund 

companies might undertake the accounting and system changes 

required, investors were more likely to exit the funds. Indeed, some 

investors might be prohibited from remaining in the funds at all. 

The floating NAV is categorically unsuitable for sweep account 

investments, and again there is no administrative fix. Relative to other 

constant NAV options such as Eurodollar funds, repurchase agreements 

or offshore deposits, the floating NAV fund is simply at an insurmountable 

disadvantage for sweeps. 

For fiduciary managers, the floating NAV's natural/non-natural person 

distinction is another administrative burden for which there appears to be 

no remedy. Our research showed that most fiduciaries (wealth 

managers, asset managers, and bank trust departments) invest through 

omnibus accounts. Such accounts aggregate funds from different kinds 

of investors (individuals, small business, family trusts, private 

partnerships, etc.). To comply with the regulation, the fiduciaries have to 

determine which of their hundreds or thousands of customers are natural 

vs. non-natural persons (an ambiguous distinction), and exclude nonnatural persons from the omnibus accounts. They are simply not able to 

do this with a high degree of confidence. To avoid the risk and cost of 

misclassifying, they instead exit the investment category entirely as our 

study predicted. 

Conclusion 

While some are calling for further study before deciding how to proceed, others 

ask if there are some obvious fixes to implement immediately. 

As stated above, immediately reinstating a constant NAV for all 

investors in all MMFs is an obvious and benign remedy for these 

threshold issues. 

We continue to be concerned about the implementation of multiple 

simultaneous regulations affecting corporate finance and investment. We 

3 
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26007.095

do believe further study of the simultaneous impact is required, but 

not at the expense of delaying the action recommended above. 

With the regulatory-induced demise of Prime and Tax Exempt MMFs, the market 

has lost a $1.3 trillion shock absorber, and America's businesses and 

municipalities have lost a $1.3 trillion primary source of capital. 

FSOC recently applauded itself for the orderly flow of funds out of Prime Funds 

as the October regulations took hold. But we observe with great concern that is 

hardly a market test of the implications of the rule. That test comes in some 

unknown future stress scenario, not during a transition which was signaled two 

years in advance. 

Not until that next stress event occurs, will we be able to observe how markets 

react and adjust, absent the $1.3 trillion shock absorbing capacity of the MMFs 

that have disappeared. 

Respectfully submitted, 

Anthony J. Carfang 

Managing Director 

Treasury Strategies, a Division of Novantas, Inc. 

4 
129 


26007.096

QUESTONS FOR THE RECORD 

Subcommittee on Capital Markets and Government Sponsored Enterprises 

Hearing entitled "The Impact of Regulations on Short-Term Financing" 

Thursday, December 8, 2016 

Mr. Deas: We have been told by proponents of a floating NAV that it would provide less 

incentive for mass withdrawals under stressed conditions. Are you aware of any research that 

indicates sophisticated institutional investors will be less likely to redeem shares in money 

market funds during times of stress if there was a floating NA V? Also, why would this argument 

not be relevant for retail investors and investors in funds that invest solely in U.S. govermnent 

debt? 

We are not aware of any specific research on the decreased likelihood of institutional 

investors' redeeming floating NA V shares in times of financial stress compared to 

those with a fixed N A V. What we do believe is that the increased disclosures on the 

holdings of money market funds from the 20 I 0 changes to Rule 2a-7 provide adequate 

information on their creditworthiness and ability to withstand stresses. The additional 

information embodied in the floating NA V is not worth the cost as evidenced by $1 

trillion leaving prime funds subject to the floating NA V rules. The cure advanced in 

the form of a floating NA V has severely weakened the patient. 

Mr. Deas: We have been told that a floating NAVis needed to provide increased transparency to 

investors so they will have a clearer understanding of the risks they face in the MMF portfolios, 

and it would make clear that investors will bear losses. If this is indeed the case, why only apply 

that increased transparency to institutional investors who invest in prime and tax-exempt funds? 

Is there research to suggest that institutional investors are less sophisticated than retail investors? 

We believe corporate treasurers and other institutional investors arc much better able 

than retail investors to assess the risks of investing in money market funds with fixed 

NA V pricing. The remedy that has been implemented with retail investors able to 

choose fixed NA V pricing seems to have targeted the wrong investor group. The data 

shows that most of the $1 trillion that has left prime funds has flowed into government 

money funds, reducing the govermnent's borrowing costs while crowding out funds 

that would in large part go to private sector. 

Mr. Dcas: There was a lot of discussion about the need to direct financial regulators to conduct a 

study of major regulatory initiatives for cumulative impacts on all financial institutions. If the 

economic impact of the SEC's floating NAV rule is significant, real and immediate, what 

additional information would a study provide about that specific impact, and can businesses 

afford to wait for the results? Are their some remedies, such as reinstating the stable NA V that 

are so obvious that they should be implemented immediately? 

We do believe that with $1 trillion having left prime funds, immediate action is 

justified. The costs have clearly outweighed the benefits of the change to floating NAY 

pricing. This will undoubtedly be an important component of the cumulative impact 

analysis we advocate, but completing such a comprehensive analysis should not delay a 

remedy to allow prime funds the option to price using amortized cost and penny 

rounding. However, the liquidity fees and gates included in the reforms to Rule 2a-7 

have been more of a deterrent to corporate treasurers' use of prime funds, and with 
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26007.097

liquidity fees and gates remaining in place, there will likely still be an aversion to prime 

funds. 

Mr. Deas and Mr. Carfang: Mr. Deas was asked by one of our colleagues on the subcommittee if 

there are things that can be done to keep the floating NA V for non-natural persons investing in 

money market funds and address the administrative burdens on institutions seeking to invest in 

those funds. Conversely, is there a way to address the systemic risk concerns that have been 

raised with the stable NA V if it is restored? 

We believe that the increased disclosures of underlying investments and mandated 

shorter terms for those investments should be retained in a reversion to stable NA V 

pricing for prime funds. This would be a risk-reducing measure. 
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26007.098

QUESTONS FOR THE RECORD 

Subcommittee on Capital Markets and Govermnent Sponsored Enterprises 

Hearing entitled 'The Impact of Regulations on Short-Term Financing" 

Thursday, December 8, 2016 

Mr. Konczal: The Seamen's Society for Children and Families serves over 1500 children and 

800 families in Staten Lvland and Brooklyn in need offoster care, child care services and 

domestic violence prevention. As a result of the SEC's money market fund rule, their cost of 

financing on $5 million in debt held by tax-exempt money market funds rose.from three basis 

points in November 2015 to 69 basis points today. On the remaining principal balance, they are 

paying over $26,000 more a year because of the rule. Another organization that supports HR. 

4216, to preserve stable value money market funds, is the Association a,[ School Business 

Officials International. In a letter to the Committee, they say the SEC rule is squeezing school 

district budgets and undermining their efforts to provide the highest quality education possible 

for our nation's students. As a proponent of the floating NA V, is this what you intended to 

happen, and is it worth the incremental benefit of the regulation? 

H.R. 4 312 would go beyond removing the floating NA V requirement of institutional municipal 

money market funds that emerged out of the SEC's 2014 rule-writing. It would also remove 

institutional prime requirements as well, whose collapse in the financial crisis posed a dangerous 

systemic risk. Perhaps a targeted effort at institutional municipal markets would be of interest, 

but as it stands the proposal is too broad and would go far beyond providing relief to schools and 

other municipal organizations. 

Though it is unfortunate that businesses can't keep low rates of borrowing associated with the 

systemic risks the financial system posed in 2008, their previous low cost of financing was not 

the result oflending fundamentals but instead of a regulatory arbitrage that proved to carry large 

systemic risks for the rest of the economy. The intention isn't to harm any specific business, but 

instead to ensure that the cost of financing reflects the risks those activities pose to the economy. 

Mr. Konczal: I fully support the need to preserve market stability, but I'm not sure how the 

SEC's money market fund rules would accomplish that. As you know, retail funds are exempt 

from the floating NAVrequirement. U.S. government funds are exempt from both the floating 

NAV and the gates andfees provisions. Local Government Investment Pools (LGIPs), which 

make up about 25% of the institutional prime money market fond market, were de linked from 

Rule 2a-7 by the Government Accounting Standardv Board in December 2015. Bank short-term 

investmentfUnds are exempt,from the rules. And after observing the impact of the floating NAV 

rule in the U.S., the Europeans appear to have abandoned their efforts to ban stable value funds 

for institutional investors. l.f the goal of the SEC's most recent money market fund rules is to 

prevent bailouts and maintain market instability, how would that be accomplished if so much of 

the market is exempt.from the rule and only the most sophisticated investors in the market are 

subject to the rule? 

As the SEC found, retail investors are significantly less likely to make large withdrawals in 

response to market stress or panic. This was seen both during the financial panic itself and during 

2011 worries over Eurozone debt. Retail investors are also a smaller portion of the market, a 

fraction of the size of the institutional market. 

Mr. Konczal: We have been told that a constant NAVis an accounting fiction and you asserted 

that investors are confUsed between bank deposits and investments in prime money market funds. 

Do you really believe that financial professionals such are corporate treasurers are confused 
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and, if so, what specific evidence do you have? Further, if financial professionals are confused, 

why would individual investors not be similarly confused? 

The argument for removing the regulatory arbitrage that characterizes fixed NA V money market 

funds isn't predicated on investors being confused. Indeed, the most disturbing part of a run in 

the money market is how rational it is. Investors have an incentive to be the first out the door, 

and knowing, in a rational manner, that others maintain this, they will be quicker than they 

would be otherwise to remove funds. This trigger a self-fulfilling prophesy. 

A floating NA V requirement means there is less incentive for mass withdrawals under stressed 

conditions with a floating NA V. There is no "cliff effect" of breaking the buck that comes from 

the penny-rounding rule. It greatly reduces the first-mover incentive, as there is no moment 

where investments are redeemable at par and then it is not Indeed, regular, small fluctuations 

would in tum make investors Jess likely to panic. This also effects fairness: losses are 

mutualized, rather than concentrated among late movers while first-movers receive their 

investments at par. It also helps with transparency, as there is a clearer understanding of the risk 

faced by investors. 

Note that confusion over whether a money market fund has FDIC insurance does add to this 

effect and panic, but it is not necessary for the urgent regulatory actions that have been taken. 

Mr. Konczal: In your testimony, you asserted that a fluctuating NAVis necessary because 

investors are confused between bank deposits and investments in prime money market funds. Do 

investors not have this same confusion vis-a-vis government and treasury funds, which are 

priced precisely the same way? To what to you attribute this cognitive disconnect? 

As noted above, confusion isn't the primary motivation for a run. Government money market 

funds that are exempt from this requirement maintain 99.5 percent of their total assets in cash, 

government securities, and collateralized repurchase agreements. This was increased from the 

original proposed 80 percent These securities are liquid during a stressful market scenario, 

indeed capital movement into these funds characterized the 2008 crisis. 

Their credit default risk is an order of magnitude lower than other assets. Indeed, this is a space 

where investors, who do have a desire for a stable money market fund option, can put money 

with having significantly less exposure to run risk. 
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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 

lntcmational Municipal Lawyers Association 

National Council of State Housing Agencies 

American Public Power Association 

July 28, 20 I 6 

The Honorable Gwen Moore 

U.S. House of Representatives 

2245 Rayburn House Office Building 

Washington, D.C. 20515 

Dear Representative Moore: 

Large Public Power Council 

TI1e organizations listed above, representing state and local governments, authorities and other public 

entities, wish to express their support for H.R. 4216, The Consumer Financial Choice and Capital 

Markets Protection Act. 

Our organizations have long opposed the Securities and Exchange Commission (SEC') modifications to 

SEC Rule 2a-7 of the Investment Company Act of I 940 that change the net-asset-value (NAY) 

accounting methodo!Ob'Y for money market mutual funds (MMMF) from stable to tloating. Our members 

rely on the hallmark stable NAY fcattn·c in a variety of ways. First, many govcmmcnts have specific state 

or local statues and policies that require them to invest in llnancial products with a stable NAY. The 

policy reason for this is to ensure that public funds are appropriately safeguarded to best serve the 

entity. Second, MMMFs with a stable NAY are the mm;t commonly used investment by state and local 

governments. Forcing govemments to find altemative investments to MMMFs creates additional risk for 

public funds by driving them to potentially invest in other, less suitable products. Finally, non- MMMF 

options may not meet liquidity standards required by their governments to meet cash management 

policies and statutes. H.R. 4216 would enable state and local governments to continue to use stable NA V 

funds for their essential and critical investment needs. 

In addition to the vital use of MMMFs as state and local government investments, it is important to note 

that MMMFs are the largest purchasers of short term municipal securities. Due to the new SEC rules, 

these funds are likely to curb their appetite for these securities, thus decreasing demand and increasing 

costs to state and local governments that issue this type of debt. In fact, at least 19 tax-exempt money 

market funds holding at least $17 billion in assets have closed, or announced they will close in 2016, and 

the pace of liquidations is expected to accelerate as the compliance date approaches. The closing of these 

funds as a result of the new SEC rules hurts state and local governments both as investors of these funds 

and as issuers of securities purchased by these funds. 

While governments will also be adversely affected by the liquidity fees and redemption gates provisions. 

which would be imposed during times of fiscal stress, H.R. 42!6 is an important first step to help 
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govcmmcnts trom having their investment operations disrupted. We continue to call on Congress and the 

SEC to provide exemptions for state and local governments trom these other provisions, so that they can 

have unrestricted access to their public funds. 

Thank you again for introducing this important legislation. We look forward to working with you and 

supporting your efforts to help state and local govcmments on this money market mutual funds issue and 

other regulatory and financial matters of mutual interest. 

Sincerely, 

Emily Swenson Brock, Government Finance Officers Association, 202-393-8467 

Michael Belannino, National Association of Counties, 202-942-4254 

Carolyn Coleman, National League of Cities, 202-626-3023 

Lan·y Jones, United States Conference of Mayors, 202-861-6709 

Elizabeth Kellar, lntemational City/County Management Association, 202-962-3611 

Chuck Samuels, National Assn of Health & Educational Facilities Finance Authorities, 202-434-7311 

Chuck Thompson, International Municipal Lawyers Association, 202-466-5424 

Garth Rieman, National Council of State Housing Agencies, 202-624-7710 

John Godfrey, American Public Power Association, 202-467-2929 

Noreen Roche-Carter, Large Public Power Council, 916-732-6509 

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