The Dodd-Frank Act was a bill introduced in light of the global financial crisis in order to reign in or at least have a supervisory authority over the financial industry to keep a close eye on the activities and limit trading which could cause another crisis down the line. In accordance with this, Wednesday saw US Treasure Secretary Timothy Geithner to advise the SEC to implement new rules on money market mutual funds. Money market mutual funds are funds that are highly liquid and trade in T-Bills or other bond instruments that mature within the year.
This means that the fund can sell its holdings in a short period of time earning a quick return. These measures have seen a backlash, however, from the industry itself with many calling them egregious and have vowed to push back on them like they have in the past. The Treasury Secretary made the statement in a meeting of the Financial Stability Oversight Council (FSOC) which was formed by the Dodd Frank Act and has gained momentum in its mandate and agenda. The industry they look over is worth $2.6 trillion and it is felt that measures should be put in place swiftly and effectively.
The industry on the other hand has denounced these proposals and is expected to hold stronger opposition if this battle goes on any further. Some feel that this will weaken the proposals over time and just like the swap markets and the futures have fought against their proposals, they feel these proposals will fail the same way. This draws up the battle lines between the two even deeper since Geithner has already said that in case SEC is slow or ineffective to take any steps; the FSOC will override them and put the measures in themselves.
Industry officials feel that the government is taking a stubborn stance over the issue and even though they have declined these proposals fully in the past, the stagnant bureaucracy in Washington is too slow to react to these industry’s suggestions.
One of the proposals set forward is to set up a 3% capital buffer in place which would mean that for every $1 invested in the capital market, 3 cents would be used as capital protection to absorb the losses and to discourage bank runs in case there is an unexpected decline in the value of the fund. This would be advantageous for the investors as it shows an initiative towards saving their investments, however, they have already been voted down by the industry as it minimises the amount of capital that they are able to invest in order to earn returns on it.
The industry is already using leverage in order to drive up their investments on the whole and this will limit the amount they can invest. Secondly, the liquidity and certainty inherent in the assets they trade in should mean that even if there was a fall in asset prices, they can still retain most of their value which means a high buffer of 3% is not only obsolete but irrelevant as well. Experts say that it is being extra protective in an industry which faces low downside risk compared to some of its counterparts.
It seems like the financial industry is closing up to the regulatory environment it works in by dismissing many of the measures that have been suggested or proposed by the SEC and now the FSOC as well. Wall Street wanted a president like Mitt Romney who would have given more to the industry by declawing the Dodd Frank Act and would have brought the financial industry to pre-2008 period. The election of Barack Obama seems to have put a damper on the plans and the pursuit of better regulations at federal and now even at the state level shows that the industry has to come to terms with the new reality and sit at the same table to negotiate a deal.