The presidents of the twelve Federal Reserve Banks have submitted a joint letter responding to the Financial Stability Oversight Council's proposal on money market mutual fund (MMF) reform.

The twelve Reserve Bank presidents support the Council's efforts to address the structural vulnerabilities of MMFs. They also agree with the Council's determination that MMFs' activities and practices could create or increase the risk of liquidity and credit problems spreading through the financial system.

"Money market mutual funds have no explicit capacity to absorb losses in the event of a decrease in the value of assets held within the fund's portfolio," said the Reserve Bank presidents in their joint letter. "This structure gives rise to a risk of destabilizing money market mutual fund runs by creating a first mover advantage."

In the letter (available at http://www.bostonfed.org/news/press/2013/pr021213.pdf ) the Reserve Bank presidents:

• discuss the risks associated with MMF activities and practices,
• focus on issues that should be addressed as part of any reform proposal, such as enhancing the accuracy of market-based net asset values (NAVs),
• present observations on each of the three reform alternatives in the Council’s proposal,
• discuss why standby liquidity fees and temporary redemption gates would not address financial stability risks, and
• concur with the Council that more than one alternative could address the financial stability concerns posed by MMFs – for example, fund sponsors could be permitted to offer both a floating NAV fund and separately a stable NAV fund with a capital buffer (or a buffer coupled with a Minimum Balance at Risk).