    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                           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

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     26-007 PDF                 WASHINGTON : 2018
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
    RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
    STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
        Pennsylvania                     DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
    BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
    BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
    SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
    ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
    MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
    DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
    ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
    ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
    ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
    LUKE MESSER, Indiana                 JUAN VARGAS, California
    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

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel
      Subcommittee on Capital Markets and Government Sponsored Enterprises

                      SCOTT GARRETT, New Jersey, Chairman

    ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    PETER T. KING, New York              BRAD SHERMAN, California
    EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              STEPHEN F. LYNCH, Massachusetts
    PATRICK T. McHENRY, North Carolina   ED PERLMUTTER, Colorado
    BILL HUIZENGA, Michigan              DAVID SCOTT, Georgia
    SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
    STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
    STEPHEN LEE FINCHER, Tennessee       BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             GREGORY W. MEEKS, New York
    DENNIS A. ROSS, Florida              JOHN C. CARNEY, Jr., Delaware
    ANN WAGNER, Missouri                 TERRI A. SEWELL, Alabama
    LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
    DAVID SCHWEIKERT, Arizona
    BRUCE POLIQUIN, Maine
    FRENCH HILL, Arkansas

                                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

                           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.
        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
    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 mother-in-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.
        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 Short-Term 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 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. 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, Dodd-Frank, 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.
        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 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 short-term 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 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.
        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, ``price-based 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 revisiting 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 regulatory 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 short-term 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 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-in-time 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.
        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
    short-term 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 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 just-in-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.
        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
    Dodd-Frank 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 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 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 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?
        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.
        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.
        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 colleagues 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.
        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 tax-exempt 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.
        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 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 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
    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.
        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.
        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 tax-exempt financing. But also, I have heard that liquidity
    fees and redemption 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.
        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.]

                                A P P E N D I X

                                December 8, 2016

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