[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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                 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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