|"Exclusive: Fed president hints at broad money-market fix"
July 26, 2011
A senior Federal Reserve official is prescribing sweeping medicine to stabilize the $2.5 trillion money market mutual fund industry, which would be rattled by potential downgrades of the government securities that are among its key holdings.
Boston Federal Reserve President Eric Rosengren told Reuters that a "combination" of solutions will be needed to reduce the risks faced by the short-term funds and their investors -- including one resisted by many fund marketers that would no longer fix the net asset value (NAV) of a fund share at $1.
In a statement relayed by Rosengren through a Fed spokesman, the Boston leader was more specific than in past about the reforms he is recommending. The fund industry has been concerned with new rules being formulated by regulators since the collapse of financial markets in 2008.
"We still need to make further progress in reducing the risk that money-market funds could be a source of instability resulting from an unanticipated credit shock," Rosengren wrote. "While several proposals have been suggested, some combination of capital buffers, floating rate NAVs and enhanced disclosure seems the best way forward."
A Fed spokesman declined to elaborate on the statement.
"Capital buffers" apparently refers to various proposals suggested by participants in the market to ensure that individual funds have the ability to offset withdrawals if investors moved to sell shares quickly. Versions of the concept have been suggested by Fidelity Investments and Charles Schwab Corp, and by a group of economists, among others.
CHOICE AND SAFETY
If that is what Rosengren is supporting, the buffers could gain ground over a competing proposal for an industrywide "liquidity bank" backed by fund companies that include Federated Investors Inc, said Peter Crane, whose Cranedata.com site follows money-market funds.
The liquidity bank would be able to borrow money from the Fed in an emergency, but Crane said a contingency might be politically unfeasible at a time of such budget uncertainty and following so
closely on the banking industry bailouts provided by the Fed.
"Anything that involves regulators helping is taboo," Crane said.
Ohio State finance professor Rene Stulz said Rosengren's endorsement of a "combination" of solutions may indicate that he wants to give fund sponsors a choice of abandoning the $1-per-share net asset values for a floating-rate model or adopting buffers to protect values in times of stress.
Some academics and fund specialists have been lobbying for floating NAVs, but industry executives fear that would undermine the stable value they have long preached for the funds--a pitch that was temporarily shaken with near-disastrous consequences when the Reserve Primary Fund "broke the buck" in the fall of 2008 because of its holdings of Lehman Brothers' securities.
Stulz, a member of the Squam Lake Group of economists, said he would favor allowing individual funds to pick their medicine if that is Rosengren's intent. "That would be real progress," he said.
Money funds are causing trepidation because they hold short-term securities from issuers very much in the hot seat: European banks holding debt of Greece and other "peripheral" nations, and the U.S. government whose credit rating may be downgraded short of a budget deal in Washington.
The U.S. Securities and Exchange Commission is leading a review of possible new rules for money funds, but the Fed also has input. The Boston Federal Reserve Bank, one of the overseers of backstops to the money-fund industry during the financial crisis, carries strong influence.
The three largest money market funds are JPMorgan Chase & Co's Prime Money Market Fund with $123 billion in assets, Fidelity Investments' $117 billion Cash Reserves Fund and Vanguard Group Inc's $112 billion Prime Money Market Fund, as of June 30 according to data from Lipper.
Some new rules for have already been imposed, including more frequent disclosure of money fund holdings. But key issues such as whether to let NAVs float are still being debated, SEC Chairman Mary Schapiro said last week.
Advocates of a "floating NAV" said it would condition investors to expect swings in value of the funds and cut the chances of runs on them in times of crisis.
In a speech at Stanford University on June 3, Rosengren said money funds could be affected by European debt woes but noted that "no one solution has been settled on" regarding floating NAVs, buffers or insurance.
The Investment Company Institute, an industry trade group, was not immediately available to comment on Monday.
Joan Ohlbaum Swirsky, an attorney at Stradley Ronon in Philadelphia who represents some fund companies, said Rosengren's decision not to mention the industrywide liquidity bank appears significant. "The fact that he is silent on the liquidity proposal may say something," she said.