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November 14, 2012 12:45 am
US regulators have proposed three options for fundamental reform of the $2.6tn money market fund industry in an effort to minimise the alleged systemic risk it poses.
The Financial Stability Oversight Council, the collection of US regulators headed by Tim Geithner, Treasury secretary, on Tuesday sought public comment on proposals that would force the industry to adopt floating share prices, hold capital to guard against losses, or restrict investors’ ability to exit the funds.
This follows the failure of the Securities and Exchange Commission to enact new rules. Mary Schapiro, SEC chairman, called the floating share price idea the “pure option” to reform the sector. Regulators said a combination of options – including new ones that come from the industry – could ultimately be adopted.
The move by the FSOC, expected following a September letter by Mr Geithner to his fellow financial supervisors, starts the clock on the US government’s effort to reform an key source of funding for financial institutions.
Officials stressed that the SEC remains the regulator best placed to reform money funds. And the FSOC, which includes the Federal Reserve, cannot force the SEC to adopt its ultimate recommendation.
However, officials and industry executives have said that the influence the FSOC commands is likely to force fundamental reform, which is expected to further crimp profits in an industry already buffeted by ultra-low interest rates.
William McNabb, head of Vanguard and chairman of an industry working group on money market funds, said: “It’s deeply disappointing that [the FSOC] has proceeded without giving due weight to the views of fund sponsors, investors and the issuers who depend upon money market funds for vital financing.”
An intensive lobbying campaign thwarted Ms Schapiro’s attempts at reform this year, when Luis Aguilar, considered the crucial swing vote out of the SEC’s five commissioners, said he opposed the proposals in August.
Regulators are concerned that the threat of runs remains in the money fund industry. After one popular fund, the Reserve Primary Fund, “broke the buck” by falling to a value of 97 cents a share after being hit by the Lehman Brothers collapse in 2008, a run ensued. The US quickly guaranteed money funds.
“The basic run issue has not been solved at this point,” said Ben Bernanke, Fed chairman.
Officials are weighing how best to reduce the risk posed by money funds while ensuring that financial institutions can continue to rely on them for funding. Money funds own 44 per cent of US dollar-denominated commercial paper issued by financial groups and they provide about one-third of the lending in the tri-party repo market.
Regulators’ worries of a run in the sector primarily relate to the destabilising effects that could have on the broader financial system. The FSOC has solicited comment on whether money funds should limit their exposure to the financial sector.
Should the SEC decline to implement what its fellow regulators consider to be necessary reforms, the industry could face a wave of restrictions. Bank regulators could limit banks’ funding by money funds or their sponsorship of them. The Fed could impose stringent capital and liquidity requirements on money fund companies such as Fidelity or Federated Investors.
The industry has argued that reforms that it proposed and which were adopted in 2010 have been sufficient and it has thus far resisted deeper change.
A Fitch Ratings report to be made public on Wednesday found that the largest US prime money funds have significantly shifted into more liquid financial instruments since the 2010 rules.
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