Reuters writes "Exclusive: Fed president hints at broad money-market fix", which says, "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."
The Reuters piece quotes a Rosengren statement, "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. While several proposals have been suggested, some combination of capital buffers, floating rate NAVs and enhanced disclosure seems the best way forward."
It adds, "'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. 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," Reuters quotes Crane.
The article explains, "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."
Finally, Reuters says, "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.'"
