Twelve of the U.S. Federal Reserve’s top officials poured cold water on an industry-backed idea to stabilize money market mutual funds, suggesting in a letter that more aggressive steps should be taken to protect investors from crisis-era panics.
In a letter to the main U.S. risk council, the presidents of all 12 regional Fed banks said there were a number of tougher reforms currently being considered that could safeguard the some $2.6-trillion industry. Fund companies could be allowed to offer different protections for different funds, they said.
But proposals to simply implement temporary withdrawal restrictions on the funds, known as “standby liquidity fees” and “temporary redemption gates,” fall short of what is needed, the Fed officials told the Financial Stability Oversight Council.
Last month the Investment Company Institute, the asset management industry’s main trade group, outlined just such a limited plan and offered few compromises.
Liquidity fees and redemption gates bear “many similarities to the status quo,” the Fed officials said in the letter. “(W)e do not believe this reform proposal contains the fundamental elements needed to address the financial stability risks posed by MMFs.”
Money market funds (MMFs) threatened to freeze global markets in the financial crisis, capped by investors’ rush to flee the well-known Reserve Primary Fund in the fall of 2008 because of its heavy holdings in the collapsed Lehman Brothers. The fund was unable to maintain its $1 per-share value, known as “breaking the buck.”
A sweeping rule proposal by the Securities and Exchange Commission was blocked last summer. Since then the industry and the FSOC, which includes officials from the Fed Board in Washington, have been locked in debate over what changes to make.
The suggestions in the letter, released by Boston Fed President Eric Rosengren and signed by all 12 Fed bank presidents, were similar to those made by the FSOC.
While investors in one fund could be protected by a floating net asset value (NAV), investors in another could be protected by a stable NAV with a capital buffer, the Fed officials said.