Federal Reserve Bank of Boston President Eric Rosengren said tougher oversight of money-market mutual funds is “overdue” and called on the U.S. Securities and Exchange Commission to adopt rules that curb risks to the financial system.
“The financial stability concerns surrounding MMMFs remain real, five years after the financial crisis,” Rosengren said in remarks prepared for a speech in New York. “MMMF runs should not be allowed to once again impede the flow of stable funding within our financial system.”
Rosengren echoed a call by all 12 Fed district bank presidents that the SEC extend its proposed rules for money-market mutual funds to a bigger chunk of the industry’s $2.6 trillion in assets. All money funds that buy corporate debt, not just those that cater to institutional investors, should abandon their fixed $1 share price, the Fed presidents said in a Sept. 12 letter to the SEC.
“While the severe runs occurred at institutional prime funds during the last financial crisis, there is no assurance that the next crisis will avoid retail funds,” Rosengren said. “With no government support and with some institutional investors in retail funds, retail funds may be much more prone to runs than the SEC proposal presumes.”
The SEC’s floating share price would apply to about $968 billion in institutional funds that buy corporate debt, known as prime funds, and $78 billion in institutional funds focused on municipal debt, as they are currently categorized by the industry, according to data compiled by fund research firm iMoneyNet in Westborough, Massachusetts. Extending the rule to prime retail funds would add about $517 billion.
The Fed’s regional bank chiefs also objected to a second part of the SEC’s plan, also put forward by the commission on June 5, that would allow funds to halt redemptions and impose withdrawal fees during times of stress.
“The reason for my strong opposition” is “that liquidity fees and gates fundamentally change the investor’s decision-making process during a financial crisis in a way that increases the potential for financial instability, and could be worse than no reform at all,” Rosengren said.
“If other investors run, the investor could be faced with gates and fees even though the underlying assets have experienced no change in value,” he said.
The SEC’s proposals are aimed at preventing a recurrence of the run on money funds that helped freeze global credit markets in September 2008. The panic was triggered by the closure of the $62.5 billion Reserve Primary Fund, whose net asset value, or NAV, dropped below $1 a share on losses from debt issued by Lehman Brothers Holdings Inc., becoming the second fund ever to break the buck.
“Moving to a floating NAV and treating MMMFs like all other mutual funds, if valuation is appropriately addressed, would reduce the financial stability concerns around MMMFs,” Rosengren said.
Several money fund providers, including Boston-based Fidelity Investments and Pittsburgh’s Federated Investors Inc., have urged the SEC to abandon or narrow its proposal to force some funds to adopt a floating share price, arguing this would damage the funds’ appeal to investors and utility for borrowers.
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