| NEW YORK
NEW YORK Feb 12 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
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
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.