SEC near proposing sweeping money fund reforms

NEW YORK (Reuters) - U.S. financial regulators are getting closer to issuing their next major proposal to reform money market funds and are contemplating two possible options, including capital buffers and a so-called floating net asset value, the top U.S. securities regulator said on Monday.

"We are focused in particular on a capital buffer option to serve as a cushion for money market funds in times of emergency and floating (net asset value), which would eliminate the expectation of stability that accompanies the $1.00 stable NAV," Securities and Exchange Commission Chairman Mary Schapiro plans to tell the members of the Securities Industry and Financial Markets Association members at their annual membership conference in New York.

"Both of these reform options would ensure that investors who use money market funds realize the costs that might be imposed during rare market events."

The $2.6 trillion money market fund industry came under scrutiny during the financial crisis after one fund "broke the buck" and saw its net asset value fall below the critical $1.00 per share level.

The Federal Reserve stepped in with emergency liquidity lines, and some money funds required millions of dollars in support from their parent firms.

Following that incident, the SEC in 2010 moved to tighten credit quality standards, shorten weighted average maturities, and impose a liquidity requirement on money market funds.

Still, many have felt those reforms fall short of what is needed -- especially over the summer, after questions arose over money market fund holdings of commercial paper issued by troubled European banks.

"While I've listened to commenters who say we have done enough, I remember the destabilizing events that followed the breaking of the buck by the Reserve Primary Fund and the need for unprecedented government support. We all should be committed to preventing that from occurring again," Schapiro said.

The New Financial Stability Oversight Council created under the Dodd-Frank Act of 2010 has been working with the SEC to come up with some additional reforms, which Schapiro said she hopes will be issued "in very short order."

The first area being eyed by regulators is possibly moving away from a stable net asset value of $1.00, an option that the industry has strongly opposed amid fears it would drive investors out of the funds industry.

A floating net asset value would allow the value of each share of a fund to vary, or "float," away from the $1.00-per-share value that most investors have come to expect from the funds.

The other area, meanwhile, involves developing a capital buffer to help assure investors that money would be available even in a time of emergency. Schapiro said that idea "holds promise."

(Additional reporting by Ross Kerber in Boston, editing by Gerald E. McCormick)