Schwab warns against proposed money market rules

NEW YORK, April 11 Wed Apr 11, 2012 5:39pm EDT

NEW YORK, April 11 (Reuters) - Proposals to further regulate money market funds offer little new protection for investors and could end up devastating the $2.6 trillion industry, Charles Schwab Corp said in a letter sent last week to the U.S. Securities and Exchange Commission.

Schwab manages about $160 billion in money market fund assets, making it one of the industry's biggest players with a stake in the market, along with firms like Fidelity Investments, JPMorgan Chase & Co and Vanguard Group Inc.

The funds are designed to maintain a constant $1-per-share net asset value, making them popular with investors looking for a short-term place to park their money.

The SEC is considering implementing a floating fund valuation to reinforce the idea to investors that money market funds are investments, not guaranteed products. It is also looking at the idea of imposing a capital buffer and a temporary hold-back on redemption requests.

Schwab, like other fund managers, worries the proposed reforms could drive away investors and "devastate the product," Marie Chandoha, president of Charles Schwab Investment Management, said in the letter.

The reforms being considered are in addition to a regulatory overhaul of the industry in 2010 following the run on the market by panicked investors in 2008 when the Reserve Primary Fund "broke the buck" with its net asset value falling below $1 per share.

Schwab said that those reforms, which included increased liquidity requirements, and shortened weighted average maturities for funds' portfolios, already significantly enhanced the stability, resiliency and transparency of the funds.

"Together these changes have made the funds significantly more resilient to volatile market conditions by requiring portfolio managers to respond proactively to changing market conditions," Chandoha wrote.

"We strongly urge the commission to conduct a broad study of the effectiveness of the 2010 reforms before proposing any additional reforms."

But SEC Chairman Mary Schapiro has said that further reforms are needed to address structural flaws in the funds, and this week her concerns were echoed by members of the U.S. Federal Reserve.

On Monday, Fed Chairman Ben Bernanke said additional steps to increase the resiliency of money market funds warrant serious consideration and are important for the overall stability of the financial system.

"The risk of runs ... remains a concern, particularly since some of the tools that policymakers employed to stem the runs during the crisis are no longer available," he said.

And on Wednesday, the president of the Federal Reserve Bank of Boston, said reforms to date are not sufficient to rid the industry of considerable exposure to risky corners of financial markets, including the Eurozone.

Schwab said that since the 2010 reforms, the net asset value of its money market funds have been stable, despite the volatility in the markets as a result of the debt crisis in Europe, the downgrade of U.S. debt, and other events that helped drive up redemption rates.

It said it believes its funds are representative of the entire industry, but only a broad study can confirm that.

"Before considering such proposals, it seems only logical that the commission undertake a rigorous, industry-wide analysis of how money market funds have behaved since the 2010 reforms were implemented," it argued.

"In fact, we believe doing so is a necessary step before any additional reform is contemplated."

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