SEC's Schapiro: U.S. risk council must push for money market reforms

Thu Sep 20, 2012 11:43pm EDT

(Reuters) - The new financial risk council must consider what reform actions it can take to reduce the continuing systemic risk posed by money market funds, Chairman of Securities and Exchange Commission Mary Schapiro wrote in an Wall Street Journal op-ed.

In August, Schapiro said she had failed to win enough support at the SEC to advance money market reforms, which had faced fierce opposition from fund companies and their allies. The reform proposals included introduction of capital buffers and floating net asset values.

In light of opposition and differing opinions, the issue has been kicked to the newly formed Financial Stability Oversight Council (FSOC), a group made up of the top U.S. regulators chaired by the treasury secretary.

Schapiro, in an op-ed published late on Thursday, said the FSOC has already recognized the vulnerability of these funds to runs and has encouraged reform.

FSOC's "options include the possibility of a formal recommendation to the SEC to apply new or heightened standards to money market funds. The SEC would then be required to apply those standards -- or within 90 days explain in writing the justification for not applying them," Schapiro said.

She argued that the council could designate certain entities as "systemically significant and subject them to prudential regulation by the Federal Reserve Board."

Money funds were long a sleepy corner of the fund industry, collecting money from investors and serving as leading buyers of short-term debt from corporations, municipalities and the U.S. government.

But in September 2008, the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brothers debt and could not maintain its $1 per share price, known as "breaking the buck."

That ignited a run of withdrawals from investors across the industry, cutting off a major source of overnight funding for many corporations. The run did not abate until the government stepped in to back the funds.

(Reporting by Sakthi Prasad; Edioting by Kim Coghill)

(sakthi.prasad@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: sakthi.prasad.thomsonreuters.com@reuters.net)

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