BlackRock, others in talks on money market compromise

NEW YORK/BOSTON Fri Oct 26, 2012 4:45pm EDT

NEW YORK/BOSTON (Reuters) - Officials from BlackRock Inc, Fidelity Investments and other mutual fund operators are meeting Friday with U.S. regulators to discuss a potential compromise for reform of the $2.5 trillion money market industry.

BlackRock, the world's largest money manager, and Fidelity, the largest manager of money market funds, had opposed a prior proposal from U.S. Securities and Exchange Commission Chairman Mary Schapiro to make the funds more stable in times of financial crisis. But renewed pressure from regulators since Schapiro's plan died in August have stimulated another effort to find a compromise.

The meetings are with officials from the SEC and the U.S. Treasury Department to discuss what they see as an "industry supported solution," BlackRock Chief Executive Laurence Fink said Friday in an interview on CNBC.

Regulators are concerned that fund investors may grow panicky during a crisis, sparking a run of withdrawals from the industry and freezing a significant source of lending across the economy, as happened in 2008.

The industry proposal appeared to focus on giving funds the ability to discourage withdrawals during times of crisis. Recently, BlackRock publicly proposed a plan to charge investors an extra fee to withdraw their money whenever a fund was under stress, discouraging hasty departures. And the fee would go back into the fund, encouraging others to stay put.

Schapiro's earlier efforts offered the industry two options. Funds could abandon their fixed $1 per share net asset value and offer a floating share price, like most other types of mutual funds. Or, they would have to maintain capital against losses while forbidding full withdrawals by customers during a crisis.

The new industry plan does not include a floating share price or capital buffers, according to a person involved in the process who spoke on condition of anonymity because the talks are still private.

COSTLY FIGHT

The industry considered the earlier proposals as too expensive and likely to drive away investors, money fund analyst Peter Crane, who runs the cranedata.com website, said.

Still, companies would prefer to settle the dispute rather than have the debate drag on and annoy fund investors. "It's like settling a lawsuit," he said. "You're probably going to win, but it's going to be a costly fight."

Representatives from most of the 10 largest money fund managers attended the talks on Friday, reflecting a broader group of top firms than in similar meetings held in May, the person involved in the process said. In May, BlackRock, Vanguard Group and others sought a compromise, but Fidelity did not participate in those efforts.

Vanguard also attended Friday's talks. "Vanguard has been very engaged in the industry's discussions regarding additional money fund reform," spokesman John Woerth said.

The fund industry's primary trade group in Washington, the Investment Company Institute, said current talks should expand on reforms the SEC passed in 2010 with industry backing which tightened credit standards for fund investments, the group said.

"ICI and the fund industry are engaging directly with the Securities and Exchange Commission in a united effort to constructively build on the success of the 2010 reforms," the ICI said in a statement.

Fidelity spokesman Vin Loporchio confirmed that Fidelity representatives were attending Friday's talks. He declined to comment on details of the meetings.

The SEC declined to comment and calls to the Treasury Department were not immediately returned. A spokeswoman for JPMorgan Chase, the second-largest U.S. money fund manager, declined to comment.

CONSTRUCTIVE DIALOGUE

Regulators started looking at money market funds in September 2008 after the Reserve Primary Fund, one of the largest money funds at the time, suffered losses on Lehman Brothers debt and could not maintain its $1 per share net asset value, an event known as "breaking the buck."

The event ignited a run of withdrawals from investors across the industry, forcing the government to step in and back the funds.

In August, the Financial Stability Oversight Council, the federal multi-agency regulator established by the Dodd-Frank reform act to oversee financial risk, took up money market reform after Schapiro said she did not have enough backing from her fellow SEC commissioners to advance her proposed reforms.

A letter from Treasury Secretary Tim Geithner last month offering potential reforms stimulated further talks, according to Christopher Donahue, chief executive of Federated Investors, the third-largest manager of U.S. money funds. "Constructive dialogue continues," he said on Friday on a call with analysts.

The company declined to comment on whether it attended Friday's meeting.

Several money market fund providers said they were unhappy that news of the meeting was made public. The leak is "counterproductive" to the negotiations, according to one executive at a money market fund firm who requested anonymity because of the sensitivity of the discussions.

Under its recent public proposal, BlackRock said money market funds, which typically have 30 percent of their holdings in assets that can be converted to cash within five days, would be frozen if liquidity fell to 7.5 percent.

At that time, investors wanting to pull money out of the funds would have to pay a fee that would go back into the fund, according to a September paper published by BlackRock outlining the proposal.

News of the meeting was first reported by Bloomberg.

(Reporting by Jessica Toonkel and John McCrank in New York and Ross Kerber in Boston; writing by Aaron Pressman.; Editing by Leslie Adler, Alden Bentley and Richard Chang)

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