Schwab calls for compromise on money market reform

Fri Nov 23, 2012 12:42pm EST

* Schwab CEO calls for floating NAV for institutional prime funds

* Says retail prime funds, non-prime funds carry less risk

Nov 23 (Reuters) - Charles Schwab Corp, one of the largest U.S. brokerages, has called for compromise on reform for the $2.5 trillion money market, throwing its support behind an idea largely rejected by others in the fund industry.

Schwab supports requiring certain money market funds to have a floating net-asset value rather than a share price pegged at $1, Schwab Chief Executive Walt Bettinger said on Friday in an opinion editorial in the Wall Street Journal.

"As far as risk goes, not all money-market funds are alike," Bettinger said.

Money market reform has been in the spotlight since 2008 when heavy exposure to collapsed investment bank Lehman Brothers caused the Reserve Primary Fund's net asset value to fall below $1 per share, or "break the buck." That sparked a run of withdrawals, freezing a major lending source across the economy.

Schwab believes that some prime money market funds, which invest in short-term fixed-income securities issued not by the U.S. government but rather by corporations, banks and foreign governments, carry greater credit risk and require reform, Bettinger said.

"The problem here is fairly obvious: If a company gets into trouble, a money-market fund's assets can decline and the value of its holdings may no longer equal $1 per share," he said in the Journal.

The risk of a run on prime funds is far greater among institutional investors, which tend to have bigger stakes than retail investors, and that is where the floating net asset values make sense, Bettinger said.

The institutional prime money market fund's price would be reported at the end of the day under the Schwab proposal. Retail funds and non-prime funds, which invest exclusively in U.S. Treasury instruments, U.S. government agency paper or debt issued by states, would continue to operate with a stable $1 per share net-asset value.

The U.S. Financial Stability Oversight Council (FSOC) rolled out a non-binding framework of new rules for the money market fund industry on Nov. 13 that included capital buffers and a floating net asset value.

U.S. Securities and Exchange Commission Chairwoman Mary Schapiro had championed a similar proposal, which failed to garner enough support from three of her colleagues.

Funds and corporate treasurers have said such changes could drive investors out of the products and harm companies that use them for short-term borrowing.

The Investment Company Institute called the FSOC plan deeply flawed. It had no comment on the Schwab proposal.

Fidelity Investments, the largest manager of money market funds, said it was examining the FSOC proposal, and would submit a comment letter to regulators on the plan. It was not prepared to comment on the Schwab proposal.

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