Transparency alone won't fix money markets: Fed's Rosengren

NEW YORK Tue Feb 12, 2013 5:59pm EST

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NEW YORK (Reuters) - Moves by fund companies to post daily net asset values, while positive, will not alone protect investors from crisis-era panics in the troubled money markets, Federal Reserve Bank of Boston President Eric Rosengren said on Tuesday.

Rosengren, an outspoken regulator in the debate over what to do about money market mutual funds, said in an interview that "the status quo really is unacceptable." He added that the problem will not be solved "purely by disclosure."

Instead, Rosengren highlighted a letter in which he and the presidents of the other 11 regional Fed banks called for more aggressive steps to reform the $2.6-trillion industry.

Money market funds threatened to freeze global markets in the financial crisis, capped by investors' rush to flee the well-known Reserve Primary Fund in the fall of 2008 because of its heavy holdings in collapsed Lehman Brothers. The fund was unable to maintain its $1 per-share value, known as "breaking the buck."

While the debate over what to do to safeguard the market has drawn on, fund managers such as Fidelity Investments, Federated Investors Inc and Charles Schwab Corp have begun posting daily fund asset values.

"Posting the daily net asset values I think is positive and I would encourage the industry to continue to think about ways where disclosure could be helpful," said Rosengren, whose Fed district is home to many of the fund companies.

"There are more disclosures that could still occur, including providing daily or weekly positions, for example," he added. "But that disclosure alone doesn't solve the issues, particularly with the potential with runs on money market funds."

In their letter to the main U.S. risk council, dated Tuesday, the presidents of all 12 regional Fed banks said they backed a number of tougher reforms currently being considered by federal regulators. Fund companies could be allowed to offer different protections for different funds, they said.

But the Fed presidents poured cold water on an industry-backed idea to stabilize the market.

Simply implementing temporary withdrawal restrictions on the funds, known as "standby liquidity fees" and "temporary redemption gates," fall short of what is needed, the Fed officials told the Financial Stability Oversight Council, or FSOC.

Last month the Investment Company Institute, the asset management industry's main trade group, outlined just such a limited plan and offered few compromises.

The fund companies have argued that the posting of daily asset values is meant to show investors that money funds are stable because the share values vary by only miniscule amounts from day to day.

Goldman Sachs Group Inc , JPMorgan Chase & Co and BlackRock Inc, which oversee $489 billion, or 20 percent, of U.S. money market funds, have also taken such transparency steps.

Last summer, a sweeping rule proposal by the Securities and Exchange Commission was blocked. Since then the industry and the FSOC, which includes officials from the Fed Board in Washington, have been locked in debate over what changes to make.

The suggestions in the letter, released by Rosengren and signed by all 12 Fed bank presidents, were similar to those made by the FSOC.

While investors in one fund could be protected by a floating net asset value, investors in another could be protected by a stable NAV with a capital buffer, the Fed officials said.

"I don't think this is going to be solved purely by disclosure, and I think that's what this letter highlights," Rosengren said.

(Reporting by Jonathan Spicer; Additional reporting by Ross Kerber in Boston; Editing by Chizu Nomiyama and Dan Grebler)

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