Fed's Rosengren slams SEC's plan for U.S. money markets

NEW YORK, Sept 27 Fri Sep 27, 2013 8:29am EDT

NEW YORK, Sept 27 (Reuters) - A top Federal Reserve official on Friday took a swipe at a fellow U.S. regulator's proposal to rein in money market mutual funds, saying a key part of the Securities and Exchange Commission's plan is a step backward and should be ditched.

Eric Rosengren, president of the Boston Fed branch who has long called for reform in the $2.5-trillion industry, took aim at one of the SEC's two-part plan to protect investors in times of stress like the 2008 financial crisis.

In the fall of that year, money funds threatened to freeze global markets as investors rushed to flee the well-known Reserve Primary Fund because of its heavy holdings of collapsed investment bank Lehman Brothers. The fund was unable to maintain its $1-per-share value, a situation known as "breaking the buck."

Rosengren said reform was overdue, but that what was needed are reforms that actually reduce the financial stability issues that remain today.

"The SEC proposal to allow funds to impose liquidity fees and redemption gates should be dropped," he said according to prepared remarks to a workshop on stable funding hosted by the New York Fed.

"This particular proposal is, in my view, worse than the status quo. It would only increase the risk of financial instability," he was to tell the bankers, academics and government regulators in attendance.

The speech took an even harder stance than a letter the Fed's 12 regional banks sent to the SEC earlier this month, in which they criticized the SEC's plan as doing little to change things.

The measure, part of a series of proposed SEC changes to the industry, would let funds ban withdrawals or charge fees for them in times of stress. Fed officials worry that would only accelerate runs in times of panic.

"These alterations would likely increase the incentive to run from a MMMF," Rosengren said. "But in addition, they increase the risk of 'contagious' runs" in which investors also flee funds that are not in trouble.

He backed a parallel SEC proposal to require funds to adopt a floating net asset value, or NAVY, but urged the regulator to expand it beyond only institutional funds to include retail funds.

Industry players have resisted changes of any kind, particularly the floating NAVY.

While the SEC is tasked with protecting investors and ensuring fair markets, the U.S. central bank's regulatory goal is ensuring overall financial-market stability.

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