Fed economists say fees and gates could lead to money fund runs

WASHINGTON Thu May 15, 2014 3:22pm EDT

WASHINGTON May 15 (Reuters) - Federal Reserve economists have released a study that found that imposing redemption fees and temporary suspensions, or gates, on money market mutual funds could spur investor runs, rather than reduce them.

The study concludes that "informed investors" would most likely wait to withdraw their cash in times of stress if no fees or gates were imposed, but would "redeem pre-emptively if fees or gates are possible."

"Rules that provide... money market funds the ability to restrict redemptions when liquidity falls short may threaten financial stability," it concluded.

It is unclear whether the study's conclusions could influence the ongoing deliberations at the U.S. Securities and Exchange Commission, which is in the final throws of drafting new money market fund rules.

The SEC's proposal contains two critical components. One calls for imposing a floating net asset value on prime money market funds, instead of letting them maintain a stable $1 per share net asset value.

The other measure, which is the industry's preferred alternative, would permit fund boards to impose a combination of redemption fees and gates in times of stress.

The SEC could opt to choose just one of the proposals, or adopt them in combination.

The study was completed in April by Patrick McCabe, an economist at the Fed in Washington, D.C., along with two New York Fed economists and an academic.

People familiar with the matter said McCabe was frequently in contact with SEC officials during former SEC Chair Mary Schapiro's tenure to discuss money fund reforms.

A Fed spokeswoman declined to comment on what role McCabe may have played behind the scenes in the money fund debate at the SEC, or on the study's potential impact.

The SEC's money fund plan was spurred by a desire to avoid a repeat of the 2008 financial crisis when the Reserve Primary Fund's net asset value fell below $1 and "broke the buck" as panicked investors flocked to redeem their money.

The SEC has been under pressure from other regulators, including the Fed, who sit on the Financial Stability Oversight Council to enact stricter money market fund reforms.

At one time, Schapiro, who was an FSOC member, had called for considering even tougher measures for money funds, such as capital buffers.

But the idea never took flight, both because of staunch industry opposition and because three fellow SEC commissioners declined to support proposed reforms until more study was conducted to justify them.

Ultimately, the SEC released the current pending proposal in June 2013. The agency had hoped to issue a final rule by now, but delays have ensued.

SEC Chair Mary Jo White told a U.S. Senate panel on Wednesday she expects the agency to finalize the rules in the "near term."

She is due to speak to an audience of fund executives next week at an industry conference in Washington, D.C. (Reporting by Sarah N. Lynch; Editing by Dan Grebler)

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