By Ross Kerber
Oct 15 Money market mutual funds could delay
full redemptions from customers at all times, researchers at the
Federal Reserve Bank of New York suggested on Monday, fleshing
out one of the latest ideas that could break a stalemate over
regulating the $2.5 trillion industry.
Under the proposal, funds would make a small fraction of
every investor's balance in a money fund subject to delayed
withdrawal at all times in what the authors called a "minimum
balance at risk," or MBR.
The idea drew opposition from the fund industry's main trade
U.S. regulators have been trying in vain to tighten rules
affecting money fund investors in the wake of the 2008 financial
crisis, when dozens of funds ran into trouble and needed backing
from their sponsors and the government. The industry maintains
that more stringent fund investing rules added in 2010 are
The new plan published in a blog post by two Fed economists
and two other Fed officials would motivate investors to look
closely at a fund's riskiness before putting in money, the four
wrote. That would be an advantage over proposals to restrict
redemptions only when funds come under stress, the report added.
The minimum balance could be five percent of an investor's
highest balance over the previous thirty days, for example, they
said. The MBR "would strengthen incentives for early market
discipline," according to the proposal outlined on the New York
Fed's Liberty Street Economics blog.
The authors include Marco Cipriani, senior financial
economist at the New York Fed, plus two other officials at the
bank and a senior economist for the Fed's Board of Governors.
A similar idea was raised in an opinion piece by New York
Fed President William Dudley in the middle of August, based on a
prior research paper by the four.
At the time, Securities and Exchange Commission Chairman
Mary Schapiro was weighing whether to issue for comment several
other possible regulatory solutions.
But a week later three of the SEC's five commissioners sided
with the industry and stopped Schapiro from moving forward with
the proposal. The proposal would have required money funds to
either abandon the $1-per-share net asset value many investors
prefer, or put in place capital buffers and redemption
restrictions to cope with rapid withdrawals.
That left the issue to the Financial Stability Oversight
Council chaired by U.S. Treasury Secretary Timothy Geithner. In
a letter on Sept. 27 he urged the council to consider reforms,
including the "minimum balance at risk" idea.
In the blog post on Monday, the New York Fed group said a
main advantage of their idea is that during times of stress, it
gives investors an incentive to stay with a fund.
Also, "retail investors, who traditionally have been less
quick to run from distressed funds, would enjoy greater
protection if they don't run" from a troubled fund, the Fed
The minimum balance at risk idea would work well in tandem
with a capital buffer for the funds, they added.
Asked about the New York Fed proposal, a spokeswoman for the
Investment Company Institute in Washington, the fund industry's
main trade group, said in an e-mailed statement that it could
make money funds less appealing.
The minimum balance at risk concept "is essentially a
redemption freeze that bars investors from accessing all of
their cash when they want it. Surveys of money market fund
investors have shown that the product would become unattractive
to them if a daily redemption freeze were implemented," said
spokeswoman Rachel McTague.
That could dry up a major source of funding for businesses
and public-sector debt issuers, she said.
She added that the Fed did not address the operational
complexities of the change.
Also, she said: "A daily redemption concept is one that a
majority of Commissioners at the SEC have opposed, so recycling
an idea from July that's already met strong resistance doesn't
seem to help the debate."