Jan 17 Charles Schwab Corp outlined to
regulators a plan to let the net asset values of some money
funds vary from their traditional $1 per share, making it the
latest company to embrace reform in the $2.6 trillion industry.
In a comment letter filed to the Financial Stability
Oversight Council on Thursday, Marie Chandoha, president of
Schwab's investment management division, said the company's
position has evolved and that some prime money funds for
institutional investors could "float" their net asset values, or
NAVs, to cope with rapid withdrawals.
Even the suggestion of a floating NAV remains anathema to
much of the funds industry. Yet, Chandoha wrote, offering such
funds would aim "reform at the sector of the money market fund
industry most likely to initiate a potentially destabilizing
run, but do so without wreaking havoc" on smaller investors and
Regulators including the risk council have been pressing to
make money funds more resilient after bumps during the financial
crisis. As major debt holders, money funds play a key role in
the financial system and their problems threatened to freeze up
global markets during the crisis.
The biggest scare came when investors rushed to pull cash
from the well-known Reserve Primary Fund in the fall of 2008
because of its heavy holdings in the collapsed Lehman Brothers.
The fund was unable to maintain its $1 per share value, known as
"breaking the buck." Sponsor support kept at least 21 prime
funds from a similar fate during the crisis, a later Federal
Reserve study found.
Rule changes in 2010 made the funds more liquid and
transparent. Before she stepped down as chairman of the U.S.
Securities and Exchange Commission last year, Mary Schapiro
pushed for further reforms like a floating NAV or capital
buffers. She failed to gather support from other commissioners
as industry leaders argued such changes could drive away big
But lately there have been signs that even the agency's
skeptics could embrace more change. Just on Wednesday,
Republican SEC Commissioner Daniel Gallagher said he expects tax
and accounting issues could be solved to allow floating NAVs.
Also, since last week the largest money fund sponsors,
including Fidelity Investments, JPMorgan Chase & Co and
Federated Investors Inc, have pledged daily disclosures
of their net asset values, which in practice have not varied
much from $1 in any case.
After Schapiro's setback, the risk council picked up the
issue and requested public comments, such as the one it got from
Schwab. Earlier this week asset manager Vanguard Group Inc and
Wall Street trade group the Securities Industry and Financial
Markets Association wrote letters backing "liquidity fees" for
money funds during times of stress, another concept not
universally loved in the industry.
FOLLOWING UP BETTINGER
Schwab Chief Executive Walter Bettinger had previously said
he would support the floating NAV for some funds in an opinion
piece in The Wall Street Journal in November.
In the comment letter, Chandoha fleshed out the idea she
called a "modified floating NAV." She wrote that, pending more
analysis, Schwab remained opposed to many of the risk council's
proposals like having funds build up buffers or holding back
But, she wrote, measures could be worthwhile to address the
behavior of large institutional investors, who pose the biggest
"run risk," making rapid withdrawals that could destabilize the
funds during a crisis.
The risks are minimal for funds that invest in Treasuries
and other government instruments, she wrote. But for prime funds
that also invest in corporate instruments, she said, a floating
NAV could be appropriate if it allows a single shareholder to
own more than 0.1 percent of total assets.