BOSTON Fidelity Investments, the largest U.S. money market fund provider, said on Thursday redemption fees on stressed institutional prime funds could be a way to avert the kind of scare that roiled the industry during the 2008 financial crisis.
If regulators proceed with reforms, they should limit them to prime money funds purchased by large institutions, Fidelity said in a letter to the Financial Stability Oversight Council. Fidelity and other money fund providers have been fighting reform on all fronts, but now they are making concessions as a way to contain any new regulation.
"The concerns that the FSOC has identified regarding susceptibility to runs do not apply to all types of (money market funds) and, therefore, there is no justification for further reforms to Treasury, government, tax exempt, or retail prime (money market funds)," Fidelity said.
Boston-based Fidelity had $430 billion in money market fund assets under management at the end of 2012. That was 16 percent of the money fund assets in the $2.6 trillion U.S. industry and more than 9 percent worldwide.
The FSOC is led by the U.S. Treasury Department and includes officials from the Securities and Exchange Commission and the Federal Reserve.
Officials from all three bodies have been pushing for further reforms because, as major debt holders, money funds play a key role in the financial system. The industry's problems threatened to freeze up global markets during the 2008 financial 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." Support from other fund companies kept at least 21 prime funds from a similar fate, a later Fed study found.
Fidelity said regulators could impose redemption fees on prime institutional funds during times of market stress.
Imposing a redemption fee on redeeming shareholders would "compensate (money market funds) and the remaining investors for the potential cost of withdrawing this liquidity from the fund, Fidelity said in its letter.
Another option would be for the SEC to modify its rules to require institutional prime money market funds to maintain a 50 percent minimum allocation to government securities, which would reduce risk, Fidelity said.
(Reporting By Tim McLaughlin; Editing by Gerald E. McCormick and Andrew Hay)