(Reuters) - U.S. regulators are not likely to adopt a high-profile plan to protect money market mutual funds with an emergency liquidity facility, top fund company executives said.
Major U.S. fund companies in January had proposed creating the liquidity facility to backstop the $2.6 trillion money fund industry during times of stress. The facility would have been funded with fees on fund sponsors.
But that plan now seems to have little support, said Gregory Johnson, new chairman of industry trade group The Investment Company Institute, in an interview late on Monday.
“It’s a fairly complex area and they (regulators) are looking at other ideas and solutions,” said Johnson, who is also Chief Executive of California asset manager Franklin Resources Inc.
Johnson’s comments come as regulators including the U.S. Securities and Exchange Commission, the Federal Reserve and others mull whether to put new restrictions on money funds to make them more robust after some scares during the financial crisis.
The SEC has made some changes since the crisis, such as having money funds keep minimum liquidity levels. Some academics and regulators have suggested changes like allowing fund net asset values to vary from $1 per share, known as a “floating NAV.”
The idea is to condition investors to swings in a fund’s value stemming from volatility. But the industry opposes the concept, concerned investors would move their money away.
Johnson and other company leaders acknowledged regulators have expressed doubts about the industry liquidity facility plan, including whether the funds could build capital quickly enough when interest rates are low. Johnson said the changes the SEC has already made are probably enough to stabilize the funds, but said regulators may still seek more new rules. Currently, he said, “Everything is on the table.”
Spokespeople for the SEC and the Federal Reserve declined to comment.
Just how money market funds should be regulated is the top issue facing the U.S. mutual fund industry, Johnson said. Although companies have waived hundreds of millions of dollars in fees amid low interest rates, the funds remain popular with investors and give corporations and banks much financing.
The funds came under pressure during the financial crisis in the fall of 2008 when one fund “broke the buck” and saw its net asset value fall below $1 per share. The Fed stepped in with emergency liquidity lines, and some money funds required millions of dollars in support from their parent firms.
The experience seems to have left regulators wary. On September 29, Eric Rosengren President of the Federal Reserve Bank of Boston, said that funds should be made to hold what he called a “capital-like buffer” of a certain size; any fund with less would convert to a floating NAV.
Instead of a floating NAV, in January the ICI proposed the liquidity facility that could buy assets to help funds meet redemptions.
While government officials have not spoken to the trade group formally, ICI general counsel Karrie McMillan noted that at a public roundtable discussion in May with industry specialists and fund executives regulators including then-chairman of the Federal Deposit Insurance Corp Sheila Bair, raised various concerns. These included doubts about opening the Fed’s borrowing window to money funds, and the length of time it might take for the proposed liquidity facility to build sufficient capital, amid low rates.
In a telephone interview on Friday McMillan said the trade group is still studying how to address regulators’ concerns while keeping investors in the funds. On the liquidity facility, she said, “That was the idea we liked at the time, but a lot has happened since then.”
Franklin’s Johnson took over leadership of the ICI last week. His predecessor, Edward Bernard, vice-chairman of T. Rowe Price Group Inc, also said in a recent interview he doubts a liquidity bank would be adopted. Now regulators must find a way to balance goals like preserving funds for customers while avoiding too much concentration in the industry.
A final set of rules, Bernard said, “is months away, but they (regulators) don’t want it to be lots of months.”
Reporting by Ross Kerber; additional reporting by Sarah N. Lynch and Pedro da Costa; editing by Carol Bishopric