April 18, 2012 / 11:41 PM / 8 years ago

US money market funds need more stability-Treasury

LAS VEGAS, April 18 (Reuters) - Money market funds, which came under scrutiny after the financial crisis, should be made more stable, a senior Treasury official said on Wednesday.

Although they are more resilient today, “further steps are needed to improve the stability of the industry and reduce money funds’ susceptibility to runs,” said Mary Miller, assistant secretary for financial markets at the U.S. Treasury at a conference of the National Federation of Municipal Analysts.

“The SEC and other members of the Financial Stability Oversight Council (FSOC) are actively discussing the most appropriate way to affect this, while preserving the usefulness of these funds for investors and issuers, including those in the municipal market” she added about the work of the Securities and Exchange Commission.

The $3.7 trillion municipal bond market is also watching how the federal government will implement the “Volcker Rule,” designed to curb the risks that banks take with depositor dollars, a practice known as proprietary trading.

The Dodd-Frank reform law passed in the wake of the 2008 financial crisis included the rule, and now agencies must devise ways to carry it out.

One question emerged from among the more than 18,000 comments submitted in response to the proposed rule, Miller said: what is the definition of a municipal security?

The market is concerned about potential distortions springing from the proposal’s differential treatment of direct obligations and agency obligations.

While the rule included an exemption to ensure that state and local governments would still be able to raise money in the municipal bond market by allowing banks to buy their debt, bonds issued by public agencies or authorities would be subject to restrictions.

With the rule, Treasury wants to preserve the safety of financial markets, as well as their liquidity and efficiency, Miller said, adding it is “committed to achieving the right balance in the final rule.”

“It is important to separate risky proprietary trading activity from the federal safety net. But as a former investor, including during the financial crisis, I also appreciate the role of market-making and know the importance of deep, liquid markets,” she said.

During times of market stress, “it is essential to have buyers who are willing to step up and buy a position,” she said. (Reporting by Tiziana Barghini; additional reporting by Lisa Lambert in Washington; editing by Todd Eastham)

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