Boston Federal Reserve chief Eric Rosengren backed greater regulation of the $2.5 trillion money market mutual fund industry on Friday, including new rules being floated by the Securities and Exchange Commission chief.
At a conference in Amsterdam sponsored by the Dutch Central Bank, Rosengren said that money fund managers “may be inviting trouble” by promoting funds as essentially risk-free, while managers are in fact taking risks on investments that can lose value.
Rosengren said he supports SEC chairwoman Mary Schapiro’s proposals to either allow money market shares to fluctuate in value, or to require firms to keep a capital cushion against losses, and charge fees to keep large institutional investors from sweeping billions out the door all at once.
Regulators have been working to strengthen money markets since the financial crisis, including requiring funds to keep more cash on hand. But they say inherent dangers persist.
The bonds and other securities these funds buy can fluctuate in value, yet managers promise to never let the price of their fund shares change. Meanwhile, customers can withdraw unlimited money at a moment’s notice.
Schapiro earlier this month testified before the Senate Banking Committee that there have been more than 300 occasions since 1970 in which managers have had to voluntarily prop up their money market funds so their value would not fall below $1 per share. But the tools the government used to stop the bleeding in 2008 may not help in a future crisis, Schapiro said. For instance, Congress now prohibits the Treasury Department from using certain funds to guarantee money markets, so that taxpayer money is not put at risk.
Officials at the Fed and the nation’s top securities regulator are worried that in a future crisis, there could again be a run on money market funds. Because they are highly liquid, money market funds are a first stop for investors, particularly giant institutions, to withdraw cash, thus putting a strain on their managers to come up with the money, and leaving smaller investors who move less quickly at a disadvantage.
In 2008, when the investment bank Lehman Brothers failed, the Reserve Primary Fund “broke the buck,” or fell below $1 a share in value because its holdings in Lehman were worth much less. Shareholders sought to cash out $40 billion in just two days, and that triggered a broader run on money market funds, and a freeze in the short-term credit markets. The Treasury Department had to step in and temporarily guarantee money market investors against losses, and the Fed bought some of the underlying investments from the funds, so firms could raise cash to meet redemptions.
The industry is pushing back against new regulations, with some of the loudest voices here in Boston. Fidelity Investments, the nation’s largest manager of money markets, with $415 billion in assets, has been vocal in urging regulators in the United States and Europe not to overdo any fixes to money markets. State Street Corp., which manages $69 billion in US money markets, told European officials that any reform efforts should “proceed with great caution” and urged them to “endeavor to improve rather than undermine the fundamental structure of the industry.”
Schapiro needs support from at least two other commissioners on the five-member SEC panel in order to propose her new rules. Rosengren suggested Friday that bank-sponsored money markets be subject to stricter rules by bank regulators even if the SEC fails to impose new rules on nonbank firms. Banks account for about half of money market assets, he said, and could face stress tests to see if the funds can withstand another crisis.