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Boston Fed’s Rosengren joins colleagues in pressing for money market mutual fund reforms

Eric Rosengren, chief of the Federal Reserve Bank of Boston, on Tuesday submitted a letter on behalf of all 12 central bank presidents to a federal oversight council in support of money market mutual fund reforms.

Rosengren has been pressing for stronger rules for money market funds in the wake of the 2008 financial crisis and was supportive of efforts by former SEC chief Mary Schapiro to impose new rules. Schapiro’s effort failed, but the Financial Stability Oversight Council has proposed similar changes to enhance the safety of money markets.

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“The status quo is not acceptable,’’ Rosengren said in an interview. “Some kind of reform is needed” to reduce the potential risk in the system.

In the letter to the Oversight Council, Rosengren and the other presidents suggested that investment firms that sell money markets could choose among various alternatives. For instance, he said, a fund complex could offer money market funds with a floating price – rather than the traditional $1 per share model – and offer others on which it holds more capital, for safety.

Fidelity Investments in Boston, the nation’s largest manager of money market mutual funds, has opposed new regulations on the sector. It and numerous other firms, including some large Wall Street players, have voluntarily started posting “shadow” floating net-asset-values. In other words, their funds are still trading at $1 per share, but they are hoping to stave off regulations by being more transparent about the precise value of the investments in these funds.

Rosengren said in the letter it’s important that firms produce “accurate” shadow share values.

Regulators and the Fed presidents are concerned about heading off a repeat of September 2008, when the Reserve Primary Fund “broke the buck,” or started trading below $1, sparking a “run” on money markets by nervous investors. As investors withdrew massive sums from these funds all at once, that in turn disrupted short-term credit markets, hurting the borrowers and helping make credit less available to households and institutions.

Beth Healy can be reached at
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