Regional Fed chiefs call for money market rules

Boston’s Eric Rosengren seeks supports to funds’ stability

Eric Rosengren sees many risks.
Eric Rosengren sees many risks.

Eric Rosengren, chief of the Federal Reserve Bank of Boston, submitted a letter Tuesday on behalf of all 12 central bank regional presidents to a US oversight panel in support of reforms for money market mutual funds.

In their letter to the Financial Stability Oversight Council, Rosengren and the other presidents took the unusual step of voicing a joint view on the need to ensure the safety of money market funds. It’s a shot across the bow for Fidelity Investments and other firms that have been lobbying against new regulations.

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


At issue is the constant $1 per share value of money market funds. Investors traditionally have bought and sold money market shares at $1, and fund managers invest the money in relatively low-risk securities like short-term government and corporate bonds. But if something goes wrong, as it did in September 2008, money markets can lose value like any other investment.

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Money market funds also are susceptible to “runs,” meaning investors can withdraw billions of dollars all at once, leaving the fund — and its remaining investors — at risk for losses.

The letter by Rosengren and the other Fed presidents suggests that the share price for money market funds should float, to reflect reality, rather than stay fixed at $1. Or, firms could hold a 3 percent capital cushion to cover any losses in a fund. A third option would involve a smaller capital buffer and applying incentives to keep large investors from pulling out vast sums during a shock to the market.

Rosengren said the Fed presidents would favor letting each investment firm choose which approach, or combination of approaches, to use.

Rosengren has been pressing for stronger rules covering money market funds in the wake of the 2008 financial crisis and supported efforts by former Securities and Exchange Commission chief Mary Schapiro to impose new regulations. Schapiro’s effort failed, but the Oversight Council has proposed similar changes.


Fidelity Investments in Boston, the nation’s largest manager of money market mutual funds, has opposed new regulations. Fidelity and numerous other money managers, including some large Wall Street firms, have recently started posting “shadow” floating net-asset-values on their websites. Their money market funds still trade at $1 per share, but the firms are voluntarily disclosing the precise value of the investments in these funds, in an effort to stave off new rules.

Rosengren applauded the increased disclosure. But, he said, “It’s not sufficient to fully reduce the financial stability concerns that I have, or that the other Federal Reserve presidents have.”

Regulators are concerned about a repeat of what happened to money markets in the financial crisis. In September 2008, the Reserve Primary Fund was forced to acknowledge its shares had fallen below $1 in value — a rare event known as “breaking the buck” — after losing money on Lehman Brothers debt. That sparked a run on healthy money market funds by nervous investors, which put pressure on short-term credit markets and borrowers of all kinds.

Beth Healy can be reached at