(Bloomberg News) Money-market mutual funds would be forced to create capital buffers equaling 1 percent to 3 percent of assets to protect against losses under a plan now favored by the U.S. Securities and Exchange Commission, according to three people brief on the regulator's deliberations.
Top SEC officials, seeking to make money funds safer, prefer the plan over another capital buffer idea crafted by Fidelity Investments and calls to eliminate the funds' stable share price, said the people, who asked not to be identified because they weren't authorized to speak publicly. The concept is based on recommendations submitted to the agency in January by university economists known as the Squam Lake Group.
"Some variant of the Squam Lake proposal would be a significant improvement that would reduce the risk that money market funds pose systemic problems in the future," Eric Rosengren, president of the Federal Reserve Bank of Boston and a frequent critic of the risk posed by money funds, said yesterday in an e-mailed statement.
Regulators and fund executives have wrestled for almost three years over how to prevent a recurrence of the run on money market funds that followed the September 2008 collapse of the $62.5 billion Reserve Primary Fund. The industry has fought a proposal to strip funds of their stable share price, saying it would kill the product that manages $2.64 trillion for companies and households, and represents the largest collective purchaser of short-term corporate debt in the U.S.
Squam Lake Proposal
The SEC's staff remains undecided on several details of the plan, including exactly how big the buffer should be, two of the people said. If the plan is endorsed by agency staff, SEC commissioners will have to approve it and may still consider rival proposals, the people said.
Florence Harmon, a spokeswoman for the SEC, declined to comment.
The so-called Squam Lake proposal would require funds to establish a segregated account holding cash or liquid assets such as U.S. Treasuries. The money would be used to bail out a fund if it suffered investment losses.
Any fund failing to maintain the required buffer would be forced to announce that failure and convert to a floating share price within 60 days, according to the proposal.
Under the plan, funds would sell bonds, or subordinated shares, to raise money for the buffer from a separate group of investors. Those investors would lose money if the buffer were tapped to cover investment losses.