U.S. SEC bolsters money market fund rules on risk, liquidity
By Rachelle Younglai
WASHINGTON, Jan 27 (Reuters) – U.S. securities regulators adopted rules aimed at making money market funds a safer investment after the collapse of the Reserve Primary Fund triggered a run on the $3.24 trillion market in 2008.
The Securities and Exchange Commission voted 4-1 on Wednesday to bolster the funds’ liquidity, limit their riskier investments and to show investors the funds may not always maintain a stable $1 share value.
The fund industry was pleased the new rules were less restrictive than the agency initially proposed last year, but the new rules were likely to come at the expense of some yield.
Money market funds were considered as safe as cash until the collapse of Lehman Brothers pushed the value of the Reserve Fund money market fund below $1 a share and forced the federal government to create a program to backstop the market.
“One of the key lessons of the financial crisis is the need for strong liquidity buffers in money market funds,” said SEC Chairman Mary Schapiro, adding the new liquidity rules would help ensure investors are able to get their money out of a fund.
Under the new rules, net asset value — or value of each share of a money fund — would be disclosed on a 60-day lag basis and allow investors to follow a fund’s share price.
Under typical industry practices, money market funds offer shares at one dollar, even if the market value of a fund’s assets are a few tenths of a cent above or below a dollar.
The enhanced disclosures would let investors see which funds are taking risks and potentially push fund managers to take fewer risks that might cause wide variations to the true net asset value.
The SEC is also requiring money market funds to hold a minimum of 10 percent of their assets in liquid securities and shortening the average maturity of debt the funds can hold to 60 days from 90 days.
Under the new rules, funds would only be allowed to invest a maximum of 3 percent in second-tier securities, such as commercial paper that is rated at the second-highest level. Previously the limit was 5 percent. The portfolio rules go into effect as early as May.
Last year the SEC had proposed completely prohibiting funds from investing in second-tier securities.
“It’s positive across the board,” said Deborah Cunningham, executive vice president at Federated Investors Inc, the third-largest money market manager. The SEC “re-thought some of their proposals and have compromised to some degree.”
Still, the new rules were likely to hurt fund returns.
Fidelity Investments, the largest money market manager, has estimated that shortening average maturities to 60 days from 90 days would reduce yields on a typical retail fund by as much as one-tenth of one percentage point.
JPMorgan Chase is the No. 2 manager of such funds.
SEC MULLS FURTHER REFORMS
Commissioner Kathleen Casey was the sole dissenter, arguing the new rules did not go far enough in some cases and went in the wrong direction in others. Casey was opposed to one of the rules that relied on credit ratings and said it “further embeds” the use of credit rating agencies.
The Republican commissioner has advocated removing a requirement that money market funds hold securities that are highly rated. But that has met stiff opposition from the mutual fund industry and other commissioners, who say the rating requirement acts as a floor.
The SEC is examining other money market reforms, including a floating NAV, which would reflect actual assets held. A floating NAV could drive investors out of the funds and into other financial products.
The SEC is also looking at real time disclosure of the net asset value, a private facility to provide liquidity to money market funds in times of stress and a two-tiered system for more conservative money market funds which would have stringent limits on risk-taking and a backstop requirement. (Reporting by Rachelle Younglai; Additional reporting by Aaron Pressman in Boston; Editing by Tim Dobbyn and Andre Grenon) ((firstname.lastname@example.org +1 202 898 8411))