SEC Considers ‘Buffer’ for Money Market Funds

'Squam Lake' proposal gains traction with agency staff

Money market funds “breaking the buck” rattle markets and scare investors who think of the funds as a cash equivalent and safe haven from volatility. To minimize the impact of this rare event, some in the SEC are pushing for the equivalent of money market “reserve requirements,” according to Bloomberg.

“Money-market mutual funds would be forced to create capital buffers equaling 1% to 3% of assets to protect against losses under a plan now favored by staff at the U.S. Securities and Exchange Commission,” the news service reports.

Citing three people briefed 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. 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, told Bloomberg.

As the news service notes, “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, for its part “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.”

Bloomberg explains that the Squam Lake proposal would require funds to establish a segregated account holding cash or liquid assets. 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,” according to Bloomberg.

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