Fed President Recommends Allowing Money Market Funds to 'Break the Buck'
A Federal Reserve president has recommended a combination of reforms to money market funds to make them less risky and more stable, according to Reuters. Among the changes proposed by Eric Rosengren, the president of the Boston Federal Reserve, are allowing net asset share values to float (i.e., no longer having them be set at $1 per share), and setting up "capital buffers" that would allow funds to offset withdrawals in the case of mass redemptions.
Regulators are concerned about the safety of money market funds since many are invested in the short-term debt of troubled nations like Greece, as well as in U.S. Treasuries, whose credit ratings could be downgraded if Congress doesn't come to an agreement soon to increase the federal debt ceiling. Indeed, Moody's issued a statement Tuesday pointing to the increased risk faced by money market funds because of the unresolved U.S. debt ceiling issue.
In 2008, investments in the debt of failed investment bank Lehman Brothers caused shares in the country's oldest money market fund, Reserve Primary, to "break the buck," or trade below $1 per share, leading to a massive wave of redemptions. Fund companies support keeping money market net asset values (NAV's) stable at $1 per share because they believe it reassures investors about their safety, but the structure can lead to panics when supposedly super-safe investments fail, as they did in 2008.
"We still need to make further progress in reducing the risk that money-market funds could be a source of instability resulting from an unanticipated credit shock," Rosengren wrote in a statement to Reuters. "While several proposals have been suggested, some combination of capital buffers, floating rate NAVs and enhanced disclosure seems the best way forward."
The Securities and Exchange Commission is currently leading a review of money market fund practices, but the Federal Reserve also has input and the Boston Fed is particularly influential, according to Reuters.
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