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Obama seeks new money market mutual funds regulation

The administration says regulators should require the funds to float their share prices rather than keep them at $1 a share.

June 19, 2009|Tom Petruno

Regulators should consider requiring money market mutual funds to float their share prices rather than maintain the constant $1-a-share value that has made the industry a popular haven for investors' cash, the Obama administration says.

The idea is mentioned in the wide-ranging plan released this week by President Obama to revamp financial-industry oversight.

The question, the administration says, is whether it would be better for the financial system overall if investors were weaned from believing that money funds can't lose principal value.

When a major money fund suffered investment losses that caused it to slightly drop its share price in September, the news triggered a run across the $3.6-trillion industry. That forced the Treasury to step in and issue a blanket guarantee of money fund assets to calm investors.

"The vulnerability of money market funds to 'breaking the buck' and the susceptibility of the entire . . . industry to a run in such circumstances remains a significant source of systemic risk," the administration says in its blueprint for regulatory reform.

Because money funds own mostly short-term, high-quality corporate and government IOUs, they haven't been required to reflect daily fluctuations in the value of those IOUs in their share prices, unless the securities permanently lose value (say, in the case of a bankruptcy).

That has allowed the 38-year-old industry to maintain $1-a-share pricing, which to investors has made the funds appear as safe as federally insured bank accounts.

The industry fears that allowing money fund share prices to float, even if the daily changes were tiny, would destroy investors' faith in the funds.

Given the record low yields on money funds -- an average of just 0.13% currently, according to iMoneyNet Inc. -- even a slight share decline could wipe out a year's worth of interest earnings.

The administration said it was open to other ideas to reduce the risk the industry poses to the financial system, including requiring the funds to buy emergency insurance from private sources to damp the risk of runs.

The Securities and Exchange Commission will take up the question of money fund reforms at a meeting Wednesday and may ask for public comment on the $1-a-share pricing issue and other possible changes in money fund regulation, Bloomberg News reported.


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