Reuters: Regulatory News: Fed's Dudley urges reform for money market funds

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Fed's Dudley urges reform for money market funds Aug 15th 2012, 18:17 Wed Aug 15, 2012 2:17pm EDT Aug 15 (Reuters) - The influential head of the New York Federal Reserve Bank is the latest U.S. central banker to come out in support of new rules for money market funds aimed at making them less vulnerable to implosion in a financial crisis. "Money funds should have capital buffers and modest limits on investor withdrawals," New York Fed President William Dudley said in a column published by Bloomberg News on Wednesday. "Such reforms are necessary to protect the economy from financial instability in the future." The addition of Dudley's voice to the ranks of those calling for an overhaul of the $2.6 trillion money market fund industry is likely to intensify a high-stakes fight over how best to safeguard the funds from debilitating runs. U.S. Securities and Exchange Commission Chair Mary Schapiro has been pushing for capital cushions and withdrawal limits, measures opposed by industry leaders who say such restrictions will hurt the appeal of their funds. Money market funds typically invest in short-term debt securities, and while they are not backed by a government insurance program, investors have traditionally treated them as cash-like because they aim to maintain a stable net asset value of $1 per share. But such confidence took a hit after shares of one large fund, the Reserve Primary, "broke the buck" on the back of the 2008 collapse of Lehman Brothers, triggering a wider run on money market funds. The Fed was forced to step in with emergency liquidity. In recent months, Fed Chairman Ben Bernanke, policy dove Boston Fed President Eric Rosengren and the hawkish president of the Richmond Fed, Jeffrey Lacker, have all lent their implicit or explicit support to Schapiro's proposal. Other high profile supporters include Treasury Secretary Timothy Geithner and former Fed Chairman Paul Volcker. But Schapiro has faced an uphill battle convincing her fellow commissioners to sign on. Three of the SEC's five commissioners have publicly expressed skepticism about the need for money market reforms beyond ones adopted in 2010. In the Bloomberg column, Dudley marshaled new Treasury data in support of further change, saying that as of April this year 105 money market funds with more than $1 trillion in assets could have been brought down by a default among any one of their top 20 borrowers. Link this Share this Digg this Email Reprints

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