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Top Financial Council Pushes for Stronger Money Fund Rules

November 14, 2012 by Leave a Comment

The Financial Stability Oversight Council, a group of 10 regulators that includes the S.E.C. chairwoman, voted Tuesday to offer three distinct alternatives and said it would recommend one or a combination of those to the S.E.C. for adoption.

The options, which mirror recent changes that failed to gain enough support to pass the five-member commission, include having money funds establish a floating net asset value, replacing the steady $1-a-share price that funds use now, or forcing the funds to set aside more cash to absorb possible losses in the value of its holdings.

If the S.E.C. does not follow through on the council’s proposals, officials said, the council could draw on other powers to impose its own tougher oversight on the mutual fund companies and banks that sell money market funds publicly or on the funds themselves.

The action Tuesday was the strongest instance yet of the council flexing the considerable muscle given to it by the Dodd-Frank Act, the financial regulatory overhaul enacted in 2010 after the financial crisis. The council, a centerpiece of the act, is led by the Treasury secretary and includes the chief regulators for the banking, housing finance, securities and consumer finance industries.

Efforts by Mary L. Schapiro, the S.E.C. chairwoman, to enact tougher rules on money market funds stalled last August after heavy lobbying by the industry. Three of the S.E.C.’s five commissioners had indicated that they would oppose the proposed rules.

But Timothy F. Geithner, the Treasury secretary, has consistently favored the tightened rules that Ms. Schapiro was advocating, and he persuaded the oversight board to leverage its new powers to push the S.E.C. to act.

Regulators were prompted to strengthen the rules governing money market funds after one of the largest funds, the $62 billion Reserve Primary fund, suffered significant losses on its investments in Lehman Brothers debt when Lehman failed in 2008.

The Reserve Primary fund “broke the buck,” meaning its net asset value fell significantly below the $1 a share that it was required to maintain. That failure prompted a run on money market funds, with investors withdrawing more than $300 billion in short order.

The panic caused the market for short-term loans between companies, known as commercial paper, to shut down even for the most financially secure companies. The Treasury Department stepped in to guarantee more than $3 trillion in money-fund assets, and the Federal Reserve devised liquidity programs to shore up the financial markets.

“At the time, there was no formal council of regulators tasked with searching for risks that could cascade throughout the financial system and harm our economy,” Ms. Schapiro said Tuesday before the council voted on the proposal. “With the creation of the Financial Stability Oversight Council, we are jointly committed to taking the actions necessary — and making the tough calls required — to avoid the type of financial collapse that this nation experienced in the fall of 2008.”

Mutual fund industry officials, who have been offering their own proposals, immediately expressed disapproval of the action. “It’s deeply disappointing that the council has proceeded without giving due weight to the views of fund sponsors, investors and the issuers who depend upon money market funds for vital financing,” said F. William McNabb III, chief executive of Vanguard and head of an industry money market funds group.

The council’s recommendation presents three alternatives, and officials said the council might adopt one, a combination of any of the three, or all or parts of other plans that have been offered by the mutual fund industry and others.

One action would require money funds to have a floating net asset value, or share price, instead of their current fixed price, an option that Ms. Schapiro called “the pure option, the simplest option, and the option that is most consistent with the S.E.C.’s regulatory approach to investment products.”

Another option would allow a $1 price but require funds to have a buffer of 1 percent of assets to absorb day-to-day fluctuations in the value of a fund’s investments; in addition, it would permit investors with more than $100,000 in a fund to withdraw only 97 percent of their assets immediately. The rest would be first in line to absorb the fund’s losses, thus discouraging redemptions.

A third proposal would require funds to have a buffer of 3 percent to absorb losses.

The oversight council will accept public comments on the proposals for 60 days beginning once the proposals are printed in the Federal Register, a process that takes several days.

Only the S.E.C. can enact regulations on money market funds. But if it fails to heed a council recommendation, the oversight group could designate individual funds or fund companies as “systemically important,” making them subject to even tougher oversight by regulators.

The council’s action was applauded by advocates for tougher financial regulation, including Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, who now oversees the Systemic Risk Council, a nonpartisan group formed by the Pew Charitable Trusts.

“Never again should policy makers be forced to choose between a financial meltdown or a taxpayer bailout of money market funds,” Ms. Bair said. “I hope the Securities and Exchange Commission will recognize the risks posed by these products and implement the needed reforms.” 

Article source: http://www.nytimes.com/2012/11/14/business/panel-pushes-for-stronger-money-fund-rules.html?partner=rss&emc=rss

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Investors Reducing Exposure to French Banks

September 13, 2011 by Leave a Comment

Even as European investors race to abandon shares in French banks, on this side of the Atlantic banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments.

In August, American money funds and other suppliers of short-term credit chose not to refinance roughly $50 billion of debt issued by European banks, a drop of 14 percent, according to JPMorgan research. Traders are so worried that they are forcing French banks like Société Générale and BNP Paribas to pay more to borrow dollars.

“Money market managers in the U.S. continue to prune risk,” said Alex Roever, who tracks short-term credit markets for JPMorgan Chase. “The issue is headline risk; fund managers may be comfortable with the banks’ credit, but many are hearing from shareholders worried by what they have read about French banks.”

Unlike their American counterparts, France’s biggest banks are more dependent on short-term funding. Money market funds in the United States have been among the biggest lenders, lending $161 billion to French banks in August, although that is down 39 percent from a month earlier.

“It hasn’t been a wholesale pullback,” Mr. Roever said. In 2008, after the collapse of Lehman Brothers, when a key money market fund sustained huge losses on Lehman debt and investors started pulling their money out of the funds, he said, “everybody shut off at once. It was like a cliff. This time the pullback has been more gradual.”

It’s not just money market funds that are getting cold feet.

On Wall Street, some big American banks have become wary of derivatives tied to French banks like Société Générale and BNP Paribas, several traders said. The two French giants are major international players in the derivatives arena, so a pullback would hurt egos and the bottom line of both companies. Derivatives are investment instruments whose value is tied to another underlying security.

And since last month, according to several bankers who insisted on anonymity, hedge funds and others firms have also withdrawn hundreds of millions of dollars from prime brokerage accounts held at French banks. Prime brokers hold assets for hedge funds and other investors, while providing loans for increased leverage on their bets.

While still small, this kind of transfer echoes the larger move hedge funds made as Lehman teetered in 2008, when a tidal wave of withdrawals helped sink the bank.

Not everyone is anxious. Some money market giants like Fidelity and Federated Investors are sticking with French banks despite the increased anxiety. At Federated, which has $114 billion under management in prime money market funds, about 13 to 17 percent of assets remain invested in French bank debt, according to Deborah Cunningham, a senior portfolio manager at Federated.

“We’re always rethinking it and assessing it, but we’ve not come up with a different answer,” she said. “We don’t feel there’s any jeopardy with regard to repayment.”

At Fidelity, which manages a total of $428 billion, Adam Banker, a spokesman, said, “We’re very comfortable with our money market funds’ European bank holdings, including French bank holdings.” As capital becomes more costly or scarce for European banks, the resulting rise in their borrowing costs risks impairing their own ability to lend, economists warn. That threatens to undermine the general economic growth prospects of already-weakened nations like Italy and France, which in turn would make the banks’ position worse.

Eric Dash and Julie Creswell contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=5c1928584f3413b6f22a80a14a58924d

Filed Under: Business News Tagged With: , ,

Hopeful, but Wary at Money Markets

August 1, 2011 by Leave a Comment

In search of safer havens, investors have flocked to newer investments like federally guaranteed, zero-interest checking accounts. Fund managers, in turn, have increased cash levels and shifted their portfolios to hold even more investments that can be easily sold to meet investor withdrawals.

Congress was working around the clock over the weekend to raise the debt ceiling by Tuesday, reaching a framework agreement late Sunday. But even a short-term Congressional deal will leave some uncertainty for money market investors.

One credit rating agency has held out the possibility that it would downgrade in the nation’s credit rating even with a debt deal in place. Such a move would probably send even more investors toward the exits, fearful that fund managers will have to decide whether to sell off other holdings whose value could be affected by lower ratings.

But the greatest fear for a fund manager is that a fund “breaks the buck” — that its share value falls below the stable $1-a-share price that money funds maintain. That happened in 2008, when the asset value of the Reserve Primary fund fell to 97 cents a share because of its large holdings of the debt of Lehman Brothers, which went bankrupt.

To break the buck, its value must fall by one-half of 1 percent, to 99.5 cents a share. Since Treasury bond prices move inversely with interest rates, if the market attaches greater risk to owning Treasuries, their interest rates would rise and prices would fall to attract buyers. A steep swing in rates and prices could cause the value of a money market fund to sink below the $1 level.

Chris Plantier, a senior economist at the Investment Company Institute, a mutual fund trade group, and Sean Collins, a senior director of industry and financial analysis, said last week that their models showed that it would take a 3 percentage point rise in short-term interest rates, affecting every security in a money market fund’s portfolio, to drive a fund’s value down to 99.5 cents a share.

With short-term rates currently near zero, a jump of 3 percentage points would be such a catastrophic event that money funds might be the least of investors’ problems. It’s so inconceivable that rates for consumers and businesses could jump that far that fast that it evokes dire images of people in bread lines.

More likely, managers say, is that a downgrade of Treasury bond ratings would push short-term rates up by one-quarter to three-quarters of a point, leaving the net asset value of money funds safely at $1 a share.

Over all, though, fund managers and regulators were optimistic that money market funds would be relatively untouched by further market turmoil.

“We’ve had a contingency team focused on this since the end of May,” Robert Brown, president of money markets at Fidelity Investments, the nation’s largest manager of money market funds, said Friday. “We have to be prepared to respond to the unthinkable.”

Fidelity has $440 billion in money market fund assets.

Federal regulators, too, say they believe that investors have seen what is possible — unlike in 2008, when Lehman Brothers went bankrupt over a weekend.

“I don’t believe the Treasury markets are going to freeze up,” said one federal regulator, who spoke on the condition of anonymity because he feared the knowledge that regulators were watching might cause undue concern about a market segment. “The funds we have talked to are well positioned to substantially handle the kinds of outflows that they have seen recently.”

Money funds must hold only highly rated, short-term assets, but government securities are exempt from the requirement. So a ratings downgrade would not automatically force fund managers to sell Treasuries.

The greater danger is to money funds with extensive holdings of short-term corporate i.o.u.’s, or commercial paper. Any issuer that enjoys a high credit rating because of implicit or explicit support from the government could be subject to downgrades if the government’s rating fell.

Those include Fannie Mae, one of the big government mortgage companies, whose debts are guaranteed by Washington but which would likely be downgraded as well, and some of the largest banks, which might enjoy an implicit belief that the government would bail them out in a financial crisis, as it did in 2008.

Regulations after 2008 require taxable money market funds to hold 10 percent of their assets in a form that can be converted to cash in a single day, and all funds to hold 30 percent of assets in a form that can be converted to cash within five days.

According to one market analyst, iMoneyNet, many funds have gone beyond that. On June 30, the company said, the average government money market fund had 58 percent of its assets in securities that would mature within five days.

Even so, the next-to-nothing interest rates that most money market funds are currently earning have been judged by many investors not to be worth the risk. A little-noticed portion of the Dodd-Frank Act, passed in the wake of the financial crisis, provides federal insurance through the end of 2012 for unlimited amounts of deposits in noninterest-bearing checking accounts.

That has led to a sharp upswing in the assets in bank checking accounts, to $2.4 trillion at the end of last year from $2.1 trillion at the end of 2009.

So far, it doesn’t seem to have worried investors that the government that is promising to make interest payments on Treasuries is the same government insuring those checking accounts. Insurance on bank accounts is covered by the Federal Deposit Insurance Corporation.

Article source: http://feeds.nytimes.com/click.phdo?i=04771de64edc271ff34896ec6201297f

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