By John McCrank
NEW YORK, April 11 (Reuters) – Proposals to further regulate
money market funds offer little new protection for investors and
could end up devastating the $2.6 trillion industry, Charles
Schwab Corp said in a letter sent last week to the U.S.
Securities and Exchange Commission.
Schwab manages about $160 billion in money market fund
assets, making it one of the industry’s biggest players with a
stake in the market, along with firms like Fidelity Investments,
JPMorgan Chase & Co and Vanguard Group Inc.
The funds are designed to maintain a constant $1-per-share
net asset value, making them popular with investors looking for
a short-term place to park their money.
The SEC is considering implementing a floating fund
valuation to reinforce the idea to investors that money market
funds are investments, not guaranteed products. It is also
looking at the idea of imposing a capital buffer and a temporary
hold-back on redemption requests.
Schwab, like other fund managers, worries the proposed
reforms could drive away investors and “devastate the product,”
Marie Chandoha, president of Charles Schwab Investment
Management, said in the letter.
The reforms being considered are in addition to a regulatory
overhaul of the industry in 2010 following the run on the market
by panicked investors in 2008 when the Reserve Primary Fund
“broke the buck” with its net asset value falling below $1 per
share.
Schwab said that those reforms, which included increased
liquidity requirements, and shortened weighted average
maturities for funds’ portfolios, already significantly enhanced
the stability, resiliency and transparency of the funds.
“Together these changes have made the funds significantly
more resilient to volatile market conditions by requiring
portfolio managers to respond proactively to changing market
conditions,” Chandoha wrote.
“We strongly urge the commission to conduct a broad study of
the effectiveness of the 2010 reforms before proposing any
additional reforms.”
But SEC Chairman Mary Schapiro has said that further reforms
are needed to address structural flaws in the funds, and this
week her concerns were echoed by members of the U.S. Federal
Reserve.
On Monday, Fed Chairman Ben Bernanke said additional steps
to increase the resiliency of money market funds warrant serious
consideration and are important for the overall stability of the
financial system.
“The risk of runs … remains a concern, particularly since
some of the tools that policymakers employed to stem the runs
during the crisis are no longer available,” he said.
And on Wednesday, the president of the Federal Reserve Bank
of Boston, said reforms to date are not sufficient to rid the
industry of considerable exposure to risky corners of financial
markets, including the Eurozone.
Schwab said that since the 2010 reforms, the net asset value
of its money market funds have been stable, despite the
volatility in the markets as a result of the debt crisis in
Europe, the downgrade of U.S. debt, and other events that helped
drive up redemption rates.
It said it believes its funds are representative of the
entire industry, but only a broad study can confirm that.
“Before considering such proposals, it seems only logical
that the commission undertake a rigorous, industry-wide analysis
of how money market funds have behaved since the 2010
reforms were implemented,” it argued.
“In fact, we believe doing so is a necessary step before any
additional reform is contemplated.”
