The Federal Reserve Bank of New York said money-market fund investors should be prohibited from withdrawing all their assets at once as a way to make the $2.5 trillion industry “safer and more fair.”
Money funds should set aside a portion of every investor’s balance as a “minimum balance at risk” that could only be withdrawn with a 30-day notice, the New York Fed’s staff said today in a report. The provision would reduce systemic risk and protect small investors who don’t pull out of a troubled fund quickly, according to the report.
“The delay would ensure that redeeming investors remain partially invested in the fund long enough to share in any imminent portfolio losses or costs arising from their redemptions,” the bank said today in a statement.
The idea, opposed by the funds industry, is already part of a proposal before the U.S. Securities and Exchange Commission that would force money funds to float their share value or build capital cushions and impose withdrawal restrictions, a person familiar with the plan said last month. The agency hasn’t made the proposal public and hasn’t scheduled a meeting for commissioners to vote on it.
Regulators have worked on money fund proposals since the September 2008 collapse of the $62.5 billion Reserve Primary Fund triggered an industry run, helping to freeze global credit markets.
The SEC toughened regulations in 2010 by raising liquidity requirements, reducing average maturities and imposing new disclosure rules. SEC Chairman Mary Schapiro, backed by Fed officials, has called for additional rules that fund companies say would destroy the product’s attraction to investors and deny short-term funding to companies, municipalities and states.
The Reserve Primary Fund suffered a loss on debt issued by Lehman Brothers Holdings Inc. The first investors to request withdrawals after Lehman’s bankruptcy got all their money out. Slower-moving investors were trapped when the fund closed, getting back about 99 percent of their cash in stages over several months.