Uncertainty over potential rules makes money funds push 24-billion backstop

A private backstop has been planned by the mutual-fund industry against money market funds.  Alternatives that have been suggested by the US regulators that includes doing away with the stable $1 net asset value (funds’ value).  The proposed plan by the industry has been sent across by the Investment Company Institute which is Washington based, where it calls for the financing of private banks by the fund companies, up to a tune of $350 million by way of assets which would grow after 10 years to about $24 billion.  The ICI has stated in its letter that all other options are unworkable and impractical as it would fail to address the vital risk to the money funds.

This rejection would be putting the fund industry on a direct collision path with the treasury department officials as well as the Securities and Exchange Commission who claim that there were several other options that were laid out by the white house.  On the funds there was one rule change that had been enacted last year by the regulators in order to prevent the repetition of the run on money funds which was due to the financial crisis where the Reserve Primary Fund collapsed totally.

Robert Plaze, associate director, SEC’s investment-management division has stated in an interview that there are some of them in the industry that think that the change in the SEC rules should suffice.

As per the recommendations made by the ICI, it includes creating a private liquidity facility and this was suggested earlier in the month of March.  As per this plan an emergency fund would be created in a trust or a bank and that would buy the commercial paper from the prime funds, at full value in case there is another crisis.  The participation of all prime funds would be required.

A collective $350 million would be accumulated in order to start the facility and the contribution through individual funds would be around 0.3% of the annual assets says ICI.  Time deposits would be issued by the bank where it would be part of the Fed Reserve system and thereby get access to the Fed’s ‘discount borrowing window.’

The main aim seems to be creating liquidity in order to facilitate redemptions by money funds in the event of a crisis as per the statements made by ICI president, Paul Schott.