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Tuesday, January 11, 2011

Fidelity Questions the Money Fund Bank

News summary by MFWire's editors

The ICI just proposed creating a special bank to backstop money market mutual funds, but not all of the biggest money fund firms are on board. That's one of the tidbits revealed yesterday by Bloomberg's Christopher Condon.

The Wall Street Journal's Eleanor Laise also covered the story.

Fund firms would pump in $350 million to start up the bank and pay three basis points on an ongoing basis, giving the bank $24 billion in debt and equity after a decade (and another $30 billion accessible via a window from the Federal Reserve). By comparison, investors withdrew about $230 billion from money funds in the three days after the Reserve Primary Fund broke the buck in September 2008 after the collapse of Lehman Brothers.

Money market giants Federated [see profile], JPMorgan [see profile] and Vanguard [see profile] are all on board. Yet BlackRock's [see profile] Simon Mendelson (managing director) worries that the bank might encourage risk-taking by money fund PMs, and Fidelity [see profile] isn't backing the idea.

"We have concerns that the costs, infrastructure and complications associated with private liquidity facilities are not worth the minimal liquidity that would be provided," Fidelity's general counsel, Scott Goebel, wrote to the SEC.

The ICI's proposal appears to be an attempt to forestall more drastic proposals under consideration, including the creation of floating NAVs for some money funds (or the requirement of their use by all) and the threat of designation by the Fed of money funds as systemically important (which would put them under the Fed's power). 

Edited by: Neil Anderson, Managing Editor


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