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Thursday, July 28, 2011

Will Money Funds Need Buffers?

News summary by MFWire's editors

Money market fundsters may want to take a look at Bloomberg. Christopher Condon and Robert Schmidt report that, according to anonymous sources, the Securities and Exchange Commission's (SEC) staff wants to implement the Squam Lake proposal for protecting money market mutual funds. Under this plan, money funds would be required to create separate accounts, funded by selling special bonds, that would hold capital buffers of between one percent and three percent of the fund's assets.

Even if the SEC staff officially presents the Squam Lake idea, it would still have to be approved by the commissioners themselves. It contrasts with several other regulatory possibilities, such as: switching money funds to floating net-asset values (NAVs) (instead of a fixed $1 share price); or, as suggested in May by Fidelity, Schwab and Wells Fargo (all big money fund managers), funds could slowly build up a non-segregated buffer of no more than 0.5 percent of assets (to avoid upsetting the stable $1 NAV).

The Squam Lake proposal (the lake is in New Hampshire) comes from a group of economists, including Rene Stulz of the Fisher College of Business at Ohio State University. Boston Federal Reserve president Eric Rosengren gave Bloomberg a favorable comment on the proposal. Spokespeople for Fidelity and the Investment Company Institute (ICI), Vanguard chief investment officer Gus Sauter and Stulz himself also commented for the Bloomberg article. An SEC spokeswoman declined to comment. 

Edited by: Neil Anderson, Managing Editor

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