Thought leaders continue to build the case for extensive new regulations of money market mutual funds as a gift for the New Year.

Just in time for Christmas the editors at Bloomberg are calling for new powers to be given to a triumvirate of regulators: the SEC, the Fed and the Treasury.

That is not the only area where the editorial calls for regulations that would be even stricter than the actual proposals from the SEC.

Bloomberg's editorial specifically calls for the regulators to be given the power to force a money market fund to close its doors to redemptions if it is facing a run by shareholders.

The rule would be intended to prevent a recurrence of the Reserve Primary Fund debacle in the fall of 2008.

"Hedge funds routinely used this lifesaver during the financial crisis. Few failed as a result. We would prefer that, instead of the industry deciding whether to shut the gate...," states the editorial.

Capital requirements for money funds is another area where the editorial goes well beyond the actual SEC proposal.

The SEC is proposing that money funds reserve capital of one to three percent of net assets. Bloomberg calls on the SEC to set the capital requirement at five percent -- the same amount required of banks.

"Reserve Primary Fund blew up after just a 3 percent loss," Bloomberg's editors point out.

Bloomberg also throws its weight behind the concept of floating NAVs, but with a twist. Money funds that "take more risk" would be required to float their NAV while those who accept restrictions would be able to offer shares at NAV.

Yet, the editorial also makes an interesting admission:

"These remedies may seem tailored to the last financial crisis and may not prevent the next one. That may be so, but avoiding a repeat of the crisis we did have is a worthy goal."

While the goal may be worthy, unintended consequences are not part of the discussion.  

Edited by: HFD


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