Giant mutual fund shops are reacting to the threat of more money market mutual fund reform, which was renewed this week by U.S. Treasury Secretary Tim Geithner and his FSOC (Financial Stability Oversight Council).

On Tuesday the FSCO sent the SEC three ideas for reforming money funds, including ideas already dropped by the SEC this summer after insufficient support from the regulatory agency's commissioners. The ICI and the Chamber of Commerce quickly denounced the FSOC's recommendations. How are fundsters reacting?

Nancy Prior, head of money funds at Boston-based Fidelity [profile], told Bloomberg that she's "disappointed with both the FSOC process as well as the outcome of the meeting," accusing the FSOC of not striking "the proper balance" between minimization of risk and preservation of the benefits of money funds.

New York City-based BlackRock's [profile] president Robert Kapito reportedly said that he "wasn't enamored" with the FSOC's recommendations. Yet Reuters quotes Kapito as also calling the FSOC's work a "good starting place" for the "tough process" of reforming the business.

New York City-based BNY Mellon's [profile] Curtis Arledge, chief executive of investment management, also took a somewhat positive tone, describing the FSOC's proposals as having "some merit."

"I'm not saying I would do it exactly the way it was in the (FSOC) proposal, although I think there is some merit to it," Arledge said, according to Reuters. "We do actually hold economic capital against our money funds ... We're a winner in the scenario where risk is actually factored in to making money funds more resilient."

Pittsburgh-based Federated Investors [profile] grossed 47 percent of its third quarter revenue from money funds. Yesterday Federated's shares fell 4.4 percent to $18.48, according to the Associated Press.

How are money fund investors themselves reacting? The Wall Street Journal reports that, according to money market fundsters, money fund investors "shrugging" the FSOC's recommendations for now. A 60-day comment period for the FSOC's recommendations would be followed by a 90-day period for the SEC to adopt the recommendations or explain why not. And if the SEC did act, they'd have their own public comment and study period to go through, too.

"This suggests that final SEC regulations would come roughly in late Q2," RBC Capital Markets analysts wrote.

New York City-based Reich & Tang's [profile] chief investment officer Tom Nelson said that "it's way too early" and investors aren't reacting yet.

"Investors won't move money till they know what the rules are," said Alex Roever, head of short-term rates strategy at New York City-based J.P. Morgan [profile].

"Any change will come only a year from now," agreed Joseph D'Angelo, head of money funds for Newark, New Jersey-based Prudential [profile].

On the PM side, ratings agency Fitch Ratings yesterday released study results (see below) suggesting that U.S. prime money market funds have moved "to significantly increase their portfolio liquidity," possibly in expectation of more money fund reform.

Company Press Release

November 14, 2012 07:24 AM Eastern Time

Fitch: Regulations and Risk Aversion Drive Post-Crisis U.S. Money Fund Liquidity

NEW YORK--Since the U.S. credit crisis, both SEC changes implemented in 2010 and ongoing investor risk aversion have driven U.S. prime money market funds (MMFs) to significantly increase their portfolio liquidity, as discussed in a new Fitch Ratings study.

As of end-September 2012, liquid assets represented approximately 45% of MMF assets, compared to approximately 20% of total assets at end-2006. Fitch's study identifies three distinct phases when MMFs increased liquidity: (1) during the U.S. financial crisis, particularly after the August 2007 stresses affecting structured investment vehicles and the asset-backed commercial paper market; (2) after the announcement and implementation of the 2010 Rule 2a-7 amendments; and (3) during mid-2011 as Eurozone market volatility started to escalate.

'U.S. financial regulators, including the FSOC, remain focused on the ability of money funds to weather market distress, and strong liquidity is important to meeting redemption requests and providing confidence during volatile periods,' said Roger Merritt, Managing Director and Head of Fitch's Fund and Asset Manager ratings group.

While the 2010 SEC rule changes essentially place a floor on fund liquidity levels, it is unlikely that currently high MMF allocations to liquid assets will persist, particularly if Eurozone stresses were to ease and the supply of high quality assets were to decline further.

'Since maintaining high liquidity dampens returns, an easing in market volatility could motivate funds to reduce these buffers by shifting to relatively higher-yielding, longer-duration investment opportunities,' said Martin Hansen, Senior Director, Fitch Macro Credit Research.

Fitch's sample set is based on public filings from the 10 largest U.S. prime institutional and retail MMFs. For this study, Fitch defines liquid assets as MMF direct holdings of U.S Treasury and agency securities (regardless of maturity), and other bank and corporate exposures (including repos) with a residual maturity of one week or less.

The full report 'Money Fund Liquidity: Regulation Versus Risk Aversion' is available at 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: Money Fund Liquidity: Regulation Versus Risk Aversion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695216

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Edited by: Neil Anderson, Managing Editor

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