MutualFundWire.com: Fed Hints at Tighter Rules for Money Funds, One Way or Another

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Thursday, July 5, 2012

Fed Hints at Tighter Rules for Money Funds, One Way or Another

"New rules are coming, one way or another" is the message being sent by Federal Reserve officials to those money market funds that have been resisting regulation changes, according to Bloomberg.

Governor Daniel Tarullo and Eric Rosengren, Bank of Boston president, said that the banks' reliance on money funds for short term cash could be limited by the Fed.

Karen Shaw Petrou, Federal Financial Analytics managing partner, told Bloomberg that the comments from the officials were "an effort to tell the industry to work with the SEC because, 'if they don't get you, we can.'"

Tarullo said on June 12 that he is supporting the SEC's proposed added regulation and he added that regulators can explore other options if the SEC fails to impose a final decision.

"In the absence of such action, there are several second-best alternatives... [one option is that] supervisors consider setting new limits on banks' reliance on funding provided by money-market funds," Tarullo said.

"Governor Tarullo identified a path that banking regulators could take to remedy perceived problems with short-term funding markets, including the role played by money-market funds," said Daniel Gallagher, the Republican who has joined the resistance against the new rules. "Fed officials have also raised the idea of expanding stress tests to incorporate support for bank-sponsored money-market funds. If the banking regulators feel they have the basis and need to take action in that space, then such action would be entirely appropriate."

This was followed by Rosengren's remarks during the Conference on Post-Crisis Banking on June 29:

Based on the historical experience of their money-market funds, the historical experience of similar funds, and their money-market funds’ exposures, sponsors could calculate the likely capital support needed from the organization in a stress scenario.