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Fed's Rosengren slams SEC's plan for U.S. money markets

The Federal Reserve Bank of Boston's President and CEO Eric S. Rosengren speaks during the "Hyman P. Minsky Conference on the State of the U
The Federal Reserve Bank of Boston's President and CEO Eric S. Rosengren speaks during the "Hyman P. Minsky Conference on the State of the U

By Jonathan Spicer

NEW YORK (Reuters) - A top Federal Reserve official on Friday took a swipe at a fellow U.S. regulator's proposal to rein in money market mutual funds, saying a key part of the Securities and Exchange Commission's plan is a step backward and should be ditched.

Eric Rosengren, president of the Boston Fed branch who has long called for reform in the $2.5-trillion industry, took aim at one part of the SEC's two-part plan to protect investors in times of stress like the 2008 financial crisis.

In the fall of that year, money funds threatened to freeze global markets as investors rushed to flee the well-known Reserve Primary Fund because of its heavy holdings of collapsed investment bank Lehman Brothers. The fund was unable to maintain its $1-per-share value, a situation known as "breaking the buck."

Rosengren said reform was overdue, but that what was needed are reforms that actually reduce the financial stability issues that remain today.

"The SEC proposal to allow funds to impose liquidity fees and redemption gates should be dropped," he said at a workshop on stable funding hosted by the New York Fed.

"This particular proposal is, in my view, worse than the status quo. It would only increase the risk of financial instability," he told the bankers, academics and government regulators in attendance.

The speech pushed back hard against industry resistance to change of any kind. It took an even harder line than a letter the Fed's 12 regional banks sent to the SEC earlier this month, in which they criticized the SEC's plan as doing little to change things.

While the SEC is tasked with protecting investors and ensuring fair markets, the U.S. central bank's regulatory goal is ensuring overall financial-market stability.

The measure that has received most attention from the Fed, part of a series of proposed SEC changes to the industry, would let funds ban withdrawals or charge fees for them in times of stress. Fed officials worry that would only accelerate runs in times of panic.

"These alterations would likely increase the incentive to run" from money market funds, Rosengren said. "But in addition, they increase the risk of 'contagious' runs" in which investors also flee funds that are not in trouble.

He backed a parallel SEC proposal to require funds to adopt a floating net asset value, or NAV, but urged the regulator to expand it beyond only institutional funds to include retail funds.

The idea of a floating NAV is that investors are able to see the fluctuations in a fund's value and can decide whether to be more tolerant of the changes or leave the funds, either way lowering the risk of destabilizing runs.

Industry players have criticized the plan as disruptive to customers. Even the treasurers of U.S. local and state governments have called the plan unnecessary.

Last week, giant provider Fidelity Investments said the SEC proposal grossly underestimates the total money fund assets that could be affected by its reforms. The floating NAV plan would hit some 65 percent of such assets, more than the 30 percent the SEC estimated, Fidelity said in a letter to the regulator.

The SEC's money market proposal has faced a difficult road.

Efforts to merely issue a proposal broke down last year after then-SEC Chair Mary Schapiro failed to muster enough votes from fellow commissioners. The current chair, Mary Jo White, managed to get enough support to issue the proposals, which are pending consideration of public comments such those from the Fed and Fidelity.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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