FSOC votes to make changes to money market funds

Mary Schapiro

The Financial Stability Oversight Council voted unanimously on Tuesday to publish three recommendations to make changes to the money market mutual fund industry.

Under the recommendations put forth by the FSOC, money market funds would be required to set aside reserves to act as a buffer in times of financial hardship, place restrictions on how quickly investors can redeem their shares or allow fund share values to fluctuate. At present, the share of a money market fund is usually valued at $1, according to The Washington Post.

The council issued the recommendations because Mary Schapiro, the chairwoman of the Securities and Exchange Commission, was unable to garner support earlier this year from a majority of SEC commissioners to move forward with reforms. Timothy Geithner, the secretary of the U.S. Treasury, recommended in September that the council consider money market reform.

The financial industry expressed frustration with the FSOC’s proposal, saying that it resembled Schapiro’s plan, The Washington Post reports.

Money market funds have historically been popular with investors because they seem relatively stable and reliable as a bank account. Unlike bank accounts, however, the funds are not federally insured. During the financial crisis, a run on money market funds ensued after share values of the Reserve Primary Fund, America’s first money market fund, fell below $1.

The FSOC said that it is trying to prevent a repeat of the 2008 crisis.

“The…proposed recommendations are not mutually exclusive and could be implemented in combination to address the structural vulnerabilities that result in the susceptibility of MMFs to runs,” the FSOC said.

The proposal will be open for a 60 day public comment period, after which the “council will consider the comments and may issue a final recommendation to the SEC.” The SEC would then be required, under the Dodd-Frank Act, to adopt the recommendation or explain to the FSOC why it had failed to do so.

The FSOC could then label money market funds as a threat to U.S. financial stability, and the Federal Reserve could take up oversight and regulation of the funds, according to The Washington Post.

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