By Ross Kerber
BOSTON, Sept 21 (Reuters) - The end of a year-old Treasury Department guarantee for money market funds has left the industry struggling with divisive questions over how it might replace the government insurance program.
The $3.5 trillion industry has avoided another run such as the one that forced the shutdown of Reserve Primary Fund a year ago in the midst of the financial crisis.
But big money fund operators including Fidelity Investments, Vanguard Group Inc, Legg Mason Inc and Federated Investors face a number of challenges as they work with the industry's Washington trade group to consider how they might replace the insurance, according to a person briefed on the matter, speaking on condition of anonymity because the group does not want to comment on its talks.
The Treasury Department ended a year-old money market mutual fund guarantee program last week that was set up after privately held Reserve Primary 'broke the buck' during the height of the financial crisis.
Wells Fargo & Co executive David Sylvester floated one idea to replace the guarantee by offering money funds access to a secured lending facility at the Federal Reserve that they could tap in case of a run by shareholders.
Sylvester wrote in a presentation at an August symposium for money fund executives that an earlier proposal by the Investment Company Institute trade group to require minimum liquidity levels in funds did not go far enough.
Connie Bugbee, editor of fund-tracker iMoneyNet, said fund companies could have to grapple with unwelcome restrictions in return for the ability to borrow from the Fed. For instance, in return for government support starting late last year, banks have faced many restrictions on executive compensation.
'Going that route is going to give the government more say on operations,' Bugbee said.
Another question is whether fund companies could build up their own insurance reserves and how much they would be willing to pay for that. Money funds currently pay yields so low some companies have had to waive their customary fees just to keep customers invested.
OUTFLOWS STABLE
Treasury officials said last week they would keep the $1.2 billion in premiums collected from money fund companies over the past year, making it unavailable for future private insurance programs.
Peter Crane, president of research firm Crane Data LLC., said smaller fund firms and ones unaffiliated with larger banks would be least able to afford to pay additional premiums, and were also the ones most in need of extra insurance.
Outflows from money funds rose to $55 billion early last week, but slowed to single digits on Thursday and Friday, he said, showing investors seem patient for now.
He said other government programs to support securities often held by money funds remain in effect through February such as the Federal Reserve's Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or AMLF.
Recent data show its current loans to banks and other entities to buy commercial paper held in money funds stood at $79 million, down from a peak of $146 billion last fall.
'In terms of liquidity, we observe a success,' said Jackie Palladino, a Fed vice president in Boston. 'Banks have not had to use the program as much as early on.'
Spokesmen for Fidelity, Vanguard, other companies and the trade group would not comment on money fund regulation.
(Reporting by Ross Kerber; editing by Leslie Gevirtz) Keywords: MONEYMARKET/ (Ross.Kerber@ThomsonReuters.com; +1-617-856-4341; Ross.Kerber.Reuters.com@Reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
BOSTON, Sept 21 (Reuters) - The end of a year-old Treasury Department guarantee for money market funds has left the industry struggling with divisive questions over how it might replace the government insurance program.
The $3.5 trillion industry has avoided another run such as the one that forced the shutdown of Reserve Primary Fund a year ago in the midst of the financial crisis.
But big money fund operators including Fidelity Investments, Vanguard Group Inc, Legg Mason Inc and Federated Investors face a number of challenges as they work with the industry's Washington trade group to consider how they might replace the insurance, according to a person briefed on the matter, speaking on condition of anonymity because the group does not want to comment on its talks.
The Treasury Department ended a year-old money market mutual fund guarantee program last week that was set up after privately held Reserve Primary 'broke the buck' during the height of the financial crisis.
Wells Fargo & Co executive David Sylvester floated one idea to replace the guarantee by offering money funds access to a secured lending facility at the Federal Reserve that they could tap in case of a run by shareholders.
Sylvester wrote in a presentation at an August symposium for money fund executives that an earlier proposal by the Investment Company Institute trade group to require minimum liquidity levels in funds did not go far enough.
Connie Bugbee, editor of fund-tracker iMoneyNet, said fund companies could have to grapple with unwelcome restrictions in return for the ability to borrow from the Fed. For instance, in return for government support starting late last year, banks have faced many restrictions on executive compensation.
'Going that route is going to give the government more say on operations,' Bugbee said.
Another question is whether fund companies could build up their own insurance reserves and how much they would be willing to pay for that. Money funds currently pay yields so low some companies have had to waive their customary fees just to keep customers invested.
OUTFLOWS STABLE
Treasury officials said last week they would keep the $1.2 billion in premiums collected from money fund companies over the past year, making it unavailable for future private insurance programs.
Peter Crane, president of research firm Crane Data LLC., said smaller fund firms and ones unaffiliated with larger banks would be least able to afford to pay additional premiums, and were also the ones most in need of extra insurance.
Outflows from money funds rose to $55 billion early last week, but slowed to single digits on Thursday and Friday, he said, showing investors seem patient for now.
He said other government programs to support securities often held by money funds remain in effect through February such as the Federal Reserve's Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, or AMLF.
Recent data show its current loans to banks and other entities to buy commercial paper held in money funds stood at $79 million, down from a peak of $146 billion last fall.
'In terms of liquidity, we observe a success,' said Jackie Palladino, a Fed vice president in Boston. 'Banks have not had to use the program as much as early on.'
Spokesmen for Fidelity, Vanguard, other companies and the trade group would not comment on money fund regulation.
(Reporting by Ross Kerber; editing by Leslie Gevirtz) Keywords: MONEYMARKET/ (Ross.Kerber@ThomsonReuters.com; +1-617-856-4341; Ross.Kerber.Reuters.com@Reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.