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Protections Of Money Market Funds

Tuesday, June 11, 2013 - 10:06 AM

Fixing money-market funds before the crisis - Chuck Jaffe - MarketWatch

"Effectively, investors would either pay a fee — which goes back into the fund — to get out in a timely fashion, or redemption privileges could be suspended for up to 30 days when the market is in trouble (under current rules, funds can suspend redemptions for a week). The thinking here is that if you can’t get out — or would suffer a penalty that may be worse than what the fund could lose — you won’t try to go.

Ultimately, the SEC could push forward one or both proposals, which face a long journey starting with the just-opened comments period before they survive the arduous rule-making process.

None of it will stop whatever causes the next financial crisis — and there will always be another one — but it should create a stabilization mechanism to keep Uncle Sam out of the picture the next time trouble comes around. The cost of that protection — saving the government the billions of pennies—could be a few cents in costs or execution for the average guy.

It may just be the compromise position necessary to get further reforms enacted.

“You will never eliminate the potential risk of a run, but you are getting pretty close to winnowing down the scenarios, while enabling money-market funds to continue on,” said Bob Kurucza, chairman of the financial services group at Goodwin Procter. “Yes, it’s about protecting investors, but the worst situation we have ever seen still only cost investors a few cents, so what this is really about is making sure taxpayers will not be picking up any broken china during the next time there’s a financial crisis. ... We’re a long way from knowing if it will work at that."
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