ICI wants money funds to bankroll redemption backstop

Proposed entity would be capitalized by the prime-money-market-fund industry.
JAN 31, 2010
The Investment Company Institute today floated an idea to create a state-chartered bank or trust company that would provide additional liquidity to prime money market funds in the event of severe market conditions. The bank or trust company would be capitalized by the prime-money-market-fund industry. “Remember, the [Securities and Exchange Commission’s] new liquidity requirements soon will require prime money market funds to hold, at a minimum, $540 billion in assets that are liquid within seven days, of which $180 billion must be redeemable on any given day,” Paul Schott Stevens, president and chief executive of the ICI, said today in Phoenix during the its Mutual Funds and Investment Management Conference. “This facility would provide a second buffer to assist prime money market funds in meeting redemptions.” The SEC’s new requirements, and in turn the ICI’s proposal, are in response to the panic that ensued when the Reserve Primary Fund "broke the buck" in September 2008, its net asset value falling to 97 cents per share. That marked only the second time in money market fund history that a fund's NAV has slipped below $1 per share. “We have discussed this facility with regulators and other policymakers, and recognize that there are significant hurdles we must clear to create such an institution,” Mr. Stevens said. “I can’t give you an exact timetable on when — or even if — this liquidity facility might be launched.” For such a facility to work, all primary money funds would have to participate, said Karrie McMillan, general counsel for the ICI. “That’s going to be a tricky issue,” she said.

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