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Proposed U.S. money market fund reform just muddies the waters

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Two-tier money market fund reform is as clear as mud. The U.S. Securities and Exchange Commission is trying again to regulate these mutual funds, which compete with bank deposit accounts. But the rules could favour funds that invest in government debt over those buying corporate debt.

The SEC isn't talking specifics, but Larry Fink, chief executive officer of BlackRock, is. He told analysts this week that some funds may have to adopt a floating net asset value (NAV) – a standard in the mutual fund industry but anathema to those running these accounts that invest in short-term debt. That's because investors, who view money market funds as higher-yielding savings accounts, could actually lose money if NAV is no longer pegged to $1 per share. But the scheme is the best option floated by regulators who want to stop 2008-like runs from happening again. It's simple and puts risk back where it belongs: on investors.

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But, according to Mr. Fink, it seems a floating NAV may not be applied to funds that invest in government debt like U.S. Treasuries. In a letter to regulators last December, BlackRock argued these funds, which represent 45 per cent of the $2.5-trillion (U.S.) market, should be exempt. After all, they weren't part of the panic in 2008, which forced the government to bail out the industry with a blanket guarantee.

Back then, though, sovereign debt was considered risk-free. It's not any more. The debt ceiling debacle and bailouts of Greece and Cyprus have shaken investor faith. Regulators, of course, could require additional safeguards for funds with fixed NAVs, like capital buffers. But that would unnecessarily complicate regulation and supervision. Moreover, it would obscure, not clarify, the risks for investors who aren't likely to take the time to read the fine print.

It's not clear why there need to be two sets of rules for money market funds, other than the need to get a deal done. The effort to reform money market funds has been a long slog. And the SEC has already failed once to overhaul the industry. Compromise may be necessary, but it shouldn't come at the expense of sensible regulation.

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