Top Fed Reserve Official Criticizes SEC’s Money Markets Plan

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On Friday, Eric Rosengren, the president of the Boston Fed branch criticized the proposal of the U.S. Securities Exchange Commission to restrain and restrict money market mutual funds. Rosengren, who is one of the most vocal advocates for reform in the $2.5 trillion industry slammed SEC’s plan to protect investors in times of economic stress.

Rosengren opined that while reforms in the money market were much needed, such reforms are meaningless if they do little to reduce issues of financially stability that the markets face today.

  

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He said about SEC’s new proposal, “This particular proposal is, in my view, worse than the status quo. It would only increase the risk of financial instability.”

Earlier this month the 12 regional Fed banks sent a letter to the SEC criticizing the plan, but Rosengren’s speech left little to imagination. “The SEC proposal to allow funds to impose liquidity fees and redemption gates should be dropped,” said Rosengren.

He expressed the belief that the new SEC plan would only accelerate defections in times of panic rather than helping to stabilize.

Rosengren said, “These alterations would likely increase the incentive to run from a MMMF … But in addition, they increase the risk of ‘contagious’ runs.” In reality, Rosengren insisted, the new SEC plan would defeat its purpose and rather than restraining fleeing investors in times of panic, would add incentives for them to flee.

Rosengren has backed a parallel SEC proposal that require funds to adopt a floating net asset value, but required the SEC to expand the measure to include retail funds and not only institutional funds.

Though the SEC and the Fed banks are on the same side, their purposes are different, and while the SEC’s job is to protect investors, the Fed banks strive to stabilize the overall economy and financial markets.