If money market funds experience another run similar to the one that occurred in September 2008, the industry would be unlikely to survive in its current form, according to an SEC official who has done extensive work on money fund regulation.
To avert such a disaster, the Securities and Exchange Commission could finalize a proposal by the end of the year aimed at reducing money market fund risk and improving disclosures about the funds, Robert Plaze, associate director of its Division of Investment Management, said during a panel discussion last Wednesday that was sponsored by the District of Columbia Bar.
Mr. Plaze is also co-chairman of the money market fund subgroup of the President's Working Group on Financial Markets, which is to issue a report by Dec. 1 making recommendations on whether changes are necessary to reduce money funds' susceptibility to runs.
Even if the SEC institutes new regulations, “the larger context is whether money market funds as a model will survive. And I suspect if there's another event similar to last September they may not,” Mr. Plaze said.
The SEC is likely to change money market fund regulation in two stages, he said.
The first set of regulations will be based on the proposal issued by the SEC in June, which would require the $3.4 trillion money market industry to improve the credit quality of its holdings and ensure that the holdings are more liquid, among other things.
More sweeping rules, dealing with controversial issues like whether money market funds should have a floating net asset value instead of a fixed $1 per share value, could come next year, Mr. Plaze said.
The President's Working Group is looking at the systemic risk that money market funds pose to the economy as a whole because they are widely used in business and municipal finance, he said.
Sara Hansard is the Washington bureau chief at InvestmentNews, a sister publication of Pensions & Investments