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Money Market Fund Industry Participants Say Regulation, Bank Downgrades Pose Threat

By Anusha Shrivastava PITTSBURGH--Proposed regulatory changes and continuing credit downgrades of banks could hurt the $2.6 trillion money market fund business, industry participants said Wednesday as they defended the sector's performance. On the eve of a Senate Banking Committee hearing on money market fund reform, panelists at a conference in Pittsburgh argued that money market funds don't need fresh regulation. "The changes in 2010 were underrated," said Michael Morin, a portfolio manager at Fidelity Investments, noting they were "successful" and significant. "They made the fund industry more resilient and no more is necessary." It is important to consider what the impact of "tinkering" with the operations of money market funds will mean for how corporate America funds itself, said Robert Deutsch of J.P. Morgan Asset Management. "Corporate treasurers need a place to go," he said. The Securities and Exchange Commission's chairman, Mary Schapiro, has been pressing for changes such as requiring money market funds to increase their capital buffer or limit the level of investor redemption so that the funds pose less of a risk to the financial system. In 2008, investors fled the funds after one fund with exposure to Lehman Brothers Holdings Inc. broke the buck, meaning the net asset value of its shares fell below $1. Following this, the SEC altered money-market-fund rules to require the funds to decrease the average maturity of their holdings and post details of the securities they hold in their portfolios. Investors now have a fair idea of the issuers the money market funds are lending to. Many money market funds had to curtail their lending to European issuers once the sovereign-debt crisis broke out in 2011 as a result of this transparency. Ongoing euro-zone turmoil led U.S. prime money market funds to lower their lending to banks in the euro zone by $7 billion in May, wrote Alex Roever of J.P. Morgan in a recent note. Lending to euro-zone banks peaked at around 32% of assets under management at the end of April 2011 and has declined to about 14% of assets under management as of the end of May. This has shrunk the pool of issuers money market funds can lend to. Another challenge money market funds face is the string of bank rating downgrades by Moody's Investors Service, since many funds cannot or don't want to hold anything but top-rated paper. Already, these conservative funds have reduced their lending to banks that could be downgraded by Moody's, reallocating the funds to Treasurys and other government-backed debt instead. On the business side, money funds have been hurt as they have had to offer fee waivers in a low-interest environment. Some have had to shutter operations and many more could be taken over by larger funds, the panelists pointed out. There is, in effect, a "forced oligopolization of this business," said Christopher Donahue, president and chief executive of Federated Investors Inc. (FII), speaking earlier in the day at the conference. Write to Anusha Shrivastava at anusha.shrivastava@wsj.com

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