Federated Investors writes "New York Fed Offers Up Woeful Redemption Restriction Idea". The July 23 comment says, "The Federal Reserve Bank of New York in a recent staff report on money market funds puts forth a proposal for a "minimum balance at risk" (MBR) which according to the authors "would be a small fraction of each shareholder's recent balances that would be set aside in the event they withdrew from the fund." Redemptions of the MBR could be delayed for thirty days, in the event of 'stress' or if the MMF 'breaks the buck'. The MBR is similar to the redemption restrictions or holdbacks that are among the draconian proposals for additional MMF regulation discussed by SEC, albeit refined a bit and with a catchy new name and acronym. Interestingly, there have numerous thoughtful and detailed comment letters filed with the SEC on the practical, technical and legal challenges associated with this approach which the authors of the report have apparently ignored. Redemption restrictions of any kind will destroy the essence of money market funds and the reason millions of investors, businesses, state/local governments and non-profits rely on the funds. The MBR would go against one of the foundational principles of all mutual funds -- that investors have the right to redeem their shares at any time. Recent studies have demonstrated the critical importance of 100 percent liquidity for MMF users. A 2011 SunGard investment study found that 80 percent of corporate treasurers and cash managers surveyed said immediate access to their funds is a major requirement of their cash investment policy. Furthermore, a recent study from Treasury Strategies reported that 90 percent of institutional MMF users would decrease or stop using the funds if there was any form of holdback -- and of those 55 percent would stop using MMFs entirely. In fact, the MBR or any redemption restriction would conflict with the investment policies of most government and institutional investors. Redemption restrictions would discourage investors from using MMFs in sweep accounts, retirement plans, securities lending and other investment programs. An MBR or holdback would significantly impact many of the popular aspects of MMFs for individual investors such as check writing and debit card access. While the New York Fed's floating of the MBR leaves out many details that would still need to be worked out by regulators, any redemption restriction sought to be enacted by the SEC would wreak havoc on the MMF industry as there are no practical means of implementing it."
