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Money funds' stable $1-a-share pricing facing U.S. review

June 17, 2009 |  7:02 pm

Money market mutual funds could eventually be forced to float their share prices rather than maintain the constant $1-a-share value that has made the industry a popular haven for investors’ cash.

That idea is mentioned in the Obama administration’s wide-ranging plan to revamp financial-industry oversight.

Regulators, the administration says, should consider whether it would be better for the financial system overall if investors were weaned from believing that money funds can’t lose principal value.

When a major money fund suffered investment losses that caused it to slightly drop its share price last September, the news triggered a run across the $3.6-trillion industry. That forced the Treasury to step in and issue a blanket guarantee of money fund assets, to calm investors.

Dollarbill "The vulnerability of money market funds to ‘breaking the buck’ and the susceptibility of the entire . . . industry to a run in such circumstances remains a significant source of systemic risk," the administration says in its blueprint for regulatory reform.

Because money funds own mostly short-term, high-quality corporate and government IOUs, they haven’t been required to reflect daily fluctuations in the value of those IOUs in their share prices, unless the securities permanently lose value (say, in the case of a bankruptcy).

That has allowed the 38-year-old industry to maintain $1-a-share pricing, which to investors has made the funds appear as safe as federally insured bank accounts.

The industry fears that allowing money fund share prices to float, even if the daily changes were tiny, would destroy investors’ faith in the funds.

Given the record low yields on money funds -- an average of just 0.13% currently, according to iMoneyNet Inc. -- even a slight share decline could wipe out interest earnings.

The administration said it was open to other ideas to reduce the risk the industry poses to the financial system, including requiring the funds to buy emergency insurance from private sources to damp the risk of runs.

The Securities and Exchange Commission will take up the question of money fund reforms at a meeting Wednesday, and may ask for public comment on the $1-a-share pricing issue and other possible changes in money fund regulation, Bloomberg News reported.

-- Tom Petruno

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