Vanguard offers details about money fund backstop

It’s been slow in coming, but the mutual fund industry is finally beginning to offer specifics about the type of backstop it wants to set up for money market funds.
In a letter to the President’s Working Group on Financial Markets about proposed regulations of money market funds, The Vanguard Group Inc. today expressed its support for an industry-sponsored liquidity facility. The fund giant also offered details about how such a facility might work.
The Investment Company Institute will submit a more involved comment letter by the end of the day on this issue, said Ianthe Zabel, a spokeswoman. “A lot of new details about how our proposal would work will be in the letter,” she said.
Apparently so: The ICI’s letter will be more than 50 pages. The comment period on the proposals ends at midnight.
The President’s Working Group, which comprises officials from the Treasury Department, the Federal Reserve, the Financial Stability Oversight Council and the Securities and Exchange Commission, issued a report in October that laid out eight proposals for money market reform.
Those proposals aped the more stringent rules the SEC put into place last year. Concerns about the stability of money funds arose after the Reserve Primary Fund “broke the buck” — that is, its net asset value fell to 97 cents a share — during the financial meltdown in 2008. That marked only the second time in history that a money market fund’s NAV slipped below $1 a share.
At an ICI conference last March, the group’s chief executive and president, Paul Schott Stevens, discussed the potential for an industry-sponsored liquidity facility that could provide money market funds with additional capital in the event of severe market conditions. He didn’t disclose details about how such a facility might work, however.
“This is the first real discussion of what it could look like,” said Peter Crane, president and chief executive of Crane Data LLC.
Indeed, Vanguard’s letter gives a glimpse into what the ICI’s proposal most likely will include.
In the letter, F. William McNabb III, chairman and executive of Vanguard, wrote that the company doesn’t support the idea of having a variable-rate NAV for money market funds, which is one of the working group’s proposals.
“We feel that doesn’t provide any additional protection,” John Hollyer, a principal in the fixed-income group at Vanguard, said in an interview. “It just changes the accounting.”
But a private liquidity facility, with all money market funds kicking in, could provide capital to the funds while allowing them to maintain a stable NAV, Mr. McNabb wrote in the letter.
Nevertheless, Vanguard placed a fair number of qualifications on its support for the backstop. The firm said it supports the proposed facility only if money market funds can maintain a stable NAV, and if funds and sponsors aren’t required to maintain banklike capital requirements. In addition, Vanguard insisted that the costs of participation must be reasonable
What’s more, the company believes that all prime money market funds should be required to participate in the backstop.
“We believe the ICI’s work performed to date on this liquidity facility, in consultation with members of the [working group], has been significant and should serve as the blueprint for the ultimate liquidity facility that is adopted by the industry,” Mr. McNabb wrote in the comment letter.