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Big biz balking at money fund reform Print E-mail
Friday, 11 September 2009

By Matthew Quinn

The U.S. Chamber of Commerce is leading the charge against a Securities and Exchange Commission's proposal that would prohibit money funds from investing in anything other than top-rated securities, the Wall Street Journal reported.

The chamber -- along with 20 companies including Walt Disney and Avon Products -- said the limitations could impair businesses' ability to tap the commercial paper market.

"In many cases, the reduced financing flexibility and increased cost of capital could negatively impact investors in these companies and be directly passed down to consumers in these industries," the companies said in a letter to the SEC.

The SEC's proposal would only allow money-market funds to invest in top-tier CP, along with other highly-rated securities. Currently, they can invest as much as 5 percent of their assets in second tier paper rated A2/P2.

The new rules are of course in response to a money-market fund, the Reserve Primary Fund, breaking the buck last September after being forced to write down the value of Lehman Brothers notes and commercial paper following the bank's bankruptcy filing.

It should be noted, however, that Lehman's short-term debt rating was A1 at the time.

The chamber's objections are likely more of an anti-regulation bent rather than true concern about the A2/P2 market. As of June 24, the SEC said, 95.7 percent of eligible commercial paper is in the top tier and 4.3 percent is in the second, the Journal said. The paper also was only able to identify one money-market fund that currently holds any Tier 2 paper-the MainStay Principal Preservation Fund, which holds just $7 million in such assets.

The chamber still insisted the proposal is a bad idea because the Tier 2 market could rebound as the economy recovers.

The commercial paper market in general has been beaten down badly during the credit crisis but has shown some signs of a turnaround.

As of Thursday, commercial paper outstanding had increased the past four weeks, reaching $1.17 trillion, according to Federal Reserve data.

That's still a far cry from the 2009 peak of $1.76 trillion.

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