By Tim McLaughlin
BOSTON, Sept 11 (Reuters) - Fidelity Investments, the largest provider of U.S. money market funds, told Securities and Exchange Commission officials that proposed industry reform could increase the borrowing costs of U.S. municipalities by up to $13 billion, according to an SEC memo.
Boston-based Fidelity has not yet made public its official comment letter on the SEC’s proposed reform. The deadline is Sept. 17.
But during an Aug. 16 meeting with the SEC’s Division of Economic and Risk Analysis, Fidelity officials said U.S. municipal financing costs could increase anywhere from $1 billion to $13 billion, depending on the amount of money market-related funding that is refinanced with more expensive debt.
A Fidelity slide presentation with the figures was part of the discussion with regulators, according to the memo Reuters obtained on Wednesday.
Money market funds currently provide low-cost financing to U.S. states and cities by buying the short-term debt they issue to fund their operations.
These funds hold $323 billion worth of municipal debt and the current annual financing cost is $275 million, according to Fidelity’s presentation. The financing costs assume average interest rates between 0.06 percent and 0.18 percent on short-term funding.
But if large chunks of that funding were replaced with more expensive, longer-term debt, municipal financing costs could surge, according to various scenarios provided by Fidelity.
Under the SEC’s proposal, municipal money market funds, for example, would have to move away from a stable, $1 per share price, to a floating net asset value (NAV).
That reform is a direct response to what happened in 2008 when the Reserve Primary Fund, one of the largest money funds, suffered losses on Lehman Brothers debt and could not maintain its $1 per share price, known as “breaking the buck.”
Critics say a floating NAV would drive away some money market investors. As a result, money funds woul have less interest in buying municipal bonds thereby forcing municipalities to offer higher rates on their debt.
But a change to a floating NAV would only decrease stability and create uncertainty, making municipal money funds, far less attractive to investors, Massachusetts Municipal Association Executive Director Geoffrey Beckwith said in a letter this week to the SEC.
“The ensuing instability would...jeopardize financial recovery at the municipal level,” Beckwith wrote. His organization represents 351 cities and towns in Massachusetts. The Government Finance Officers Association also opposes the SEC’s NAV pricing reform.
Nevertheless, Pete Crane, a long-time money fund analyst and co-founder of Crane Data, said there is a strong chance that municipal money market funds could be excluded from the SEC’s NAV reform.
As Fidelity said in its presentation to the SEC, municipal money market funds are not big enough to pose a systemic risk. They account for about $260 billion, or 10.5 percent, of the $2.6 trillion money fund industry. And Detroit’s bankruptcy did not destabilize municipal money funds, nor did they see significant redemptions during the 2008 financial crisis.