Another proposal under consideration is requiring money market funds to maintain a capital reserve. Having this capital “on reserve” would provide a buffer to absorb any losses if the fund can’t maintain its $1.00 value. The capital reserve may be structured in one of two ways: 1) as a reserve owned by the funds shareholders, the capital of which is accumulated over time by shaving off some of the yield on investments and placing it in the reserve; and 2) as a reserve that is not owned by shareholders, but funded by the investment advisor or sponsor who would post capital by issuing subordinated class shares to the fund, taking out loans, charging higher management fees, or sidelining working capital from different business units that would otherwise be infused into the capital markets driving economic growth.
This proposal would needlessly drive up the cost of operating money market funds, which will ultimately be passed down to investors, without producing any substantive increases in the safety of the industry. In fact, a capital buffer is likely to increase volatility and moral hazard with money market funds. Furthermore, businesses and other investors would experience lower returns and be incentivized to find alternate investment opportunities.
Moreover, small fund providers may not have the ability to post capital, thus driving them out of the marketplace. The consequence would be reduced choice for businesses and other investors to manage their cash and concentrated risk in fewer providers of money market funds.