Researchers at the Federal Reserve of New York have spoken out in support of a money market fund reform proposal that would require a small fraction of every investor’s balance to be subject to delayed withdrawal at all times (called a “minimum balance at risk” or MBR). Under the plan, a portion of a redeeming investor’s MBR would also be subordinated to nonredeeming investors’ shares. Subordination, which would only affect the allocation of losses in the event that a fund “breaks the buck” and is liquidated, is meant to ensure that if a money market fund does suffer losses, redeeming investors absorb them before nonredeemers do.
The idea was initially outlined in a Fed staff report published in June 2012. The officials argue that the plan would incentivize investors to evaluate a fund’s riskiness before making an investment. They also argued it would give investors a reason to stay in the fund and “retail investors, who traditionally have been less quick to run from distressed funds, would enjoy greater protections if they don’t run.”