[ by Melanie Gretchen ]

The Financial Stability Oversight Council proposed new rules for the $2.5 trillion money market fund industry, on the grounds that current regulations are not enough to prevent runs in a time of crisis.  If the counsel's framework looks familiar, it's because SEC Chairman Mary Schapiro presented a similar plan, which failed to receive he needed support from 3 of her colleagues.

Who the FSOC is: a council of federal financial regulators, (i) created by the 2010 Dodd-Frank reform law, and (ii) chaired by Treasury Secretary Timothy Geithner, and (iii) including Ms. Schapiro.

On Tuesday, the council voted to offer 3 distinct alternatives, to recommend one or a combination of those to the SEC for adoption.

The proposal's 3 main options

• call for funds to hold a capital buffer of up to 1% of a fund's value and impose redemption holdbacks in times of stress
• require money funds to have a floating net asset value, or share price, instead of their current fixed price
• impose a higher buffer of 3% of a fund's value, though funds could hold less capital if they met other requirements

What makes the FSOC proposal significant: it could pressure the SEC to agree on a course of action.

• in the event of failure, if the commission does not follow through on the council’s proposals, the council could draw on other powers to impose its own tougher oversight on the mutual fund companies and banks that sell money market funds publicly or on the funds themselves

"Never again should policy makers be forced to choose between a financial meltdown or a taxpayer bailout of money market funds.  I hope the Securities and Exchange Commission will recognize the risks posed by these products and implement the needed reforms." -- Sheila Bair, former FDIC chairwoman, currently overseeing the Systemic Risk Council, a nonpartisan group.

For further details, go to [Reuters, 11/13/12] and [NY Times, 11/13/12].