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Update 1 us chamber report sees no need for more money fund reforms


* Report touts success of SEC's 2010 fund reforms* Also finds funds withstood 2011 eurozone crisis* Warns against SEC imposing new reforms on industry* SEC, FSOC mull possible actions on money fund reforms* FSOC slated to meet in closed session ThursdayBy Sarah N. LynchWASHINGTON, Oct 16 Money market fund regulations adopted by U.S. securities regulators in 2010 reduced risks in the $2.5 trillion industry, according to a report sponsored by the U.S. Chamber of Commerce that questions the need for further reforms. The report, drafted by three finance and economics professors, concludes that the Securities and Exchange Commission's 2010 rules have left money market funds more liquid and better able to withstand a wave of customer withdrawals. The report says the industry weathered the economic turmoil in Europe in 2011 despite an uptick in redemptions and did not pose any systemic risk to the marketplace."Given the remarkable stability of the industry in the summer of 2011 during the eurozone crisis and uncertainty about whether the U.S. would raise its debt ceiling, we question whether there is sufficient evidence to support additional reform," says the report by David Blackwell and Kenneth Troske from the University of Kentucky, and Drew Winters of Texas Tech University.

The 2010 reforms tightened credit quality standards, shortened weighted average maturities, imposed a liquidity requirement on money market funds and increased disclosure of fund holdings. The report is the latest effort by the Chamber of Commerce to fend off efforts by SEC Chairman Mary Schapiro and the Financial Stability Oversight Council, or FSOC, to impose another round of rules on the money market fund industry. The chamber released the report just two days before the FSOC is slated to meet behind closed doors, where the topic of money market funds is expected to be discussed. Last month, Treasury Secretary Timothy Geithner said the FSOC will begin considering new reforms after Schapiro failed to attract the three SEC votes she needed to advance her own plan.

Schapiro has argued that more regulations are needed to prevent another run like the one seen in the 2008 financial crisis, when the Reserve Primary Fund "broke the buck," meaning its net asset value fell below $1 per share. She had hoped to put out a proposal for public comment with two key components. One would have called for new capital buffers and redemption restrictions in a time of chaos. The other explored moving to a floating net asset value. Banking regulators are supportive of her efforts. In a report on Monday, a group of researchers at the Federal Reserve Bank of New York argued for new rules, saying funds could delay full redemptions from all customers at all times to encourage investors to look closely at a fund's risk before putting in money. But the money market fund industry worries that new rules would drive money out of their funds and into bank accounts at a time of very low interest rates. Opposition to the reforms has also been mounted by many companies and local-government agencies that rely on money funds to buy their short-term debt instruments. Three SEC commissioners - Democrat Luis Aguilar and Republicans Daniel Gallagher and Troy Paredes - have also expressed skepticism and have said they want first to study the effects of the 2010 reforms before proceeding with new rules.

The SEC's economists are currently conducting the study requested by the three commissioners, and results could come in a few weeks, according to one person familiar with the matter. Despite his resistance to Schapiro's original proposal, Gallagher has said he hopes the agency will consider a fresh package of reforms. He has also said he would be open to considering a floating net asset value coupled with allowing fund boards to impose liquidity "gates."Any move to a floating net asset value is likely to be strongly opposed by the industry."If the fund value of money funds is undermined, investors are likely to move their money to products that increase risk in the financial system," said Fidelity's Money Markets President Nancy Prior at a U.S. Chamber event on Tuesday convened to examine the report's findings."A greater concentration in banks... will increase financial pressure on the Federal Deposit Insurance Corp. and the American taxpayer."Geithner has said the FSOC will likely weigh a package of money market reforms at its November meeting. Eventually, he hopes to present those suggestions to the SEC for consideration. Under the Dodd-Frank financial oversight law of 2010, the SEC would need to adopt the FSOC's suggestions, or reject them in writing within 90 days. The Chamber has previously said it prefers to leave money market fund matters to the SEC, and not to the FSOC.

Update 2 latest spike in euro money rates keeps pressure on ecb


* Eonia hits 0.30 pct, above ECB's 0.25 pct refi rate* Falling excess liquidity putting pressure on rates-analysts* Low ECB loan repayments next week may offer some respiteBy Marius Zaharia and Marc JonesLONDON, Jan 17 Pressure on the European Central Bank to ensure rising borrowing costs do not snuff out the euro zone's fledgling recovery crept higher on Friday as they rose above its benchmark for the third time in as many months. At the ECB's last meeting, President Mario Draghi said an "unwarranted" rise in the bank-to-bank lending rates that underpin borrowing costs across the economy would be one of the triggers for another rate cut or more drastic action. Eonia, the euro zone overnight bank-to-bank lending rate, settled at 0.30 percent overnight, up from 0.21 percent the previous day and from between 0.10 and 0.15 percent last week. The rise pushed Eonia back above the ECB's headline 0.25 percent rate that banks pay when they borrow at the central bank's still-unrestricted lending operations. It was the first time this year but the third time since November.

Analysts say it is a symptom of falling excess liquidity -money banks have beyond what they need for their day-to-day operations. Banks have already paid back almost half of the 1 trillion euros the ECB flooded into the system at the peak of the crisis. Excess liquidity is now down to just over 130 billion euros, its lowest since September 2011 and down from a mid- 2012 peak of 800 billion."Money market rates ... continue to see upward pressure, as liquidity conditions gradually tighten, which will put more pressure on the ECB to make a move," said Jan von Gerich, chief fixed income analyst at Nordea in Helsinki."The ECB wants to prevent such a rise in short-term rates because it would effectively tighten monetary conditions, putting pressure on economic growth and potentially pushing the euro zone's already sub-target inflation even lower.

REPAYMENTS EASE The focus is now on whether banks look to self-regulate market rates themselves by taking more from the ECB when it holds its weekly and 3-month lending operations in the next couple of weeks. There looked to be signs of it already on Friday as banks paid back just 991 million euros of the near 540 billion euros that remains of the ECB's 1 trillion euro, 3-year LTRO bonanza.

"At least it argues against Eonia spiking further up," said Marius Daheim, chief strategist at Bayerische Landesbank. Chris Clark, a strategist at ICAP added that market prices also pointed to self-regulation taking place."With 1-month Eonia closing around 0.21 percent yesterday evening, this surge in short-term borrowing rates is expected to pass, although probably not until next week's main refinancing operation," he said, adding that things such as tax deadlines in Italy would keep the pressure on till then. But others say longer-term money rates trading lower than overnight ones suggested market participants were also expecting some form of additional ECB policy action this year. The forward interest rate market [ECBWATCH showed Eonia was expected to trade at 0.19 percent after the February meeting and as low as 0.15 percent at the end of the year. Top ECB policymaker Benoit Coeure gave little sign in an interview on Thursday that anything was imminent, though he repeated that the bank has room to cut its interest rates further or offer out more cheap liquidity."If we continue to see Eonia well above 15-20 basis points in coming weeks the ECB will probably feel forced to take remedial action," Rabobank market economist Elwin de Groot said. "That could be already in the next meeting."