Fueled by concerns about bond-fund runs after an eventual
tightening of interest rates, Federal Reserve Board officials are reportedly
discussing charging investors a fee for accessing bond funds, according to the Financial Times.
The FT report points
to concern that “bond funds are becoming ‘shadow banks,’ because investors can
withdraw their money on demand, even though the assets held by the funds can be
hard to sell in a crisis.”
Since 2009, when the Fed responded to the financial
crisis by bringing interest rates down, bond markets have seen a booming level
of investment. If rates rise, subsequent to a stronger economy, Fed officials
fear an investor response to shift money away from fixed-income assets will
trigger a fire sale of funds.
Until now, imposing fund fees has been one of a handful
of options mulled by both the Securities and Exchange Commission (SEC) and the
Financial Stability Oversight Council (FSOC)—of which the Fed is a member—to
quell liquidity concerns for money-market funds.
The purported fee discussion comes on the heels of a recent
Fed study, which found that imposing redemption fees and gates on money-market
funds could make them “more fragile and vulnerable to runs,” as a result of
preemptive fund withdrawals.
Sources told the FT that a corporate bond exit fee would require a rule change within the
SEC’s standing rules, thus requiring the support of SEC commissioners. Currently
undergoing their own disagreements on money-market fund rule changes and
frustrated with what some SEC commissioners call Fed encroachment on their jurisdiction,
it’s unlikely that the SEC will yield to accommodate.