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Fed Eyes Exit Fees on Corporate Bonds to Prevent Panics

  • By Konstantine Kastens, AFP Public Policy Analyst Twitter: @KastensAFP
  • Published: 6/18/2014

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.

 

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