MSRB Seeks More Time for Fund Program

WASHINGTON - The Municipal Securities Rulemaking Board this week called for the Treasury Department to extend the termination date for its $50 billion temporary guarantee program for money market mutual funds to Sept. 18 from April 30.

In a two-page letter released late Tuesday, the board stressed that the program is vitally important to tax-exempt money market funds and their customers, as well as for banks that have contractually agreed to maintain liquidity in the roughly $400 billion market for municipal variable-rate demand obligations.

Tax-exempt VRDOs held by money market funds, the biggest purchasers of such short-term debt, typically may be tendered for purchase at par on seven days' notice, the MSRB said in the letter, which was signed by chairman Ron Stack, managing director and head of public finance at Barclays Capital.

But if the guarantee program expires next month and, in anticipation of that event, investors sell off their investments in money market funds in large numbers, it's possible those VRDOs might not be remarketed to other investors. Banks would then be obligated to purchase them under the terms of letters of credit or standby bond purchase agreements.

"The effect on those banks would be significant and some banks might be unable to meet their purchase obligations," the MSRB told Treasury Secretary Timothy Geithner.

The board also noted that there could be "serious debt-management consequences" for issuers in the event that their VRDOs became bank bonds. Typically, when banks hold un-remarketable VRDOs for a certain period of time, the issuer may be required to repay the debt in a significantly shorter period of time than under the terms of the original debt offering.

"The MSRB believes that, to avoid this result, this successful guarantee program should be extended soon," the board said. It urged the Treasury to announce the extension "significantly" in advance of the guarantee program's current termination date to reduce what would otherwise be "unnecessary volatility in the tax-exempt marketplace as the April 30 termination date approaches."

The board also said that it stands ready to assist Treasury in developing other programs that could aid state and local issuers, and the broader municipal securities market, during the financial crisis.

Meanwhile, the Securities Industry and Financial Markets Association said yesterday that it strongly supports the MSRB's letter.

"It is essential that the guarantee program be extended as soon as possible to protect against investor uncertainty in tax-exempt money market funds and the downstream ramifications on fund balances and issuers," said Leslie Norwood, SIFMA managing director and associate general counsel.

The guarantee program, which Treasury has already once extended, was originally unveiled on Friday, Sept. 19. It was aimed at stopping investors from pulling investments out of their money market funds - which are not insured by the Federal Deposit Insurance Corp. - amid the market turmoil immediately following the collapse of Lehman Brothers and a run on a money market fund that had exposure to the firm's debt.

Tax-free funds were originally excluded from the program but later added amid concerns that investors would withdraw their money from the funds in record numbers when the markets reopened.

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