MSRB Asks Treasury To Extend Fund Guarantee

Date: March 3, 2009

Contacts:            Jennifer A. Galloway, Chief Communications Officer
                          (703) 797-6600

Emphasizes Links Among Investors, Banks and Issuers

Alexandria, VA - The Municipal Securities Rulemaking Board today asked Treasury Secretary Timothy Geithner to extend the Department's Temporary Guarantee Program for Money Market Funds beyond its scheduled expiration date of April 30, 2009 because of its importance to tax-exempt money market funds and their customers, as well as for maintaining liquidity in the municipal variable rate securities market. The guarantee program allows money-market funds to purchase insurance based on their assets thereby providing a level of security for investors.

In its letter to Secretary Geithner, the MSRB says the Treasury's guarantee program "has been a tremendous success" in the tax-exempt marketplace by preserving "demand for variable rate demand obligations (VRDOs), of which tax-exempt money market funds are the principal investors." The MSRB says, "We urge Treasury to extend the Guarantee Program to September 18, 2009, the outside expiration date of the Program.  We also encourage Treasury to do so significantly in advance of the Guarantee Programs current termination date" in order to "reduce what would otherwise be unnecessary volatility in the tax-exempt marketplace as the April 30 termination date approaches."

The MSRB's letter emphasizes the importance of the guarantee program "to money market funds and their customers, who are overwhelmingly individual investors" and also to banks that often have obligations to repurchase VRDOs if securities have been tendered by investors but cannot be remarketed.  "If individual investors withdraw their investments from money market funds in large numbers, the money market funds will exercise their tender rights.  Since they are the principal investors in VRDOs, it will not be possible to remarket most of those VRDOs to other investors, and banks will be required to honor their purchase obligations.  The effect on those banks would be significant.  Some banks might be unable to meet their purchase obligations."  The letter says that "while the states and local governments who issued the VRDOs are obligated to reimburse the banks, they typically are not required to do so immediately, but instead may "term out" their reimbursement obligations over a period of time. The MSRB believes that, to avoid this result, this successful Guarantee Program should be extended soon."  Such term outs, the letter says, could result in "serious debt management consequences to issuers."

Click here to access the full letter.  

The MSRB protects investors, state and local governments and other municipal entities, and the public interest by promoting a fair and efficient municipal securities market. The MSRB fulfills this mission by regulating the municipal securities firms, banks and municipal advisors that engage in municipal securities and advisory activities. To further protect market participants, the MSRB provides market transparency through its Electronic Municipal Market Access (EMMA®) website, the official repository for information on all municipal bonds. The MSRB also serves as an objective resource on the municipal market, conducts extensive education and outreach to market stakeholders, and provides market leadership on key issues. The MSRB is a self-regulatory organization governed by a board of directors that has a majority of public members, in addition to representatives of regulated entities. The MSRB is overseen by the Securities and Exchange Commission and Congress.