Fidelity Is Planning a Firm To Insure Its Money Funds
April 29, 2011
Fidelity Investments is seeking approval from the Securities and Exchange Commission to establish an insurance company that would help cover potential losses in its money-market funds. Fidelity, the nation's largest mutual-fund company, said establishing its own insurance company would be the most ``cost-effective way to ensure against a credit default'' that would hurt the value of its money-market funds. In doing so, Fidelity will create a mutual insurance company owned by its money-market funds. Fidelity, a subsidiary of FMR Corp., began seeking SEC approval after a ruling by the Internal Revenue Service in March gave it favorable tax treatment in creating the insurance company. Fidelity is awaiting SEC approval to create the unit. Roberto Jacob, the Fidelity general counsel who came up with the idea, said the insurance company won't be used as a marketing ploy. He said that's because it will cover only one kind of risk: credit risk, in which a company's default affects the value of securities in Fidelity money-market funds. Money-market funds typically invest in the safest short-term investments issued by the federal government or companies. However, in recent years, funds have fallen victim to losses due to declines in their derivatives investment. The financial problems of Orange County, Calif., which affected millions of dollars in short-term securities also focused attention on the safety of money-market funds. Mr. Jacob said that the insurance wouldn't cover interest-rate risk and other types of risk and initially will guarantee only $100 million of losses on the $80 billion that exists in 36 of the hundreds of Fidelity money-market funds. ``We're very reluctant to use this as a big marketing tool. It's not a guarantee against (all) losses,'' he added. Mutual-fund experts say that while the concept is a novel one, they don't expect other companies to follow suit. That's because other fund organizations aren't as big as Fidelity and don't have the economies of scale to do so. Mr. Jacob said the reason why Fidelity seeks to establish an insurance company is because private insurance is too expensive.
