Sentinel Management Group, an Illinois-based money manager, has told clients it won't satisfy redemption requests for the $1.5 billion it manages in money funds.
Sentinel is a futures commission merchant regulated by the Commodities Futures Trading Commission. The fund primarily invests in excess cash for other commodity traders in overnight accounts.
Sentinel told its clients it was seeking to halt redemptions until they can be honored in an orderly fashion.
In a letter dated Aug. 13, Sentinel said it was worried it would not be able to meet any significant redemption requests.
"We had previously thought that the market would return to some semblance of order and that our clients would not join the panic. Unfortunately, this has not been the case," Sentinel said in the letter.
"We do not see an alternative and we don't believe it is anyone's best interest if a run on Sentinel took place and we were in a forced liquidation mode," Sentinel's management continued.
Earlier Tuesday, Sentinel asked the CFTC for permission to halt redemptions in an attempt to avoid a forced liquidation. However, the CFTC said it doesn't have the authority to grant the request.
The CFTC said it is "aware of the Sentinel situation" and is monitoring it. In addition, the regulator has not been contacted by any other funds with similar issues.
CME Group, which runs the Chicago Mercantile Exchange and the Board of Trade, said they have confirmed that clearing member firms have continued to meet all of their obligations and are in good standing.
Sentinel is not a clearing member of CME Group or any other Exchange, CME added.
Rival Horizon Cash Management, which manages $3.2 billion, said it has had no problems makings redemptions if its clients have needed them, and there is no risk to their clients' funds.
It remains unclear what Sentinel was invested in at this time, but news of the fund's actions sparked jitters in the asset-backed commercial paper market. A small portion of the commercial paper is backed by subprime mortgages, and about $20 billion of the $1.2 trillion market has had trouble.
Many money market and money funds invest in this portion of the commercial paper market to earn a few extra points of interest for their clients.