The Financial Stability Board (FSB) has published a final report and a set of policy proposals aimed at improving the resilience of money market funds (MMFs).
FSB members will assess the vulnerability of MMFs within their jurisdictions and apply the policy framework and toolkit described in the report to address these weaknesses in accordance with their national legal frameworks.
Subsequently, the FSB will work with IOSCO to assess the effectiveness of these responses at the member level, as well as to take further steps to promote the resilience and efficient functioning of short-term finance markets.
These efforts are part of a multi-year work plan aimed at strengthening the resilience of non-bank financial intermediation (NBFI) following the market turmoil of March 2020.
The FSB delivered the report, entitled Policy Proposals to Enhance MMF Resilience, to the G20. A cover letter, sent on October 11, highlights the significant progress made since the start of the project through risk management measures in open money market funds, to assess the impact of margin calls and the basic funding market structure.
A preliminary version of the report was released for public consultation in June 2021 and this final report incorporates the comments provided during this consultation process.
The FSB plans to submit a full progress report on its work on NBFI resilience to the G20 in late October 2021.
At the heart of its analysis, the FSB indicates that money market funds are subject to two main areas of vulnerability: sudden and disruptive redemptions by investors wishing to access liquidity; and the challenges they may face when selling assets, especially under tense market conditions.
The first type of vulnerability arises because money market funds engage in liquidity transformation, they are used for cash management by investors, and they are exposed to credit risk. At the same time, regulatory thresholds can encourage investors to buy back a fund to avoid the consequences of the fund crossing this threshold – what the FSB calls âcliff edge effectsâ.
Taken collectively, the FSB argues that these features may contribute to a first-come advantage for investors who withdraw from the fund in a crisis, which can make MMFs individual, or in some cases the entire fund industry. monetary, vulnerable to rushes.
The report offers a range of policy options to address the vulnerabilities of MMFs, examining how these options would affect the behavior of MMF investors, fund managers and sponsors, as well as their broad impact on money market funding markets. short term.
Policy options include the use of swing pricing to impose the cost of redemptions on fund investors who redeem from a fund. These include provisions to guard against potential losses, including capital buffers and the application of minimum balance at risk measures (p 2).
These also include steps to examine regulatory thresholds that can potentially lead to cliff-edge effects, including removing the links between regulatory thresholds and the application of fees or barriers.
The FSB recognizes that individual jurisdictions need flexibility to tailor measures to their specific circumstances.
It makes it clear that a single policy option may not be sufficient to address all MMF vulnerabilities. For some jurisdictions, the goal of improving the resilience of MMFs may be to make funds more liquid-like, targeting preservation of capital and liquidity for investors. For others, it may mean offering greater flexibility to investors, for example by allowing changes in repayment terms during times of market stress. For many, this will involve a combination of the options detailed in the policy toolkit.
By reviewing the progress made, the FSB will carry out an “inventory” of the measures adopted by the various member jurisdictions before the end of 2023.
In 2026, it will carry out a new assessment of the broader impact that these collective initiatives have had in dealing with risks to financial stability.
IOSCO will review its policy recommendations for money market funds, published in 2012, to fit the policy framework and toolbox detailed in this CSF report.