Global Regulators Try Again to Eliminate Money-Market Hazards

The Financial Stability Board released a 63-page report Wednesday advising an overhaul of regulations for money-market funds, aiming to fix flaws exposed by early-pandemic turmoil that froze vital financial markets.

The funds should penalize investors trying to grab money quickly in a crisis, according to the report. The FSB, in a set of proposals made to financial regulators worldwide, also suggested barring investors from yanking all their money out.

The almost-$9 trillion global industry is experiencing deja vu. The 2008 financial crisis exposed major issues with money-market funds, which are supposed to be boring places to park cash and earn a little interest. Regulators spent years trying to eliminate those issues, designing a slew of mechanisms intended to slow the withdrawal of investor cash during times of stress. But the Covid-19 financial panic made clear that there are still problems with the funds and short-term debt markets.

March 2020 marked “the second time in 12 years that authorities in Europe and the U.S. had to step in to support the sector,” Randal Quarles, current FSB chairman and also vice chairman for supervision at the Federal Reserve, said in a press briefing. Because money-market funds are still susceptible to investor runs and difficulties when forced to dump assets under pressure, the report “presents a range of policy options to address these vulnerabilities.”

Funds should charge investors for the cost of their early and large-scale redemption moves, “especially at times when liquidity is particularly costly,” according to the FSB report. Investors who keep their money in the fund would, as a result, see higher returns. This, the FSB said, may have to be mandated by regulators to overcome reluctance among managers to impose it.

Global Regulators Try Again to Eliminate Money-Market Hazards

The international standards group also advocated for a “minimum balance at risk” rule. Investors would be banned from withdrawing all of their money in an instant and would have to leave a “small fraction” behind. A related idea -- a capital buffer -- might also be useful, the FSB said. Money would be put into an escrow account to cover material losses from “rare, pre-defined events.”

The regulator also raised the possibility of stress tests and more public disclosures of assets in the funds, which hold short-term government and corporate debt.

Another way to discourage investors from racing for the exits would be to alter the rules on funds’ liquidity, the report said. At least in the U.S., current regulations stipulate that if a fund’s liquid assets fall below a threshold, its board can impose a fee of up to 2% on withdrawals, or even suspend them entirely.

Those provisions incentivized investors to pull money out last year before the fees were imposed. Decoupling the threshold from penalties could assuage these concerns and give funds greater flexibility in managing their liquidity.

Quarles has made money-market reform the major project of his final year as FSB chairman and Fed vice chairman, jobs he’ll step away from in December and October, respectively. That leaves a narrow window for him to get a new set of U.S. money-market rules going at the Fed.

Read More: Money-Market Fund Overhaul Plan Coming This Year, Quarles Says

The FSB is soliciting public feedback on this new report. A final version will come out ahead of an October Group-of-20 meeting.

©2021 Bloomberg L.P.

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