Global watchdogs float remedies to cure money market fund stress

2/2 © Reuters. FILE PHOTO: A picture illustration of U.S. dollar, Swiss Franc, British pound and Euro bank notes, taken in Warsaw January 26, 2011. REUTERS/Kacper Pempel 2/2

By Huw Jones

LONDON (Reuters) - Global financial regulators proposed options ranging from capital buffers to charges to avoid a repeat of central banks having to rescue the $8.8 trillion money market funds (MMF) sector as they did during a "dash for cash" last year.

The Financial Stability Board (FSB), which coordinates financial rules for G20 economies, on Wednesday put forward a selection of measures for regulators to make MMFs more resilient and reduce the temptation for investors to flee for the exits.

During extreme market turmoil in March 2020, the Federal Reserve and other central banks had to inject liquidity into the financial system to avoid MMFs from buckling under heavy demand for redemptions, for the second time in 12 years.

The industry has argued that all parts of the financial system came under severe strain last year at the height of the COVID-19 crisis as economies went into pandemic lockdowns.

The MMF sector, with over half in the United States, is critical for short-term financing of the economy and companies, investing in government debt and short-term paper, allowing investors to cash in their shares on a daily basis.

"MMFs are susceptible to sudden and disruptive redemptions, and they may face challenges in selling assets, particularly under stressed conditions," the FSB said in a report.

One option was "swing pricing" or allowing fund managers to impose transaction costs on those who redeem shares to reduce the impact on investors who remain in the fund, the FSB said.

Another option is for a small fraction of each investor's shares not to be redeemed immediately, and changing how "gates" or temporary bar on investor exits are implemented, it added.

A capital buffer of sufficient size would also mitigate pressures from heavy redemptions, although it would bump up industry costs, the watchdog said, adding that stress tests for individual MMFs and for the sector as a whole could also work.

Eric Pan, CEO of global funds industry body ICI, said it was encouraging that the FSB also recognises the need to improve how wider short-term markets function, including commercial paper and certificates of deposit.

"Importantly, the FSB acknowledges that certain reforms, like capital buffers and swing pricing, could ultimately eliminate certain money market funds from the marketplace," Pan said.

The FSB has put the policy options out to public consultation and will publish a final report in October.

It would be up to regulators in each member country to decide on the combination of measures, allowing them to skirt steps like capital requirements which have divided regulators in the past as well as industry.

The FSB will follow up with implementation reviews.

FSB MMFs Graphic - https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgqomkpq/FSB%20MMFs%20Graphic.PNG