LONDON: Regulators will propose changes to money market funds next year after pandemic lockdowns in March highlighted how the $6.9 trillion sector struggled under severe stress, a report said.
The Financial Stability Board (FSB), which coordinates financial rules for the Group of 20 major economies, said in a report on Tuesday to G20 leaders meeting this week that the turmoil in markets in spring had exposed vulnerabilities throughout the financial sector.
But further investigation is warranted into money market and open-ended funds, into how derivatives clearing houses vary margin or cash calls to cover trading positions, and into the structure of bond markets, the FSB said.
“It’s clear we need to take action to address these issues,” Randal Quarles, chair of the FSB and Vice Chair of the U.S. Federal Reserve, told reporters.
Without central banks doling out liquidity to maintain stability, sectors such as money market funds would probably have fared far worse in the “dash for cash”, the FSB said.
It set an “ambitious” work plan, with policy proposals to enhance the resilience of money market funds due in mid-2021, along with a study of margining practices. Work on open-ended funds and bond markets would stretch to 2022.
Eric Pan, CEO of the Investment Company Institute, a global funds industry body in Washington, said stresses surfaced in many parts of the market in March and called on regulators to assess the need for new rules carefully.
“We encourage international regulators to continue to take an empirical, data-based approach, to draw careful distinctions among market participants and products,” Pan said.
Money market funds holding non-government assets saw big outflows in the United States and Europe.
Central banks and securities regulators at the FSB have clashed in the past over funds, with central bank attempts to clone bank capital and liquidity rules rebuffed by market watchdogs.
A more consensual approach is likely this time round to focus on reinforcing existing tools such as “gates” and extra fees at times of high redemptions. Money market reform is a priority for Italy, which takes over the G20 presidency next year.
The Bank of England has suggested it may need to offer non-banks access to its liquidity in the same way banks can.
The FSB said there was a need to avoid “moral hazard”, or an expectation that central banks would act again as a safety net for struggling funds in the next crisis.
In clearing, some regulators have suggested higher levels of margin in normal times to avoid hefty increases in rocky markets that in March triggered a search for cash by requesting redemptions from funds.
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