The sharp, sudden reaction of financial markets to the onset of the Covid-19 pandemic revealed vulnerabilities in the money market fund sector that global policymakers are now seeking to address.
The Financial Stability Board (FSB) issued a consultation paper on Wednesday that sets out policy proposals designed to enhance the resilience of money market funds.
Specifically, the proposals seek to address structural weaknesses exposed by the market turmoil in March 2020 due to stress in short-term funding markets.
Among other things, the FSB found that money market funds “are susceptible to sudden and disruptive redemptions, and they may face challenges in selling assets, particularly under stressed conditions.”
As a result, individual funds and the sector as a whole are susceptible to runs that could also produce systemic stress, the group said.
“Enhancing [money market fund] resilience will help address systemic risks and minimize the need for future extraordinary central bank interventions to support the sector,” the FSB said.
The policy proposals include measures designed to shift the cost of redemptions onto investors who are redeeming their funds, enhance funds’ ability to absorb losses, and to reduce liquidity transformation.
The FSB said its proposals are intended to give regulators specific reform options and to inform possible changes to the policy recommendations in this area from the International Organization of Securities Commissions (IOSCO).
The consultation also sets out considerations for regulators in determining how different policy options could be combined to deal with vulnerabilities in different types of funds.
“The optimal combination should take account of jurisdiction-specific circumstances and policy priorities, as well as cross-border considerations including to prevent regulatory arbitrage that could arise from adopting divergent approaches across jurisdictions,” it said.
Additionally, the FSB suggested that efforts to improve the resilience of money market funds could be joined by measures designed to improve short-term funding markets, and by policies to enhance risk management by fund managers and systemic risk oversight by regulators.
The deadline for providing feedback on the proposals in Aug. 16. The FSB will issue its final recommendations in October.