Global securities regulators have published a set of policy recommendations for money market funds, which aim to prevent runs on the funds, and systemic risk.
The International Organization of Securities Commissions (IOSCO) published a final report Tuesday, which sets outs its recommendations for common global standards for the regulation and management of money market funds (MMFs). The global group of regulators notes that publication of the report was opposed by a majority of the commissioners of the U.S. Securities and Exchange Commission (SEC), which also shot down a round of reforms in the United States earlier this year, too; but that there is no other opposition to the report at its board meeting in Madrid in last week.
The report, which sets out 15 recommendations, notes that the global money market industry represents approximately US$ 4.7 trillion in assets under management, and accounts for about a fifth of all collective investment schemes worldwide. And, it says that while they didn’t cause the financial crisis, they showed a potential to spread, or even amplify, a crisis.
Various reforms to money market regulation and operations have been adopted since the crisis, but IOSCO notes that these mainly focused on the asset side of funds. This latest set of recommendations address vulnerabilities arising from the liability side, as well as the crucial issue of valuation and the display of a constant net asset value, it says. In particular, IOSCO says its recommendations “seek to address the vulnerabilities around the risk of run and first mover advantage which could have broader consequences for the financial system.”
The recommendations include that: money market funds should comply with fair value principles when valuing their portfolios; that valuation practices should be reviewed by a third party; that they should adhere to liquidity minimums; conduct stress tests; and adopt tools to deal with exceptional market conditions and substantial redemptions pressures. It also recommends that funds’ disclosure should draw investors’ attention to the absence of a capital guarantee and the possibility of principal loss; along with the funds’ valuation practices and procedures for dealing with market stress.
IOSCO says that all the recommendations are important for the safety and robustness of the money market industry, however it allows that the implementation of some of the recommendations may need to be phased in, “to avoid disruptive impacts on the industry and the functioning of the financial system at large.”
It is also proposing to review the application of these recommendations within two years to assess whether they should be revised, complemented or strengthened. At that time, it will consider the impact of new banking regulations and the evolution in the structure of bank funding, potential regulatory reforms to the “shadow banking” system, the interest rate environment, along with changes in the industry and the potential development of competing products.
IOSCO says that its work on money market funds is an important part of the efforts by the G20 and Financial Stability Board (FSB) to strengthen the oversight and regulation of the shadow banking system.