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Reforms designed to address vulnerabilities in money market funds — specifically the risks posed by funds that hold illiquid assets but promise daily redemptions — have yet to be comprehensively adopted, finds a review by the Financial Stability Board (FSB).

In a new report, the global policy group said its review of the implementation of policy proposals that were put forward in 2021 found that progress has been inconsistent and more work needs to be done by regulators.

“The main identified vulnerability is the mismatch between the liquidity of money market fund asset holdings and the redemption terms offered to investors, which makes money market funds susceptible to runs from sudden and disruptive redemptions,” the report said.

These risks are particularly relevant for funds that invest in riskier assets, such as corporate debt. And these risks can be amplified by funds that have a high share of institutional investor ownership and a stable net asset value, which can create incentives for investors to preemptively redeem their holdings in times of stress, it said.

In response, the FSB recommended that regulators adopt a range of policy tools, including measures to impose the costs of redemptions on investors that cash out first, enhancing the ability of funds to absorb credit losses, and reducing liquidity transformation.

The FSB’s review found that, while some jurisdictions have introduced new policy tools or revised existing ones, others are still developing the tools to address these issues.

As a result, it concludes that more work is needed to enhance the resilience of money market funds and to limit the need for extraordinary central bank interventions during times of market stress.

To that end, the FSB calls on regulators to review their policy frameworks and to adopt tools to address funds’ liquidity issues.

It also recommends that existing tools, such as minimum liquidity requirements, should be re-examined to determine whether these need to be re-calibrated to ensure their efficacy.

The FSB also calls on the International Organization of Securities Commissions to consider the findings of this progress report when it revisits its policies for money market funds.

The report also “lays the ground for the assessment of the reforms’ effectiveness that the FSB plans to conduct in 2026,” said Ryozo Himino, chair of the FSB’s standing committee on standards implementation, in a release.