Proposed reforms to the global money market fund sector to address vulnerabilities that were exposed with the market disruptions that followed the onset of the Covid-19 pandemic are likely negative for asset managers that offer these funds, says Moody’s Investors Service.
Last week the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, proposed a series of reforms designed to make money market funds less vulnerable to sudden spikes in redemptions, and to make it easier for funds to liquidate assets in stressed markets.
In a new report, Moody’s said that while the FSB’s proposals would make money market funds safer, they also “raise questions about whether [these funds] can remain a commercially viable fund product if the proposals are implemented.”
The report noted that money market funds proved susceptible to investor runs during the global financial crisis and again when the pandemic first hit in March 2020.
In both cases, it said, “redemptions from [money market funds] did not abate until central banks intervened.”
Therefore, reforms to enhance funds’ ability to cope with redemptions would likely reduce the need for interventions and help curb systemic risk.
Yet, at the same time, measures to make funds safer to the financial system could also reduce their appeal to investors and therefore to the asset managers that issue them, the report suggested.
“Some of the FSB’s reform options aim to reinforce the sector by imposing redemption costs on investors or by improving [funds’] loss absorption capacity,” the report said. “Others would reduce [funds’] liquidity transformation or limit adverse ‘threshold’ effects, such as preemptive withdrawals as fund liquidity declines toward levels where redemption restrictions kick in.”
While these options would likely enhance funds’ resilience during periods of stress, the reforms “would also make them less attractive to investors and sponsors,” Moody’s said.
“For example, measures such as swing pricing and minimum balances at risk would make [funds’] shares less liquid, potentially deterring some investors. They would also entail costly operational challenges that could in some cases make [funds] uneconomical for their sponsors,” it said.
The FSB’s consultation closes on August 16. It plans to issue its final recommendations in October.