High US regulators pledge to hunt reforms for cash markets

Top regulators promise to press ahead with reforms in a key corner of U.S. financial markets that the Federal Reserve and Treasury Department hurried after they were churned during the coronavirus outbreak in Spring 2020

June 11, 2021, 11:28 pm

3 minutes read

Members of the Financial Stability Oversight Council discussed reforms targeting so-called short-term finance markets, which include trillions of dollars in money market mutual funds.

The board of directors is an inter-agency group led by Treasury Secretary Janet Yellen who said the 2020 crisis prompted “extreme political intervention” by the Federal Reserve and the Treasury Department to restore order to the market.

Federal Reserve Chairman Jerome Powell, also a member of the council, said the 2020 crisis was triggered by a “jump in cash” that prompted the Fed to step in with reserve funding to calm the turmoil.

“Rapid repayments on money market funds resulted from the liquidity pressure and exacerbated it in turn,” he told the panel.

Powell said that after the Fed created a money market mutual funds liquidity facility with $ 10 billion in assistance from the Treasury Department, “the turmoil has eased, conditions in short-term finance markets have improved and access to credit has improved.”

The council received a closed briefing from staff at the Securities and Exchange Commission on the comments they had gathered on the reforms that need to be pursued to make short-term finance markets more resilient in times of financial crisis.

SEC Chairman Gary Gensler told the group during its open meeting that he had directed SEC officials to develop recommendations that the five-member SEC can vote on. Yellen said she fully supports the SEC’s efforts to reform the current system.

Councilors also expressed concern that the global financial system is not moving fast enough to prepare for the transition from LIBOR, the London interbank supply rate that has served as the benchmark rate for trillions of dollars in financial contracts.

The regulatory authorities have supported the switch from the LIBOR rate to the Secured Overnight Financing Rate (SOFR) by the end of this year.

However, Yellen and other officials expressed concern that not enough was being done to prepare for the move from LIBOR to SOFR.

“More needs to be done to enable an orderly transition,” Yellen told the panel. “While important advances are being made in some segments of the market, others, including corporate lending, are far behind what they should be at this stage of transition.”