International watchdogs float cures to treatment cash market fund stress

LONDON (Reuters) – Global financial regulators suggested options ranging from capital buffers to fees to avoid central banks having to bail out the $ 8.8 trillion money market fund (MMF) sector again, as they did last year have done in a “jump on cash”.

The Financial Stability Board (FSB), which coordinates the financial rules for the G20 economies, on Wednesday put forward a selection of measures for regulators to make MMFs more resilient and reduce the temptation of investors to flee into the exits.

During the extreme market turmoil in March 2020, the Federal Reserve and other central banks had to inject liquidity into the financial system for the second time in 12 years to keep money market funds from buckling under the strong demand for redemptions.

The industry has argued that all parts of the financial system were hit hard last year at the height of the COVID-19 crisis when economies were locked into a pandemic.

The MMF sector, with more than half in the United States, is vital to the short-term funding of the economy and businesses as it invests in government bonds and short-term papers that allow investors to redeem their stocks on a daily basis.

“MMFs are prone to sudden and disruptive repayments and can face challenges in selling assets, especially under stressful conditions,” the FSB said in a report.

One option is “swing pricing,” or the ability to allow fund managers to impose transaction costs on those who redeem shares in order to reduce the impact on investors who remain in the fund, the FSB said.

Another possibility is that a small portion of each investor’s shares will not be redeemed immediately and the implementation of “gates” or temporary bans on investor exits will be changed, he added.

A sufficient capital buffer would also ease the pressure from high redemptions, although that would add to the industry’s costs, the watchdog said, adding that stress testing for individual MMFs and for the sector as a whole could work as well.

Eric Pan, CEO of the global fund industry association ICI, said it was encouraging that the FSB was also recognizing the need to improve the way the broader short-term markets, including commercial paper and certificates of deposit, work better.

“What is important is that the FSB recognizes that certain reforms such as capital buffers and swing pricing could ultimately eliminate certain money market funds from the market,” said Pan.

The FSB has carried out a public consultation on the policy options and will publish a final report in October.

It would be up to the regulators in each member country to decide on the combination of measures so that they could bypass steps such as capital requirements that have divided regulators in the past as well as the industry.

The FSB will follow up on the implementation reviews.

Reporting by Huw Jones; Editing by Alexander Smith, Kirsten Donovan