3 Minutes to Read (Reuters) – LONDON, June 30 (Reuters) – To avoid a repeat of the $8.8 trillion money market funds (MMF) industry being rescued by central banks during a “rush for cash” last year, global banking regulators offered alternatives ranging from capital buffers to charges. On Wednesday, the Financial Stability Board (FSB), which coordinates financial rules for G20 economies, proposed a set of reforms for regulators to consider in order to make MMFs more resilient and limit the incentive for investors to escape. For the second time in 12 years, the Federal Reserve and other central banks had to inject money into the financial system during intense market instability in March 2020 to keep MMFs from collapsing under strong redemption demand. Last year, at the height of the COVID-19 crisis, the financial system as a whole was put under extreme duress, according to the sector, as economies went into pandemic lockdowns. The MMF industry is crucial for short-term financing of the economy and companies, investing in government debt and short-term paper and letting investors to cash in their shares on a daily basis, with over half based in the United States. In a report, the FSB stated, “MMFs are vulnerable to unexpected and disruptive redemptions, and they may have difficulty in selling assets, particularly under stressed conditions.” Swing pricing, or allowing fund managers to charge transaction costs on individuals who redeem shares to minimise the impact on those who remain in the fund, is one idea, according to the FSB. Another alternative is to keep a tiny percentage of each investor’s shares from being redeemed right away, as well as adjusting how “gates” or temporary barriers to investor departures are implemented, according to the report. A significant capital buffer would help alleviate pressures from large redemptions, albeit it would raise industry costs, according to the watchdog, who also suggested stress testing for individual MMFs and the sector as a whole. The FSB has invited public comment on the policy choices and will provide a final report in October. It would be up to regulators in each member country to choose which measures to combine, allowing them to avoid steps like capital requirements that have previously divided regulators and business. The FSB will conduct implementation reviews in the future. Huw Jones contributed reporting, and Alexander Smith edited the piece. Continue reading
