Financial Stability Board Money Market Fund Workshop
Financial Stability Board
Workshop on Enhancing the Resiliency of Money Market Funds
Monday, July 12, 2021
Opening Statements
Hyun-Song Shin, Bank for International Settlements
In his opening remarks, Shin said the Financial Stability Board’s (FSB) consultation report found that Money Market Funds (MMFs) are not homogeneous across jurisdictions and that the U.S. is by far the largest market, followed closely by China. Shin said one issue is that MMFs are usually denominated in local currency, but that in Europe, dollar funds account for nearly one third of the assets. He said MMFs are important providers of short-term funding for certain institutions and added that MMFs are also used by retail and institutional investors as cash management vehicles. He noted the secondary market for commercial paper (CPs) is not very liquid, as investors tend to buy and hold these instruments until maturity.
Shin said the report found MMFs to be susceptible to two types of vulnerabilities – sudden and disruptive redemptions as well as the challenges associated with selling assets. He said analyzing redemption episodes could give insight into possible systemic vulnerabilities, given the role of MMFs as funding vehicles for the banking sector. He said they considered a wide range of policy options to address these vulnerabilities and grouped the options by mechanism: swing pricing, minimum balance at risk (MBR), a capital buffer, the removal of stable net asset value (NAV), limits on eligible assets as well as additional liquidity requirements and escalation procedures. Shin said some complementary measures they considered for risk monitoring included stress tests, reporting requirements, and disclosures. In terms of changing the microstructure of the markets, he outlined that they considered standardization, all-to-all trading, increased transparency, and enhanced regulatory reporting.
Shin said the FSB wants to consider how jurisdictions should prioritize options given the specific characteristics of the market, as well as how policymakers can combine options into a package that address all identified vulnerabilities. He explained that they are requesting feedback by August 16th, 2021 for the final report to be delivered to the G20 in October of this year.
Panel Discussions
Proposals to Enhance Money Market Fund Resilience
Moderators:
- Antoine Bouveret, European Securities and Markets Authority
- Patrick McCabe, Federal Reserve Board
Kevin Gaffney, Fidelity, said MMFs are a critical component of the capital markets as they are utilized by a broad spectrum of investors. He added that MMFs offer a relatively low yield in the current low interest rate environment. He said there are large portions of MMFs that operate extremely well in volatile markets, and for the funds that have shown to be resilient, they do not require further reform. Gaffney said there is a fear of a redemption gate being applied, but they believe removing ties between regulatory thresholds and fees and gates would allow fund managers to access these funds without having to sell assets. He said he supports limits on eligible assets as a policy option but that swing pricing in MMFs would be extremely challenging due to same day settlement issues and deterrent to investors.
David Scharfstein, Harvard Business School, said the reforms pertaining to the MMF market in 2008 were not helpful. He outlined that a two-pronged approach that focuses on reducing the incentive to runs and enhancing the resiliency of markets would be beneficial in this space. He mentioned the idea to issue a subordinated share class that would absorb losses and pay this class a yield but noted this share class would have to be very big and would likely be too costly. Scharfstein said enhancing the asset liquidity of MMFs would likely require the use of Treasury bills but might imply that MMFs with more run-prone investors should be required to hold more liquidity. He added they need to design ways for MMFs to use the liquidity buffer in times of stress. He also argued that MMF returns and the size of the sector are likely currently inflated, explaining that current concerns about the market shrinking are not actually something to worry about.
John Slyconish, StateStreet, said it will be important to ensure MMFs are more protected against liquidity shocks. He explained that banks rely heavily on MMFs for their own short term funding needs, and overnight cash investors rely on MMFs as an important outlet. Slyconish said with the increase in global bank reserves since the onset of COVID-19, there have been sharp reductions in bank leverage ratios. He stated if there were a more limited set of viable alternatives, banks would potentially not have the capacity to absorb the additional cash. He concluded that there should always be an effort to preserve the role MMFs currently play.
Mark Carey, Global Association of Risk Professionals, said when looking at the sector from the flow of funds perspective, if you created bank-only prime funds, the banks would continue to have access to dollar funding while everyone else would not. He said banks already proved to be resilient during volatile times, so there is no need for additional reform. Carey also expressed his concern with “giving national authorities the scope to do nothing”, arguing there could be a potential consequence in the long run about regulatory arbitrage across boarders if some jurisdictions can just do nothing and let their MMFs grow larger.
Considerations in Selecting Policies
Moderators:
- Hyun-Song Shin, Bank for International Settlements
- Sarah ten Siethoff, Securities and Exchange Commission
John Donohue, Stanford Law School, said when considering policy changes, there has to be a recognition that risk exists in any investment product. He said these are investments that clients invest their cash in who likely do not look at these products as safe cash deposit investments. Donohue said there seems to at least be an agreement that everyone wants to preserve the functionality of these products. He said we need to consider the complexities and operations costs of some proposals in the report, arguing that a three percent MBR is not feasible as capital buffers will only destroy these products. He added his belief that swing pricing does not work and concluded by suggesting a modified redemption fee that would be prescriptive and allow clients to pay for liquidity while protecting the shareholders who choose to stay.
Mikael Pacot, AXA Investment Managers (Paris), warned policymakers to be careful to not go too far trying to address vulnerabilities. He said it will be difficult to ask MMFs to operate on a daily basis and that it would be detrimental to investors. Pacot added a key consideration when choosing a policy is whether we want MMFs to be more cash-like or investment-like.
Andrew Metrick, Yale University, outlined that having rules and regulations which only come into effect during stress times, such as gates and fees, will make people act earlier. He argued that policies should be in place consistently, not only during stress times. In thinking about policy options, Metrick said there is a need to examine how to get some kind of reasonable ex-ante payment through the private sector or government, without having the externalities that are not paid for.
Robert Plaze, Proskauer Rose LLP and Former Deputy Director of the Division of Investment Management, SEC, discussed two reforms put in place after the 2008 crisis. First, he said the flooding in AV for institutional funds had unclear accomplishments. He explained that the second reform was implementing fees and gates tied to financial liquidity of the fund, and noted it was an experiment to see if it would impede a run by investors. Plaze said the risk then was not running out of liquidity, but the risk of funds reaching the 30 percent threshold or fee and then becoming tied up. Plaze said a fee will always be shortly followed by a gate resulting in that money being locked up, so he argued that fees and gates must be lifted.
For more information on this hearing, please click here.