Bloomberg: Risk Remains in Prime MFs
Bloomberg Law published the oddly-titled, "Dearth of Dollars Exposes Flaws in Rebooted Money-Fund Rules." It tells us, "Groundbreaking reforms to safeguard a major source of short-term borrowing are again under scrutiny after the pandemic-related dollar liquidity crunch that prompted Federal Reserve intervention. U.S. money-market funds -- which provide a lot of the cash that companies and governments borrow on a short-term basis -- underwent a major regulatory overhaul in 2016 to prevent a repeat of a damaging run on these funds that took place during the 2008 meltdown. But a coronavirus-related exodus of cash earlier this year from so-called prime funds -- those that are able to buy short-term company paper -- showed that this risk remains. And that has some suggesting that further tweaks may be warranted to shore up dollar funding markets." They quote Barclays' Joseph Abate, "People saw that the liquidity levels in these funds were declining.... They didn't know what the outcome would be if the funds' seven-day liquidity buffer breached 30%.... Rather than take the chance that funds might impose additional fees or suspend withdrawals, there was a 'preemptive run' from investors." Bloomberg writes, "The prospect of a regulatory reassessment isn't confined to the sphere of money-market funds. The upheaval which convulsed markets earlier this year has prompted many to question whether changes made to rules for banks and other markets in the wake of the 2008 crisis might require further tinkering.... In U.S. funding markets, conditions have eased since the crisis reached its apex several months ago, but questions remain about whether regulators ought to alter money-fund rules -- for example by increasing the amount of extra cash they are required to keep on hand for redemptions before they need to sell assets. Other possible changes that might be considered, according to Barclays' Abate, include putting limits on what proportion of prime fund cash is parked in commercial paper, or eliminating the so-called liquidity fees and gates that were introduced in the 2016 reforms.... Abate believes the Securities and Exchange Commission could revisit money-market reforms once the pandemic has calmed, but some fund managers are skeptical that changes will be made. Mandating a cap on how much funds allocate to commercial paper, for example, would be a hindrance to corporate borrowers, as these types of funds account for up to a quarter of their investor base, according Deborah Cunningham, chief investment officer for global money markets at Federated Hermes Inc. in Pittsburgh. Although there's always the ability to make minor adjustments, she doesn't see recent events as drastic enough to prompt major changes." The article adds, "An SEC spokesperson declined to comment, but Dalia Blass, a director in the SEC's Division of Investment Management, said at a meeting last month that she would hesitate to make recommendations for regulatory changes to address potential impacts discerned so far. 'Doing so risks being premature as we are still in the middle of the pandemic and its evolving impact on the U.S. and global markets,' she said." Finally, the piece says, "While the Fed's swift implementation of new facilities helped unfreeze the short-term credit markets, 'policy wonks' will still be on the lookout for regulatory changes, according to Abate. 'Fund managers handled the redemptions and handled their liquidity,' said Fitch's [Greg] Fayvilevich. '`But the fact is that the Fed needed to intervene in the market and specifically set up the facility to provide money funds with liquidity, clearly something needs to be addressed there.'"
