FT: MMFs Brace for Reg Changes
The Financial Times featured the article, "Money market funds brace for rules overhaul after Covid shock," which explains, "As the coronavirus pandemic rocked capital markets in March, US policymakers were confronted with a rapidly escalating crisis in a crucial part of the financial system: money market funds. Huge investor outflows from prime money market funds -- instruments that invest in corporate, agency and other short-term debt -- left managers scrambling to sell assets, threatening a vital source of funding for businesses across America. The Federal Reserve rushed to stem the bleeding, which sliced more than $100bn off the sector's assets, by effectively backstopping the market. The Fed's actions evoked memories of when it was forced to step in after the Reserve Primary fund 'broke the buck' in 2008 and triggered a run on money market funds. While the intervention helped to avert a fully fledged liquidity crunch this time around, the events raised difficult questions for policymakers, who had only recently introduced reforms designed to make the funds less vulnerable to destabilising runs. Regulators in the US and Europe are now under pressure to review whether rules that they introduced in the aftermath of the 2008 crisis are fit for purpose." The article tells us, "A fresh regulatory overhaul could have major reverberations for the sector, coming at a time when it is already struggling to navigate ultra-low interest rates. However, the funds' interconnections with the wider financial system means that policymakers have no choice, some analysts say." They quote Fitch Ratings' Alastair Sewell, "The unique niche money market funds inhabit, and the fact they were at the centre of the liquidity storm in March, mean they will be a high priority for regulators." The FT piece continues, "In Europe, several funds that operate a stable NAV came close to no longer being able to guarantee [sic] their €1 per share price, a move that would have resulted in losses for investors and potentially triggered further outflows, according to Fitch's Mr Sewell. Speaking anonymously, one senior European regulator said: '`It could have been a negative market event and destabilised market confidence, with consequences for financial stability.'" They add, "Neal Epstein, a senior analyst at Moody's in New York, points out that it was the Fed's intervention that ultimately prevented a liquidity crisis this year, suggesting that regulatory safeguards alone are not enough. 'It may make sense to institutionalise the role of the Fed as a lender of last resort,' he suggests. 'I doubt that anyone could have provided sufficient liquidity [to funds] when investors wanted to get out of risk assets.' Funds in Europe did not benefit directly from either central bank support or assistance from their banking parents. EU regulators have signalled that they intend to review this disparity with the US, where banks including Goldman Sachs and BNY Mellon stepped in to help their money market funds. Regardless of the approach they take to reforming the rules, policymakers will have to be conscious of the fact that money market funds are likely to be at the centre of an investor 'dash for cash' once again." See also, Reuters' odd piece, "Goldman money funds' liquidity buffer swells before U.S. election."
