BlackRock, the second largest manager of money market mutual funds in the world (according to Crane Data), submitted an extensive comment letter to the Financial Stability Board in response to the FSB's "Policy proposals to enhance money market fund resilience: Consultation Report". Managing Director, Global Head of Cash Management Business Thomas Callahan, and MDs from the Global Public Policy Group Carey Evans and Elizabeth Kent, write, "BlackRock, Inc. respectfully submits its comments to the Financial Stability Board in response to its Consultation report on Policy Proposals to Enhance Money Market Fund Resilience. Our views in this letter reflect our ViewPoints on Lessons from COVID-19: The Experience of European MMFs in Short-Term Markets and Lessons from COVID-19: U.S. Short-Term Money Markets. The views in this letter are also generally consistent with those expressed in our recent responses to the President's Working Group on Financial Markets: Overview of Recent Events and Potential Reform Options for Money Market Funds and the ESMA Consultation on EU Money Market Fund Regulation, both of which are attached as appendices." (Note: BlackRock's Callahan will co-keynote our upcoming Money Fund Symposium conference, which will still take place live on Sept. 21-23 in Philadelphia. We hope to see you in Philly next month!)
Their comment letter tells us, "The market dislocation in March of 2020 stemmed from a global public health crisis, which created unprecedented shocks to the real economy, supply chain disruption, and worldwide uncertainty. During this period, investors moved quickly to increase liquidity by raising cash. As investors and issuers worldwide chased liquidity simultaneously, short-term funding markets largely froze with many holders of even high-quality commercial paper struggling at times to find a bid from dealers in the secondary market. Money market funds were left to balance the competing pressures of rapidly changing end-investor need for cash and liquidity with a breakdown in the STFMs. That said, the reforms implemented after the 2008 Global Financial Crisis made MMFs more resilient, allowing them to weather the dash for cash during the COVID-19 Crisis much more smoothly than they otherwise would have."
It explains, "The lack of a secondary market that does not rely on bank dealer intermediation, particularly for CP, was the root cause of the turmoil in the STFMs, including with respect to MMFs, during March 2020. The COVID-19 Crisis underscores the need to consider improving the liquidity of the STFMs by making changes in the market structure for CP and other short-term instruments to develop a more robust market for secondary trading. While MMFs were not without issue, any reforms to MMFs in isolation will not be effective in enhancing market stability and preventing the need for extraordinary official sector interventions in the future if the underlying issues in the STFMs are not initially or concurrently resolved."
The post says, "As such, BlackRock recommends the following: The liquidity strains in the STFMs need to be addressed at the root cause, as those strains would exist with or without MMFs. We recommend regulators consider implementing standardization in the CP market, increasing transparency, and encouraging the structure to move from an OTC market to greater use of all-to-all platforms for both primary and secondary trading of CP to deepen the pool of liquidity providers. Without addressing these market dynamics, we respectfully disagree that enhancing MMF resilience will minimize the need for future extraordinary central bank interventions. While it may not be necessary to provide relief to the MMF sector, it could still be necessary to support the STFMs in a future liquidity event."
BlackRock tells the FSB, "Additionally, to further enhance the stability of the secondary market for high-quality CP, policymakers could consider encouraging the use of banks' balance sheets as a countercyclical buffer. We recommend the FSB consider guidance on how such buffers may be utilized in a future STFM liquidity crisis to provide additional stability to the STFMs. We believe that banks are better holders of high-quality CP relative to other investors such as corporates, particularly during periods of stress, as they have more options available to them for financing."
They state, "With respect to MMF reform, there are important jurisdictional differences in MMF structure, experience, and regulation, particularly given the divergent reforms post-GFC. In March 2020, US and European MMFs exhibited different market dynamics, and, within Europe, the dynamics further varied across different fund types and currencies. The distinctive features and idiosyncratic nature of MMFs make 'one size fits all' reforms an inappropriate solution. We cover some broader themes in this letter and have attached letters to the U.S. Securities and Exchange Commission and the European Securities and Markets Authority that dive deeper into reform suggestions for the US and European MMF structures, respectively, as appendices."
BlackRock continues, "We agree that mitigating the impact of large redemptions, while simultaneously helping to reduce the likelihood of destabilizing redemptions, should be the primary focus of MMF specific reforms. To achieve this, we believe that the policy focus should be on ensuring that liquidity thresholds and fees are adequately calibrated, useable, and do not create 'bright lines' which enhance client redemption risks. To achieve this result, we recommend (1) decoupling the potential imposition of gates and fees from regulatory liquidity thresholds; (2) retaining the regulatory liquidity threshold requirements as a portfolio construction feature to provide MMFs a substantial liquidity buffer; (3) implementing changes to currency-denomination specific daily liquidity levels; and (4) decoupling not just fees and gates from liquidity thresholds but also decoupling fees from gates to more appropriately effectuate the primary purpose of fees."
They comment, "We strongly disagree that swing pricing, capital buffers, or minimum balance at risk options are appropriate reform measures for MMFs. Such measures are not operationally feasible for the vast majority of MMFs and are unnecessary when the above enhancements to the liquidity thresholds and fee requirements are implemented. With regards to swing pricing specifically, while we find that to be a valuable tool for other types of open-ended funds ('OEFs'), we believe liquidity fees are the more appropriate mechanism for assigning potential costs in MMFs."
BlackRock adds, "We also believe that changing the redemption terms of MMF shares would undermine their fundamental utility to investors, and could prompt a shift into alternative products, which may have unknown market functioning or financial stability implications.... [W]e believe that some MMF reform options (a liquidity exchange facility and concentration limits) could have the unintended consequence of enhancing the transmission of risk across MMFs; we are not therefore supportive of pursuing these proposals."
They state, "We have outlined below a combination of recommendations that we believe will enhance the resiliency of MMFs while also preserving the product features that provide the greatest utility to investors.... BlackRock supports not only retaining the regulatory liquidity thresholds as a portfolio construction feature but also increasing the MMF's minimum level of overnight liquidity to at least 15%, with minimums depending on the MMF's currency denomination.... BlackRock believes that it is appropriate for USD-denominated prime or credit MMFs to hold a minimum of 20% of their assets in overnight liquidity."
Finally, the comment concludes, "BlackRock thanks the FSB for the opportunity to comment on the Consultation Report. We appreciate and support policymakers' efforts to further strengthen the STFMs and MMFs. In addition to our own response, we have contributed to the responses of several wider industry associations and would like to express our support for these submissions; in particular, we support the submissions of the Investment Company Institute ('ICI'), the European Fund and Asset Management Association (“EFAMA”), the International Capital Markets Association ("ICMA”), and the Institutional Money Market Fund Association ('IMMFA')."
