Reuters writes, "EU watchdog calls for urgent reform of money market funds." They comment, "Reforms to tackle vulnerabilities in money market funds are urgently needed for the sector to cope better with economic shocks, a top European Union securities regulator said [last] Tuesday. Money market funds or MMFs are widely used by companies for day-to-day financing purposes. But MMFs in Europe and the United States struggled with redemptions in some cases when economies went into lockdown to fight COVID-19 in March 2020, forcing central banks to inject liquidity into markets to avoid them freezing up." (Note: Total money fund assets rose another $22.1 billion on Thursday, 3/23, to yet another record level, $5.536 trillion! Month-to-date, MMFs have jumped by $283.2 billion. See Monday morning's MFI Daily for Friday's numbers.) (Thanks to those who attended our Bond Fund Symposium last week in Boston! Attendees may access the materials and recordings in our "Bond Fund Symposium 2023 Download Center.")
The news brief explains, "Verena Ross, chair of the EU's European Securities and Markets Authority (ESMA), said ESMA had already made several concrete proposals to the EU's executive European Commission to reform MMFs. 'The vulnerabilities that surfaced during the pandemic have demonstrated that legislative changes to enhance the resilience of the money market fund sector are needed sooner rather than later,' Ross told an ALFI funds industry conference in Luxembourg."
In related news, ICI Global Chief Michael Pedroni posted a blog entry entitled, "Financial Stability Board Is Missing the Plot." He tells us, "The Financial Stability Board (FSB), an international organization created in the wake of the 2008 financial crisis to monitor the global financial system, needs a new script. In the name of policing systemic risk, the FSB (#fsb) has spent the last few years leading the charge of central banks, finance ministries, and regulators to scrutinize every aspect of regulated investment fund products like mutual funds and UCITS. They have pointed a spotlight onto these open-ended funds -- a well-lit sector of the capital markets -- and kept it there.... [T]he FSB's chair just outlined in a public letter that the organization will double down on what they call the 'importance of addressing vulnerabilities in the non-bank sector.' Translation: their 2023 work program will spend even more time and resources probing open-ended funds."
Pedroni explains, "Like a tired franchise movie, another sequel isn't needed. Analyzing open-ended funds for yet another year won't yield any new material. Open-ended funds are highly regulated and transparent products. They have withstood stress across multiple decades, and ICI's data demonstrate clearly that open-ended funds did not cause the market volatility of 2020. When it comes to risk, we know that investments always involve some risk in exchange for potential returns. ICI's research shows that these risks are distributed equally regardless of whether the assets are held in a mutual fund or directly by an investor. In other words, open-ended funds and individual investors behave similarly in a crisis. It's time for the FSB to shift the camera lens elsewhere."
He writes, "There is a bigger picture here, with cyclical and structural threats to financial stability that demand the FSB's immediate attention.... We know that inflation and rising interest rates will expose highly leveraged sectors. The FSB should analyze the potential distribution of risks across capital markets comprehensively -- no easy task, but one the FSB is well placed to do.... A third must-do for the FSB is to understand why banks, the traditional private suppliers of liquidity, were constrained in their ability to meet the demand for liquidity in March 2020.... [W]hen the supply of liquidity is insufficient to meet demand in the United States, contagion to the rest of the globe is relentless and rapid."
Pedroni adds, "By tackling these threats, the FSB will support the wider financial system and help central banks avoid what they fear most -- being stuck as the lenders of last resort in times of crisis. The FSB's stubborn focus on open-ended funds does a disservice to retail investors who rely on market stability for their savings and retirement. For the FSB, it's a path of least resistance, when we know the body is well-placed to examine growing threats to markets. Another FSB sequel on regulated open-ended funds won't change anything. We all need the FSB to use its important mandate to focus on the evident and pressing risks to financial stability."
The FSB February letter, "FSB Chair outlines work priorities for 2023," says, "The Financial Stability Board (FSB) ... published a letter from its Chair, Klaas Knot, to G20 Finance Ministers and Central Bank Governors, ahead of the G20 meeting on 24‑25 February. The letter notes the recent easing in global financial conditions but warns that, while expectations of a 'soft landing' for the global economy have grown, the outlook remains clouded by uncertainty.... The letter lays out the FSB's work during 2023 to monitor and address these vulnerabilities and introduces three reports the FSB is delivering to this meeting on: Non-bank financial intermediation (NBFI). Addressing vulnerabilities in the non-bank sector is a key priority."
They state, "Many of the vulnerabilities and channels of contagion analysed in the report are being addressed in the FSB's work programme to enhance the resilience of NBFI. Additional priorities, outlined in the letter, include an in-depth study of forms of non-bank leverage that are not always apparent in supervisory and regulatory data; policy work to address liquidity mismatch in open-ended funds; work to enhance market participants' liquidity preparedness for margin and collateral calls and to identify data gaps in regulatory reporting; and a peer review of money market fund policy reform measures."
Finally, in more news on Euro money funds, S&P Global Ratings published a release entitled, "HSBC Euro ESG Liquidity Fund Assigned 'AAAm' Principal Stability Fund Rating." It says, "S&P Global Ratings today said it has assigned its 'AAAm' principal stability fund rating (PSFR) to HSBC Euro ESG Liquidity Fund, a subfund of HSBC Global Liquidity Funds PLC, domiciled in Ireland. The subfund, managed by HSBC Asset Management, is approved as a short-term, low volatility net asset value fund under EU Money Market Fund Regulation and its investment approach reflects a rising consideration for environmental, social, and governance (ESG) factors."
Another release, "Moody's assigns Aaa-mf rating to State Street EUR Liquidity LVNAV Fund," states, "Moody's Investors Service has assigned an Aaa-mf rating to State Street EUR Liquidity LVNAV Fund, a short term low volatility net asset value (LVNAV) money market fund domiciled in Ireland and managed by State Street Global Advisors Europe Limited. The Fund's primary investment objective is to achieve a return in Euro in line with prevailing money market rates whilst aiming to preserve capital and maintain a high level of liquidity."
