Analysis: U.S. money market funds, advocates, stake out positions as crackdown looms
13/04/2021 18:19
By Pete Schroeder and Michelle Price
WASHINGTON, April 13 (Reuters) - Market participants this
week staked out their positions on how to fix systemic risks in
the $4.9 trillion U.S. money market fund industry, in what is
shaping up to be the first big fight for U.S. President Joe
Biden's financial regulators.
After taxpayers bailed them out for the second time in 12
years during the pandemic-induced turmoil in March 2020, money
market funds - a key source of short-term corporate and
municipal funding - are facing a regulatory reckoning which
could potentially change the industry beyond all recognition.
Monday was the deadline for submitting feedback to the U.S.
Securities and Exchange Commission (SEC) on ideas the Treasury
Department floated in December on ways to boost money market
fund resilience amid market stress. L1N2KA2BD
The industry on Monday disputed that money market funds were
to blame for last year's turmoil in short-term funding markets,
citing its own analysis, while conceding some changes were
warranted. Advocacy groups, meanwhile, called for major reforms.
"Without fundamental repairs, disorder will happen again,"
wrote http://4atmuz3ab8k0glu2m35oem99-wpengine.netdna-ssl.com/wp-content/uploads/2021/04/Systemic-Risk-Council-Comment-Letter-File-No.-S7-01-21.pdf
the Systemic Risk Council, a think tank comprising former
regulators, warning the implicit government guarantee the sector
now enjoyed would drive "even bigger problems down the road."
The Investment Company Institute (ICI), which represents
the asset management industry, cautioned against hasty changes
and said policymakers "should prioritize the examination of the
activities and behavior of all market participants."
An SEC spokeswoman did not immediately provide comment on
the review.
Because money market funds invest in high-quality short-term
debt instruments and offer daily redemptions, investors
generally expect immediate liquidity with little price
volatility, and are easily spooked when those expectations are
not met during market stress, according to the Treasury.
As the pandemic shut down the economy in March 2020,
investors pulled more than $130 billion from institutional
investor "prime" and tax-exempt money market funds, contributing
to stress in the short-term funding markets, it said.
To calm fleeing investors and stem a broader crisis, the
Treasury and Federal Reserve launched emergency liquidity
facilities to backstop the market.
The panic was reminiscent of 2008, when a run on money
market funds threatened to freeze up global markets and prompted
the government to backstop the sector.
That bailout led the SEC in 2010 and 2014 to introduce rules
aimed at reducing the risk of investor runs. But last March
showed those changes were inadequate, said regulatory experts.
Among the additional reforms floated by the Treasury were
new liquidity and capital requirements, allowing fund boards
more flexibility to charge for or suspend redemptions, and
adjusting the fund's value in line with dealing activity to
transfer costs to redeeming investors, known as "swing pricing."
The ICI did endorse two measures: scrapping fixed thresholds
for imposing redemption fees and suspensions, which it said
intensified investor flight, and raising the proportion of a
fund's weekly assets which must be liquid, currently 30%.
The group said the Treasury's other ideas, many of which
were dismissed during the SEC's previous review, would not help
improve financial system resilience.
Better Markets, a Washington-based advocacy group, however,
warned policymakers not to again bow to industry resistance and
to instead implement a combination of the Treasury's proposals.
The group's legal director Stephen Hall said finishing the
job of regulating the industry was "long overdue" and that he
expected the SEC to issue proposed new rules soon.
(Reporting by Michelle Price
Editing by Chizu Nomiyama)
((michelle.price@thomsonreuters.com; +12026041711; Twitter:
@michelleprice36;))