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Global watchdogs propose solutions to cure strain on money market funds By Reuters

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© Reuters.

By Huw Jones

LONDON (Reuters) – Global financial regulators have proposed options ranging from capital buffers to fees to prevent central banks from having to bail out the $ 8.8 trillion money market fund (MMF) sector as they did during a “race for cash” last year.

The Financial Stability Board (FSB), which coordinates financial rules for G20 economies, on Wednesday unveiled a selection of measures for regulators to make MMFs more resilient and reduce investors’ temptation to flee to exits. .

During the extreme market turmoil in March 2020, the Federal Reserve and other central banks had to inject liquidity into the financial system to prevent MMFs from bowing to strong demand for redemptions, for the second time in 12 years.

The industry has argued that all parts of the financial system came under great pressure last year at the height of the COVID-19 crisis when economies entered pandemic lockdowns.

The FMM sector, with more than half in the United States, is essential for short-term financing of the economy and companies, News Block in public debt and short-term paper, allowing investors to collect their shares on a daily basis. .

“MMFs are susceptible to sudden and disruptive repayments, and can face challenges in asset sales, particularly under stressful conditions,” the FSB said in a report.

One option was to “change the price” or allow fund managers to impose transaction costs on those who redeem shares to reduce the impact on investors who remain in the fund, the FSB said.

Another option is for a small fraction of each investor’s shares not to be exchanged immediately, and to change the way the “gates” or the temporary ban on investor exit are implemented, he added.

A capital buffer of sufficient size would also mitigate the pressures of heavy repayments, although it would increase the costs of the industry, the regulator said, adding that stress tests for individual FMMs and for the sector as a whole could also work.

Eric Pan, CEO of the global fund industry body ICI, said it was encouraging that the FSB also recognized the need to improve the functioning of the broader short-term markets, including commercial paper and certificates of deposit.

“Importantly, the FSB recognizes that certain reforms, such as capital buffers and swing prices, could ultimately remove certain money market funds from the market,” said Pan.

The FSB has put the policy options up for public consultation and will publish a final report in October.

It would be up to the regulators in each member country to decide on the mix of measures, allowing them to bypass steps like capital requirements that have divided both regulators and industry in the past.

The FSB will follow up on implementation reviews.

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