Regulators target money market funds after COVID-19 turmoil

LONDON (Reuters) - Regulators will propose changes to money market funds next year after pandemic lockdowns in March highlighted how the $6.9 trillion sector struggled under severe stress, a report said.

FILE PHOTO: Federal Reserve Vice Chairman for Supervision Randal Quarles addresses the Economic Club of New York in New York City, U.S., October 18, 2018. REUTERS/Brendan McDermid/File Photo

The Financial Stability Board (FSB), which coordinates financial rules for the Group of 20 Economies (G20), said in a report on Tuesday to G20 leaders meeting this week that the turmoil in markets in spring exposed vulnerabilities throughout the financial sector.

But further investigation is warranted into money market and open-ended funds, into how derivatives clearing houses vary margin or cash calls to cover trading positions, and into the structure of bond markets, the FSB said.

“It’s clear we need to take action to address these issues,” Randal Quarles, chair of the FSB and Vice Chair of the U.S. Federal Reserve, told reporters.

Without central banks doling out liquidity to maintain stability, sectors like money market funds would probably have fared far worse in the “dash for cash”, the FSB said.

It set an “ambitious” work plan, with policy proposals to enhance the resilience of money market funds due in mid-2021, along with a study of margining practices. Work on open-ended funds and bond markets would stretch to 2022.

Money market funds holding non-government assets saw big outflows in the United States and Europe.

Central banks and securities regulators at the FSB have clashed in the past over funds, with central bank attempts to clone bank capital and liquidity rules rebuffed by market watchdogs.

A more consensual approach is likely this time round to focus on reinforcing existing tools like “gates” and extra fees at times of high redemptions. Money market reform is a priority for Italy, which takes over the G20 presidency next year.

The Bank of England has suggested it may need to offer non-banks access to its liquidity in the same way banks can.

The FSB said there is a need to avoid “moral hazard” or an expectation that central banks would act again as a safety net for struggling funds in the next crisis.

In clearing, some regulators have suggested higher levels of margin in normal times to avoid hefty increases in rocky markets that in March triggered a search for cash by requesting redemptions from funds.

Reporting by Huw Jones; Editing by Hugh Lawson