A press release titled, "FSB review finds uneven implementation of money market fund reforms, tells us, "The Financial Stability Board (FSB) ... published its "Thematic Review on Money Market Fund (MMF) Reforms." The review takes stock of the measures adopted or planned by FSB member jurisdictions in response to the 2021 FSB report, Policy Proposals to Enhance MMF Resilience. The review does not assess the effectiveness of those policy measures in addressing risks to financial stability, as this will be the focus of separate follow-up work by the FSB in 2026." The Financial Stability Board is "an international body that monitors and makes recommendations about the global financial system" comprised primarily of bank regulators. (Note: Register and make hotel reservations soon for our Bond Fund Symposium, which is March 25-26 in Philadelphia. We hope to see you in Philly!)
Their release claims, "The main MMF vulnerability identified by jurisdictions is the mismatch between the liquidity of fund asset holdings and the redemption terms offered to investors, which makes MMFs susceptible to runs from sudden and disruptive redemptions. To address vulnerabilities, the 2021 FSB report provided a menu of policy options including: imposing on redeeming investors the cost of their redemptions; enhancing the ability to absorb credit losses; addressing regulatory thresholds that may give rise to cliff effects; and reducing liquidity transformation."
It explains, "The review finds that progress in implementing the 2021 FSB policy proposals has been uneven across FSB member jurisdictions. Authorities in all jurisdictions reported that they had implemented policies aimed at addressing MMF vulnerabilities prior to the 2021 FSB Report. Since then, some jurisdictions have introduced new policy tools or recalibrated existing ones (China, India, Indonesia, Japan, Korea, Switzerland, US), while others are still in the process of developing or finalising their reforms (EU, South Africa, UK). The review concludes that, given the vulnerabilities reported in individual jurisdictions, further progress on implementing the FSB policy toolkit would be needed to enhance MMF resilience and limit the need for extraordinary central bank interventions during times of stress."
The FSB says, "The review calls on FSB member jurisdictions that have not yet done so to review their policy frameworks and adopt tools to address identified MMF vulnerabilities, taking into consideration the 2021 FSB policy proposals. Where relevant tools, such as minimum liquidity requirements, are already available, the review recommends that FSB jurisdictions consider whether these need to be re-calibrated to ensure their effective use and to maintain a sufficient level of MMF resilience. It also recommends that IOSCO consider the findings of this review when it revisits its 2012 Policy Recommendations for MMFs in light of the 2021 FSB Report. The FSB will take these findings into account in its monitoring of the vulnerabilities and policy tools for MMFs."
Ryozo Himino, Chair of the FSB's Standing Committee on Standards Implementation (SCSI) that oversaw the preparation of the peer review comments, "This report summarises the progress made to date by FSB member jurisdictions in implementing the 2021 FSB policy proposals to address MMF vulnerabilities, identifies remaining areas for further work, and lays the ground for the assessment of the reforms' effectiveness that the FSB plans to conduct in 2026."
The full "Thematic Review on Money Market Fund Reforms" report says in its Executive Summary, "Addressing vulnerabilities in money market funds (MMFs) is a key element of the FSB's work programme to enhance the resilience of the non-bank financial intermediation (NBFI) sector. Drawing primarily from responses to a questionnaire, this peer review takes stock of the measures adopted or planned by FSB member jurisdictions in response to the 2021 FSB report on Policy Proposals to Enhance Money Markey Fund Resilience (2021 FSB Report), including those jurisdictions' evidence-based explanations of relevant MMF vulnerabilities and policy choices made. The review does not assess the effectiveness of those policy measures, as this will be the focus of separate follow-up work by the FSB in 2026."
Among its "Main Findings," they state, "MMFs are important providers of short-term financing for financial institutions, corporations, and governments. MMFs are also used by retail and institutional investors to invest excess cash and manage their liquidity. Global MMF assets reached US$9 trillion at end-2022, following growth of 8.6% in 2021 and 1.3% in 2022, and are heavily concentrated in the United States (US), the European Union (EU, particularly in Ireland, France and Luxembourg) and China. Between 2020 and 2022, overall MMF assets increased in the US and China but decreased slightly in the EU."
The FSB paper explains, "MMFs differ across FSB jurisdictions in terms of definition, structure, eligible assets, investors, currency denomination (local or foreign), liquidity and maturity limitations. MMFs with 'stable' net asset value (NAV) account for 82% of global MMF assets but are currently offered in less than half of FSB member jurisdictions. In some jurisdictions, the types of assets in which the MMF may invest depend on the structure and type of NAV of the MMF. MMFs are often denominated only in local currency, with important exceptions in the EU, Hong Kong, Mexico and Switzerland."
Discussing "Assessing MMF vulnerabilities," the FSB says, "Authorities from China, EU, France, India, Indonesia, Japan, Korea, Mexico, Saudi Arabia, South Africa, UK and US identified some vulnerabilities associated with MMFs in their jurisdictions. The main identified vulnerability is the mismatch between the liquidity of MMF asset holdings and the redemption terms offered to investors, which makes MMFs susceptible to runs from sudden and disruptive redemptions. This is particularly the case for the non-public or non-government bond MMFs that invest in riskier assets, such as corporate debt. This vulnerability can be amplified by the presence of a high share of institutional investors and a stable or low-volatility NAV, and by other rules that may give rise to threshold effects that provide incentives for investors to pre-emptively redeem their MMF holdings in times of stress. Authorities that did not identify this vulnerability cited the high quality and liquidity of the assets held by MMFs in their jurisdiction."
It continues, "While MMFs in most jurisdictions exhibit a strong home bias in both their asset portfolios and investor bases, there are some cases of significant cross-border funding and investing flows -- particularly in Europe -- that can transmit vulnerabilities across borders and markets. These vulnerabilities are often difficult to assess given data gaps on MMF investors and on the issuers of the instruments in which the MMFs invest. The existence of these cross-border flows, as well as differences in availability or calibration of policy tools, creates the potential for regulatory arbitrage and cross-border spillovers, raising the need in such cases for international cooperation in closing data gaps and implementing policy reforms to ensure resilience."
The report also says, "A subset of the respondents that identified some vulnerabilities associated with MMFs (China, EU, France, Japan, Korea, Mexico, South Africa, UK and US) reported that such vulnerabilities could raise financial stability concerns under certain conditions. Some other authorities (India, Indonesia and Saudi Arabia) reported that identified vulnerabilities could not raise such concerns, citing the size of the MMF sector, the liquidity of MMF assets and regulation."
The section, "Addressing MMF vulnerabilities," comments, "Several jurisdictions report policy tools aiming to address MMF vulnerabilities linked to the impact of large redemptions and first-mover advantage, including many that were already in place before 2021. Anti-dilution liquidity management tools (LMTs) -- such as swing pricing, anti-dilution fees and liquidity fees -- that allow fund managers to pass on the cost of redemptions to redeeming investors were reported as available in 21 jurisdictions, though no information was collected in the course of the peer review on their actual design and use. With the exception of India, where authorities can impose the use of swing pricing for specified periods in the event of market dislocation, no jurisdiction had mandated the use of these tools for MMFs; rather, their use was generally at the full discretion of the fund manager. Only the US has introduced new LMTs since 2021, while reforms in the EU (which are applicable to all open-ended funds, rather than specifically for MMFs) and UK are still in progress."
