The Central Bank of Ireland recently published a discussion paper titled, "An approach to macroprudential policy for investment funds." It explains, "The objective of this Discussion Paper is to advance the debate on a potential approach to the development and operationalisation of a macroprudential framework for the investment funds sector.... While macroprudential policy is well developed in the banking sector, it remains nascent beyond banks, including the funds sector. This is despite the growing role of the funds sector in global financial intermediation and recent episodes, including the COVID-19 shock and last year's Gilt market disruption, highlighting the potential for the funds sector globally to amplify shocks in the face of financial vulnerabilities. Investment funds, though, are different to banks, so a macroprudential approach to the funds sector cannot simply be an extension or replication of the macroprudential framework applied to banks. This Discussion Paper therefore aims to inform and aid the ongoing international and European regulatory debate on macroprudential policy for the funds sector." (Note: Please join us for our European Money Fund Symposium, which takes place Sept. 19-20, 2024 in London, England.)
It continues, "The global non-bank financial intermediaries (NBFI) sector, and particularly the investment fund component of it, has grown significantly since the Global Financial Crisis (GFC). The absolute size of the global NBFI sector grew from €72 trillion in 2008 to €212 trillion in 2021 and this growth can be largely attributed to the rise of investment funds. The NBFI sector now represents approximately half of all global financial assets in 2021 and just over half for the EU.... The funds sector is playing an increasingly important role in the wider global financial system. The sector, both globally and in Ireland, is now a larger part of overall financial intermediation and has strong linkages to other sectors of the financial system ... and also has increased linkages to the real economy."
The CBI paper continues, "There has been increasing focus by policymakers and regulators globally on addressing systemic risk in the funds sector. International bodies such as the Financial Stability Board (FSB), the International Organisation of Securities Commissions (IOSCO), the European Systemic Risk Board (ESRB) and the European Securities and Markets Authority (ESMA) have all progressed work in recent years covering the role of investment funds and their relevance from a systemic risk perspective. These have included analytical and policy work on issues such as Money Market Fund ('MMFs') resilience, liquidity mismatch in Open-Ended Funds ('OEFs') and Exchange Traded Funds ('ETFs')."
It says, "The Irish-resident funds sector intermediates financing to the global financial system, supporting the funding of financial institutions. Around half of Irish funds' investments provide financing to other financial institutions, through holdings of debt and equity securities issued by such institutions.... For example, Irish resident MMFs provide significant financing to the euro area banking sector. The amount of money market instruments issued by euro area banks held by Irish resident MMFs increased to almost €80 billion by of the third quarter of 2022, or approximately 18% of these institutions' outstanding money market debt securities. The funds sector in Ireland also holds almost €45 billion in long-term debt securities, or roughly 1.5% of the total long-term debt securities issued by euro area banks as of the third quarter of 2022."
The piece explains, "During the early months of the GFC, MMFs in the United States also experienced large redemptions from investors. Funds were being forced to sell their assets into an illiquid market in order to meet the redemption requests. In particular, the market for asset-backed commercial papers (ABCP) -- a type of security held by many US MMFs at the time -- became highly illiquid. This led to increased stress in money markets, resulting in further MMF redemptions leading to more forced sales of assets. To prevent this fire-sale mechanism from spiraling further, the Federal Reserve introduced the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) on September 22nd 2008. The AMLF provided nonrecourse loans the US financial institutions to purchase ABCP from MMFs."
It states, "UCITS and the money market fund regulation (MMFR) also have requirements that could partially address the amplification mechanisms and/or transmission channels of investment funds. Specifically, they both have requirements for risk management and asset concentration limits. For example, UCITS stipulates that no single asset can represent more than 10% of the fund's assets and holdings of more than 5% cannot in aggregate exceed 40% of the fund's assets."
On "Central Bank Interventions in Markets," they write, "The two most recent episodes of such markets interventions were in light of significant market dysfunction at the onset of the COVID-19 shock in 2020 and the Gilt market disruption in the UK in 2022. During the COVID-19 shock, and in the context of a sudden 'dash for cash' in global markets, a number of central banks internationally engaged in large asset purchases programmes. In the case of the US, there were also direct interventions by the Federal Reserve to provide liquidity to MMFs, through the introduction of the Money Market Mutual Fund Liquidity Facility (MMLF). Many of these operations were aimed, in part, and at least initially, at restoring market functioning. During the UK Gilt market episode, the Bank of England commenced an asset purchase programme, to safeguard UK financial stability in light of risks stemming from a dysfunction in the Gilt markets."
In other news, Investment News writes again on brokerage sweep lawsuits in, "Wells Fargo sued twice over cash sweep rates, LPL sued again." They state, "In the span of two days, three more lawsuits have been brought against brokerages over their cash sweep rates, including two cases against Wells Fargo and another against LPL. Those add to other recent lawsuits over sweep rates filed against Merrill Lynch, Morgan Stanley, and Ameriprise, as well as a separate one LPL is facing. The cases also come as Wells Fargo last month indicated that it has changed pricing for cash sweeps at the cost of its net interest income and as the firm deals with an SEC investigation into its rates."
LPL said in a statement, "Designed primarily for short-term cash holdings, our FDIC-insured cash sweep vehicles prioritize security, liquidity, and yield -- in that order. We also offer investment options suitable for a longer-term horizon, such as money market funds, CDs, and fixed income funds. This flexibility allows our clients to tailor their investment strategies to align with their risk tolerance and financial goals."
The article tells us, "The recent lawsuit against that firm cites its cash sweep rates as a range from 0.35 percent to 2.2 percent, depending on the size of the account. Meanwhile, sweep rates at Vanguard and Interactive Brokers are 4.6 percent and 4.83 percent, regardless of account size, according to the complaint. One of the lawsuits against Wells Fargo points to a range of 0.05 percent to 0.5 percent for the default cash option for Wells Fargo Advisors clients. Wells Fargo declined to comment on the lawsuits."
It says, "Given that the deluge of cases is relatively new, it's hard to gauge how successful the plaintiffs could be. But two factors will likely affect whether the complaints overcome the hurdle of motions to dismiss, said one lawyer who asked not to be named because similar litigation could affect clients. The first factor is how well the rates and options for cash are disclosed to customers.... The second factor is the brokerage's relationship with the client and whether a financial advisor works with them."
Investment News quotes an anonymous lawyer, "Whenever you have a financial advisor involved, fiduciary duties come into play." They add, "Outside of the lawsuits, it's worth noting the effect that customers' demands for higher-yielding cash options, as well as regulatory scrutiny is having on brokerages' business, as at least several have responded by increasing sweep rates, that source said. 'The impact's going to go beyond litigation. It's going to affect some of the business models going forward.'"
For more on recent Brokerage Sweep News, see these CraneData.com stories: "Tradeweb Completes ICD Acquisition; AdvisorHub on Wells Sweep Suit (8/2/24), "IN: Ameriprise Sued Over Sweeps" (7/31/24), "Federated Hermes' Donahue, Cunningham Call Hits Sweeps, Flows, Rates" (7/29/24), "Ameriprise, Raymond James Discuss Sweeps Issues on Earnings Call Q&As" (7/26/24), "Barron's Writes on Pressure on Sweeps" (7/25/24), "WSJ, Investment News on Brokerage Deposit, Advisory Sweep Pressures" (7/19/24), "Schwab, BlackRock Q2 Earnings: Cash Migration Slowing, But Continues" (7/17/24).
