Earlier this month, we reported on the Financial Stability Board and its paper, "Holistic Review of the March Market Turmoil." (See our Nov. 18 News, "FSB Reviews March Market Turmoil, Targets Short-​Term Funding Markets.") But we overlooked a follow-up report from the International Organization of Securities Commissions, the "international body that brings together the world's securities regulators [that] works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda." IOSCO published a "Thematic Note," entitled, "Money Market Funds during the March-April Episode." They comment, "MMFs are not homogeneous across jurisdictions and as such demonstrate a range of characteristics dependent on their structure, which is reflected in the regulatory approach adopted by different jurisdictions."

IOSCO describes the turmoil, "Decline in business activity worldwide and the high volatility in many markets, contributing to demand for cash and safe assets, may have led to some MMF investors redeeming their holdings, driven by a combination of cash needs and 'flight-to-safety' behaviour (e.g. to USD government assets). Indeed, market turmoil in March and April primarily affected US and EU MMFs, though the effects varied by types of MMF, with significant outflows from MMFs holding primarily non-public debt and historic inflows into MMFs primarily holding government instruments. In the US and the EU, USD denominated non-public debt MMFs experienced the most significant redemptions over the recent stress periods."

They explain, "US prime MMFs recorded outflows of $125 billion in March, representing 11% of their assets and faced challenges to maintain their weekly liquidity buffer. It seems that the potential application of gates – which could result if a fund dropped below the 30% liquidity threshold – may have accelerated outflows. These outflows happened at the same time that the underlying market (notably the commercial paper market) saw reduced liquidity preceding the announcement of the Federal Reserve liquidity facility (Money Market Mutual Fund Liquidity Facility ('MMLF') and Commercial Paper Funding Facility ('CPFF') in particular).... MMLF directly benefitted Prime MMFs, together with the US SEC's temporary relief permitting MMFs to transact with affiliated parties. Prime MMFs recovered their pre-COVID-19 level of assets under management by the end of April."

The piece continues, "In the EU, USD denominated stable non-public debt Low Volatility Net Asset Value MMFs ('$LVNAV') recorded net large outflows from mid-March although the situation varied across funds ($70 billion overall and around 25% of the total net assets of $LVNAV overall). As for US prime MMFs, the potential application of fees and gates under certain conditions may have accelerated outflows. $LVNAV partly used their weekly liquid assets to meet redemptions and also sold some of their securities in the secondary market, and, where lack of dealers did not allow that, they decided to not re-invest maturing money market instruments.... As these funds were excluded from the Federal Reserve programme, liquidity tensions lasted longer for $LVNAV compared to US Prime MMFs. With volatility decreasing and the market stabilising, outflows fell from the beginning of April and have been replaced by inflows since then."

IOSCO writes, "EUR denominated non-public debt MMFs faced both inflows and outflows but overall experienced large net outflows (€ 44 billion for French-domiciled Variable Net Asset Value MMFs ('€VNAV') by end-March and around 15% of the total net assets of €VNAV), although the situation varied across funds. Despite there being no suspensions, the European Central Bank ('ECB') reminder that liquidity buffers might be used by banks may have had a positive effect on the MMI market and alleviated pressures on MMFs as banks began providing some liquidity in their owner paper. The ECB programme did not directly benefit MMFs but helped to restore confidence, primarily by supporting issuance of corporate commercial paper on the primary market from the end of March. By mid-July, standard €VNAV reached pre-COVID-19 levels in terms of assets under management."

They state, "By contrast, US government MMFs and EU public debt MMFs primarily invested into US short-term government debt securities recorded large inflows in March. Yields on US government MMFs declined in response to lower interest rates and higher demand for government assets supported by fund inflows. As markets stabilised, some outflows have been observed in government MMFs, which may also reflect seasonal effects."

The report tells us, "It is important to note however that MMFs behaved differently – both across jurisdictions and, even within the same MMF category in a particular jurisdiction, and faced different contexts and issues as a result of their characteristics such as investor profiles, portfolio holdings and/or regulatory requirements."

It adds, "Overall, central bank actions taken at the height of the crisis have had a positive impact on markets, including the functioning of specific market segments, but also more broadly on market sentiment. In some jurisdictions, central bank interventions directly supported MMFs, particularly the MMLF in the US combined with the CPFF which participated to restore market confidence. In other jurisdictions, the impact on the MMF sector was indirect. In all cases, the actions taken seem to have provided support to short-term money markets generally and not just the MMF portion of that market. The central bank actions to support bank intermediation in the short-term markets through regulatory relief on capital and leverage ratios and through encouraging the use of buffers has been no less effective. The global nature of actions taken, across North America, Europe and Asia was also an important element of the central bank support measures proving to be so effective. However, differences in the design of central bank interventions have had a differential impact on MMFs globally."

Finally, the report states, "This analysis focuses, in the first instance, on a factual description of the events that took place across jurisdictions during March 2020 based on available data and sources. It describes where the MMF sector remained stable and where it came under stress, taking into account the differences between MMF type and currency. Finally, it suggests further analysis to strengthen the money markets' ecosystem and MMFs' regulatory framework."

A release entitled, "ICI Statement on IOSCO Money Market Fund Note," explains, "ICI President and CEO Eric J. Pan issued the following statement upon the release of 'Money Market Funds During the March–April Episode,' a note issued today by the International Organization of Securities Commissions (IOSCO): 'We welcome IOSCO's thoughtful review of the experiences of money market funds across jurisdictions during the unprecedented market turmoil triggered by responses to the COVID-19 pandemic. As the global standard-setter for capital markets regulation, IOSCO should play a central role in considering any potential policy reforms for the money markets and money market funds. Such factual, data-driven analysis is crucial to guide future regulatory responses."

Pan adds, "We particularly welcome IOSCO's recognition that regulators must take into account differences among money market funds; that money market funds are only one participant in short-term financial markets; and that certain banks' reluctance or inability to buy back their own paper might have been the result of explicit regulatory restrictions. These and other observations in IOSCO's note are supported by ICI's analysis in our recent report, 'Experiences of US Money Market Funds During the COVID-19 Crisis.' We look forward to engaging with IOSCO on further analysis and discussion."

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