Reuters writes, "Fed's Quarles says regulators to lay out money market fund reforms in July." The brief explains, "A group of financial regulators will lay out recommendations in July to improve the resilience of money market funds and minimize the chance they will need government support in the future, Federal Reserve Vice Chair Randal Quarles said on Tuesday. Quarles, in his capacity as head of the Financial Stability Board, said the group will focus on the relationship between money market funds and the short-term funding market, particularly the commercial paper market, after a liquidity crunch led to a run on those funds last March that necessitated government intervention." In a speech yesterday entitled, "The FSB in 2021: Addressing Financial Stability Challenges in an Age of Interconnectedness, Innovation and Change," Quarles says, "[A] holistic Review underscored how vulnerabilities in the financial system amplified the economic shocks of the COVID event. In particular, it highlighted the dependence of the system on readily available liquidity, and vulnerabilities if liquidity strains emerge -- in money market mutual funds (MMFs) and open-end funds, through margin calls and in core bond markets. Importantly, it provides a high-level view on how these parts of the financial ecosystem operate and transmit risk while under stress." He explains, "In my view, one of the most significant findings relates to MMFs. The Holistic Review documented how the extremely high demand for liquidity, combined with a flight-to-safety, triggered a 'dash for cash' that hit institutional prime money market funds particularly hard. In the US, prime MMFs publicly offered to institutional investors had outflows of roughly $100 billion, or 30 percent of the funds' assets, over two weeks in mid-March. This was a faster run, in terms of the percentage of fund assets redeemed, than during the turmoil in September 2008. Similar patterns were also seen in Europe, particularly for US dollar-denominated MMFs. Other funds that are active in short-term funding markets, such as ultrashort bond funds, also saw unprecedented outflows in March. The March market turmoil is the second time in roughly a decade that we have witnessed destabilizing runs on MMFs. More concerning this time, however, is that we had taken steps between these events precisely to reduce the likelihood of such runs." Quarles adds, "The FSB will publish a report in July for consultation that will set out consequential policy proposals to improve MMF resilience. The proposals should also reduce the likelihood that government interventions and taxpayer support will be needed to halt future MMF runs. This work will also consider the relationship between MMFs and short-term funding markets, with a particular focus on commercial paper and certificate of deposit markets and the impact of dealer behavior."

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