The OMFIF, or Official Monetary and Financial Institutions Forum, which calls itself "an independent think tank for central banking, economic policy and public investment," released a report (in partnership with Federated Hermes) entitled, "The future of money market funds." They write on, "The need for constructive dialogue," and comment, "OMFIF has conducted a thorough review of what happened in the money markets in March 2020, and whether the current ideas mooted by a host of national and international policy-makers to 'fix' money market funds would have the desired effects. We have spoken to a wide range of industry participants, former policymakers, market regulators, lawyers and academics and taken on board their views. This paper is the result of that research." (Note: Thanks again to those who attended our "Asian Money Fund Symposium" webinar last week. For anyone who missed it, the replay is available here, and the materials are available to subscribers via our "Money Fund Webinar 2021 Download Center.)
The OMFIF paper explains, "There is clearly a disconnect between how policy-makers view MMFs and what the funds themselves believe to be the issues at play in the markets in which they operate. At the very least, this demands a period of constructive dialogue between the parties, which this paper aims to encourage and facilitate. Such a dialogue would avoid a rush to judgement about a financial market segment that plays an important role for companies (in reducing their borrowing costs) and for investors in diversifying their exposure and increasing their returns). The truth is that MMFs have performed robustly and proved their resilience through two seismic financial crises."
It continues, "MMF industry participants are clearly ready and willing to engage in these discussions. They agree, for example, that concerns about liquidity in secondary money markets are justified. However, they rightly point out that this is an issue for the market as a whole, rather than just MMFs, and that policy-makers need to adopt a holistic approach."
The introduction tells us, "OMFIF believes that organisations such as the President's Working Group in the US, the European Securities and Markets Authority in the European Union, and the Financial Stability Board internationally are considering proposals -- such as capital buffer requirements, minimum balance at risk or swing pricing requirements -- which either address problems that don't exist or make MMFs far less able to fulfil their core role. The danger is that investors will seek alternative -- and perhaps systemically riskier -- alternatives."
The report's Executive Summary says, "We urge regulators to consider and consult in constructively with the industry the following key findings of the paper. Its points include: "MMFs are capital markets instruments, and should not be regulated like deposits; While there were liquidity issues created by a once-in-a-century economic shock, there was no bailout -- no taxpayer money was lost in 2020 (or in 2008) because of MMFs; MMFs' footprint on short-term markets accounts for just 10% of the market today, compared to 30% pre-2008; While some post-financial crisis regulatory initiatives in the US and Europe helped the functioning of the market in 2020, the tie between weekly liquid asset threshold and potential imposition of a fee or gate backfired, and in fact exacerbated outflows from MMFs; and Central bank interventions -- such as the Commercial Paper Funding Facility and Money Market Mutual Liquidity Facility -- were much smaller than in other markets, never fully drawn down and quickly paid off, demonstrating the relatively robust nature and resilience of this 50-year-old market."
The summary adds, "If policy-makers take into account the wealth of data and analysis available, and a broad view of the short-term markets, they should realise that the stresses of 2020 were not due to the vulnerability of MMFs or any other financial product. The dislocation of 2020 was caused by a global economic shock to the system, resulting from the decisions of governments around the world to shut down their economies to prevent the spread of Covid-19."
OMFIF's white paper explains, "This report focuses on a narrow but critical component of the global financial system: the short-term funding markets. In the aftermath of the crisis, policy-makers are naturally looking at what changes there should be to the regulation and supervision of financial markets to mitigate the stresses experienced in March 2020. This report examines what refinements, if any, should be made in the regulation of money markets, including MMFs, which are a vital player in those short-term markets. It should be recognised at the outset that it may be impossible to avoid the severe economic damage caused by such a global pandemic and the resulting coordinated government action, or even to substantially reduce that through product regulation."
It states, "OMFIF favours fair-minded and balanced regulation of financial markets in a way that protects systems and society from undue risk, promotes growth and stability and allows the financial industry to thrive and innovate. OMFIF was launched more than 10 years ago precisely to offer central banks, sovereign funds and other players in the financial system a forum to discuss issues and challenges."
The piece also comments, "MMFs were another focus of regulatory review in the financial crisis and were subjected to significant reforms in the US in 2010 and 2014 and in Europe in 2017. Because of these reforms, MMFs held higher levels of liquidity going into the March 2020 crisis and may have had enough to ride it out, were it not for the regulatory link between weekly asset liquidity level and board consideration of fees and gates. The 30% WLA requirement became a floor instead of a buffer. Despite tremendous market-wide challenges caused by the pandemic and government decisions to close economies, short-term liquidity drying up and cash requirements of panicked investors put these funds under considerable stress. Central banks supplied targeted liquidity to the money markets."
It continues, "Conventional wisdom has it that if something is not broken, don't try to fix it. There really are two questions. The first is whether short-term funding markets need fixing. The second is whether MMFs also need fixing. The short-term markets may need structural improvements, but the case has not been made that MMFs need improvements. Those who claim that money markets are broken need to prove it. It is not enough, as we shall examine in detail, simply to assert that MMFs need extensive regulatory intervention to repair or restructure them just because they experienced stress in a pandemic-caused crisis that impacted the entire financial system."
The OMFIF explains, "There is a fundamental disagreement on how to view the financial stress that occurred in March 2020. Those who have long rued the very existence of MMFs and objected to this alternative to bank intermediation are seizing on last year's stress as a reason to put further restrictions and conditions on MMFs, even if this means allowing them a significantly reduced role or banning them entirely, which would prevent millions of investors from benefiting from them. They are simply following the mantra of 'let no crisis go to waste'."
They write, "That may well eliminate the need for central bank or government intervention into MMFs (but would not eliminate or even reduce the need in a crisis for intervention into the underlying money markets, financial institutions or the economy at large), but at what cost? Short-term funding markets, with or without MMFs, fulfil a clear need both for borrowers and investors. MMFs have been an important mechanism in facilitating the flow of short-term funds. If they are regulated to the extent that they cannot efficiently play that vital role, then who will play it?"
The report also explains, "There is a fundamental philosophical difference as to whether MMFs are deposits that should be subject to bank-like regulations or investment products that are appropriately supervised by securities regulators.... 'Importantly, we must recognise that no structure or regulation can make a financial product completely invulnerable to market shocks,' according to one industry participant."
Finally, it adds, "The way forward entails first and foremost a detailed analysis of what actually happened with the onset of the pandemic. There is a wealth of data available and modern technology offers tools to assist regulatory agencies in sorting through it. There then needs to be an open dialogue involving all market participants, taking a holistic view of the short-term funding market and the entire ecosystem of finance. Reforms need to be forward-looking. All this will take some time. Policy-makers should not rush to conclusions before properly assessing the facts and the potential unintended consequences of the suggested reforms."
