SSGA Comment Letter to FSB
State Street Global Advisors also recently submitted a comment letter to the Financial Stability Board in response to the FSB's "Policy proposals to enhance money market fund resilience: Consultation Report". Cash CIO Matthew Steinaway tells the FSB, "The March and April 2020 market turmoil was undoubtedly the first true stress test of global financial markets following the implementation of post Global Financial Crisis ('GFC') reform measures. As the magnitude of the COVID-19 pandemic became more apparent, governments responded by effectively imposing a near-total shutdown of global economic activity. This resulted in an exceptional and unprecedented demand for liquidity, with particularly acute pressure being felt in short-term funding markets. In that context, MMF flows were indicative of a 'flight to safety' rather than, as seen in 2008, a 'flight to quality' i.e. investor flows were driven by their prioritization of access to liquidity rather than as a result of concerns regarding the underlying credit quality of investments in MMFs. However, MMFs were not the cause of the pandemic-related market volatility and did not exacerbate market conditions by disposing of their less liquid assets to meet redemptions. Instead, as their primary purpose is the provision of liquidity and the preservation of principal, this seems entirely logical in light of market events and we believe was reflective of prudent risk management." He explains, "Based on last year's experience, State Street Global Advisors is supportive of efforts being undertaken by policymakers to improve the resilience of short-term funding markets, including money market funds. However, it is important to recognize that the challenges faced by market participants were not limited to MMFs and, as such, an effective solution will not be found through further reforms to MMF regulations alone. In our view, the outcome of the review process and any subsequent reforms should also be targeted at addressing the underlying issues observed during the pandemic-related market stress. In addition, future reforms to MMFs should not undermine their ongoing viability as they continue to play a valuable and crucial role, whether as an investment vehicle for investors, as a source of funding for issuers and the real economy, and as facilitators of liquidity for financial markets more broadly. With regards to MMF-specific reform measures, the FSB considers a wide range of policy options. State Street Global Advisors supports the proposals that seek to improve the usability of a fund's liquidity. In particular, we strongly support the proposal to remove the link between MMF minimum liquidity requirements.... In that context, we would support considering the conditionality for the use of liquidity fees, which should be available for use at the discretion of the fund manager and/or the board when in the best interests of the fund and its investors. However, we do not support the other options considered in the report such as capital buffers, the creation of a liquidity exchange bank ('LEB') or even sponsor support. These options would not be suited to MMFs, make the instrument unviable and, as in the case of sponsor support, would increase the interconnectedness between banks and non-banks." SSGA adds, "We would like to re-emphasize that banks, due to balance sheet restrictions, don't have the capacity to absorb the deposits. This is even more prevalent and relevant in periods of market stress. In addition, investors would be likely to move into short duration strategies/direct investments which would introduce much more risk into the system. As a result, the opposite effect would be achieved, i.e. financial stability would be weakened. Lastly, when considering the policy options ahead of its final report, we strongly recommend that the FSB be guided by the following key principles: 1. Focus on challenges revealed during the market stress: Notably, given it was a market-wide liquidity event, reforms should be focused on addressing liquidity risk. This includes ensuring the usability of the inherent liquidity within an MMF. 2. Address underlying market structure issues: Reforms should not be targeted at MMFs alone but also consider underlying structural issues, in both the short-term funding market and fixed-income markets more broadly, in order for reforms to be truly effective. 3. Ensure the ongoing viability of MMFs: We continue to believe MMFs play a critical and valuable role in financial markets, and that the outcome of the reform process should not deprive investors of a valuable investment vehicle nor issuers of a crucial source of funding. 4. Avoid the need for external support: Reforms should mitigate the potential need for external support, whether that be from the public sector or indeed the fund sponsor and/or its affiliates. However, we believe there should also be recognition that during periods of extreme market stress, or 'black swan' events, normal market functioning may only be restored through policymaker intervention. State Street Global Advisors is keen to continue being an active and constructive participant in this debate, and we remain supportive of efforts to improve the resilience of MMFs, as well as broader short-term funding markets. We look forward to contributing to these discussions with international policymakers."
