As we mentioned in Tuesday's Link of the Day, the Financial Stability Board, a group of global regulators, published its "Policy Proposals to Enhance Money Market Fund Resilience - Final Report earlier this week. We've already quoted from the press release, "Policy proposals to enhance money market fund resilience: Overview of the responses to the consultation" and from the FSB's statement, "Policy proposals to enhance money market fund resilience: Final report." But today we excerpt from the summary document, "Policy proposals to enhance money market fund resilience - Overview of the responses to the consultation." (Reminder: Please join us next week for European Money Fund Symposium Online, a free 2 1/2 hour webinar on Oct. 21 from 9:30-12:00pm Eastern. Register here.)

The Introduction states, "The consultation report with policy proposals to enhance MMF resilience was published on 30 June 2021 and the comment period closed on 16 August. The FSB received responses from various stakeholders, the large majority of which came from fund managers and their trade associations (mainly in the US and Europe). The remaining responses came from banks or banking associations, and from other trade associations and think tanks. All non-confidential responses have been published on the FSB's website. In addition, the FSB organized a virtual public workshop on 12 July to gather further feedback on the consultation report."

It explains, "In general, the FSB's view is that substantial changes are not needed to the report in response to consultation feedback, as it did not introduce major new elements to the analysis. Respondents from outside the asset management industry were generally in favor of further MMF reforms. By contrast, responses from the industry were generally against MMF reforms other than the removal of ties between regulatory liquidity thresholds and the ability to impose fees and gates, although many industry respondents expressed agreement with the use of mechanisms to allocate liquidity costs to redeeming investors (and especially anti-dilution levies), and to a lesser extent with the removal of stable net asset value (NAV) MMFs. Most respondents also expressed support for work to enhance the functioning of short-term funding markets (STFMs). This document summarizes the comments raised in the public consultation and sets out the main changes made to the final report in order to address them."

Discussing the "Comments received," the FSB summarizes, "Many of the respondents from the asset management industry argued that problems in MMFs were a symptom rather than a cause of the market dislocations experienced in March 2020. In their view, MMFs were perceived as one of the most liquid instruments to use in order to meet other cash needs and for this reason experienced large flows. Industry respondents argued that MMF redemptions from certain types of funds did not contribute to increasing the cost of short-term funding for borrowers. They also argued that problems were exacerbated by the fact that dealers' balance sheets were under pressure because of the large volume of various assets being sold relative to the dealer capacity."

They tell us, "The same respondents argued that the main issue was the lack of functioning in underlying short-term funding markets rather than problems with MMFs themselves. They pointed out that no MMF had to rely on suspensions and that all redemptions were met. However, one respondent pointed out that the shadow NAV of some funds came close to breaking the 20bp collar in the EU, while in the US one fund's NAV dipped below the 30% Weekly Liquid Assets (WLA) threshold for one day, which allowed this fund to impose a liquidity fee or gate. [`Editor's note: This is incorrect. No funds imposed liquidity fees or gates, though one dipped below 30% WLA.] Respondents highlighted the crucial role of the link, present in the US and in Europe, between the breaching of liquidity thresholds and the ability of funds to impose liquidity fees or gates. One respondent provided results from a simulation that, it argued, shows that if liquidity thresholds in US MMFs were not linked to the possibility of fees and gates, the funds would have been better able to use their liquidity buffers and meet redemptions for five weeks without any central bank interventions."

The FSB summary says, "Some respondents highlighted the different behaviour of government and non-government MMFs and suggested that reforms (if any) should be limited to the latter type of funds which experienced outflows.... Most respondents from outside the industry, however, argued that the March 2020 turmoil highlighted that MMFs are vulnerable, and some argued that they could impose material financial stability costs on society and that they benefit from an implicit government guarantee at least in some jurisdictions. [Note too: There was only one outside the industry submission.] These respondents generally were in favour of reforms to the MMF structure to make sure that these societal costs are borne by MMFs and their investors. Policy options mentioned included swing pricing, the imposition of stricter limits on assets that MMFs can buy, and the use of MBR and of capital requirements."

Regarding the "Response to comments," they state, "Some clarifying edits have been made to the report but the overall narrative has not changed. The consensus of the FSB membership, as reflected in its November 2020 Holistic Review of the March Market Turmoil, is that the March 2020 turmoil highlighted issues in MMFs that were subject to a very high level of redemptions in an illiquid market. The consultation report did not argue that MMFs caused the stress in the underlying markets, but that they contributed to (and were impacted from) it as a result of their structure and the fact that they rely on markets that are not liquid in times of stress to meet investor redemptions. Central banks intervened to re-establish the orderly functioning of markets and not simply to assist MMFs, but MMFs were among the entities that experienced high liquidity pressures during March 2020."

The FSB adds, "The consultation report already referred to potential future work to enhance the resilience of STFMs. In response to the feedback from the public consultation, the FSB and IOSCO intend to carry out follow-up work, complementing MMF policy reforms, to enhance the functioning and resilience of STFMs."

On the "Vulnerabilities in MMFs," they comment, "Some industry respondents rejected the conclusion that the March 2020 turmoil highlighted significant vulnerabilities in MMFs. They pointed out that the stress was mainly due to the lack of liquidity in STFMs (as opposed to the credit crisis of 2008) and argued that MMFs' problems were a result of the problems in STFMs. In their view, central banks did not 'bail out' MMFs and their interventions were not necessary to rescue them. Some respondents argued that institutional MMF outflows are usually large at the end of the quarter and that the graphs presented by the FSB overstate the problem by not taking this feature into account."

The summary also says, "Due to different market and product structures across jurisdictions, respondents confirmed that a one-size-fits-all reform solution would be challenging, and not even desirable.... However, there was near total consensus that a removal of the regulatory linkage of liquidity requirements to fees and gates would be an appropriate policy option to address the pressures MMFs experienced in 2020. Respondents underlined that it would enable MMFs to use their available liquidity to the full, act as a countercyclical release, and eliminate any cliff edge that spurred investors to redeem.... Responses showed some openness to consider the application of a liquidity or anti-dilution fee in stress situations. They largely preferred this option to swing pricing, which was seen as an impractical and unviable way to internalise liquidity costs. There was a strong push among US-based respondents to place the decision when to use this fee and how to calibrate it at fund board level."

The FSB explains, "Some edits to the report have been introduced to help dispel possible misunderstandings on the part of the respondents. A notable one is the fact that the FSB is not advocating the selection of representative options over the alternatives (variants), but rather that the representative options illustrate the mechanisms used to improve MMF resilience and that all options should be considered by jurisdictions.... For example, if swing pricing is particularly difficult to put in place for MMFs in a jurisdiction, it may be appropriate for that jurisdiction to adopt other policies (such as liquidity fees or anti-dilution levies).... For instance, in MMF jurisdictions such as the US and Europe, the possibility of using a liquidity fee is already in place but restricted to specific circumstances and almost never used. A proper implementation of such a policy without creating incentives for pre-emptive runs should allow fund managers to use it regularly."

Finally, they write, "A minority of responses disagreed that similarities in MMF portfolios may present contagion risk, noting that larger issuers benefit from greater liquidity by being able to sell their paper to MMFs and that high standards in credit risk management are sufficient to mitigate this risk.... A significant minority of respondents argued that central bank facilities that have been used as emergency measures should be formalised and be made available at all times. These respondents specifically mentioned having a permanent repo facility accessible to MMFs, including MMFs' assets in central bank asset purchase programmes, and even central banks acting as market makers of last resort in short-dated government bills during stress periods."

For more, see these Crane Data News stories: "More Comment Letters to FSB: HSBC AM, BNP Paribas, Amundi and Aviva" (9/7/21), "Federated Tells FSB: Eliminating Central Bank Intervention Unrealistic" (9/1/21), "BlackRock's FSB Comment: Address STFM Root Causes, 15% Daily Liquid" (8/26/21), "Fidelity to FSB: Narrowly Construct" (8/25/21), "JPMAM's Donohue to FSB: Reform Must Be Calibrated and Contextualized" (8/24/21), "Vanguard Comment Letter to FSB Urges Floating NAV, More Liquidity for Prime MMFs" (8/23/21), "ICI Comments on Financial Stability Board's Report; ICI MMF Holdings" (8/18/21) and "FSB Policy Proposals for Money Fund Resilience; Broad Range of Options" (7/1/21).

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