An illustrative photo of US dollar, Swiss franc, sterling and euro banknotes taken in Warsaw on January 26, 2011. REUTERS / Kacper Pempel

LONDON, June 30 (Reuters) – Global financial regulators have offered options ranging from capital buffers to fees to prevent central banks from repeating themselves having to save the money market fund (MMF) industry from $ 8.8 trillion of dollars, as they did during a year “money rush”.

The Financial Stability Board (FSB), which coordinates financial rules for the G20 economies, on Wednesday proposed a selection of measures to regulators to make money market funds more resilient and reduce the temptation of investors to flee to exits.

During the extreme market turmoil in March 2020, the Federal Reserve and other central banks had to inject liquidity into the financial system to prevent money market funds from crunching under strong demand for redemptions, for the second time in 12 years . Read more

The industry has argued that all parts of the financial system were strained last year at the height of the COVID-19 crisis as economies entered pandemic lockdowns.

The MMF sector, with more than half in the United States, is essential for short-term financing of the economy and businesses, investing in public debt and short-term bills, allowing investors to cash in their stocks daily.

“Money market funds are subject to sudden and disruptive redemptions, and they can face difficulties when selling assets, especially under stressful conditions,” the FSB said in a report.

One option was to “swing pricing” or allow fund managers to impose transaction costs on those who buy back shares in order to reduce the impact on investors who remain in the fund, the FSB said.

Another option is not to immediately redeem a small fraction of each investor’s stock and change the way “portals” or temporary investor exit bans are implemented, he added.

A capital cushion of sufficient size would also ease the pressures of large repayments, although this would increase the costs of the sector, the watchdog said, adding that stress tests for individual money market funds and for the sector in its whole could also work.

Eric Pan, CEO of the global fund industry body ICI, said it is encouraging that the FSB also recognizes the need to improve the functioning of broader short-term markets, including commercial paper and certificates of deposit.

“It is important to note that the FSB recognizes that certain reforms, such as capital buffers and swing pricing, could ultimately eliminate some money market funds from the market,” said Pan.

The FSB has submitted the policy options for public consultation and will issue a final report in October.

It would be up to regulators in each member country to decide on the combination of measures, allowing them to bypass steps such as capital requirements that have divided regulators in the past as well as the industry.

The FSB will follow up on the implementation reviews.

Reporting by Huw Jones; Editing by Alexander Smith, Kirsten Donovan

Our standards: Thomson Reuters Trust Principles.



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