FSB – Issued consultation on its policy proposals to enhance money market fund resilience

June 30, 2021 – FSB consulted on policy proposals to enhance MMF resilience, including with respect to the appropriate structure of the sector and of underlying short-term funding markets. Proposals form part of FSB’s program on non-bank financial intermediation (NBFI). The FSB’s Holistic Review of the March 2020 market turmoil highlighted structural vulnerabilities in MMFs and related stress in short-term funding markets. MMFs are susceptible to sudden and disruptive redemptions, and they may face challenges in selling assets, particularly under stressed conditions. These features can make individual MMFs, or even the entire MMF sector, susceptible to runs, and may also give rise to system-wide vulnerabilities. Policy options aim to address vulnerabilities and are intended to inform jurisdiction-specific reforms, adjustments to policy recommendations for MMFs issued by IOSCO. Enhancing MMF resilience will help address systemic risks and minimize the need for future extraordinary central bank interventions to support the sector.

Policy options are grouped according to the mechanism by which they will enhance resilience, namely, to 1) impose on redeeming investors the cost of their redemptions; 2) absorb losses; 3) reduce threshold effects; 4) reduce liquidity transformation. The report assesses the likely effects of each option on the behavior of MMF investors, fund managers, and sponsors, as well as their implications for the underlying markets.

The consultation report also sets out considerations on how options could be selected and combined to address all the vulnerabilities arising from different types of MMFs. The optimal combination should take account of jurisdiction-specific circumstances and policy priorities, as well as cross-border considerations including to prevent regulatory arbitrage that could arise from adopting divergent approaches across jurisdictions.

Additional Reforms
These policies could be accompanied by additional reforms in two areas: policies to support robust risk management by fund managers and risk monitoring by authorities. In addition, measures to improve the functioning of the underlying short-term funding markets.

Responses to the public consultation should be sent by August 16, 2021, with MMF policy proposals in the subject line; all responses will be published on the FSB website unless respondents request otherwise; the final report will be published in October 2021.

For more information, visit www.fsb.org.

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