The Financial Stability Board (FSB) today published its final report with policy proposals to enhance money market fund (MMF) resilience.
The report, which was delivered to the G20, is a key deliverable for
2021 of the FSB’s work programme on non-bank financial intermediation.
The policy proposals in the report aim to address systemic risks and
minimise the need for future extraordinary central bank interventions to
support the sector.
MMFs are subject to two broad types of vulnerabilities that can be
mutually reinforcing: they are susceptible to sudden and disruptive
redemptions, and they may face challenges in selling assets,
particularly under stressed conditions. The prevalence of these
vulnerabilities in individual jurisdictions may depend on market
structures, use and characteristics of MMFs.
The report considers the likely effects of a broad range of policy
options to address these vulnerabilities. Policy options are grouped
according to the main mechanism through which they aim to enhance MMF
resilience. The policy toolkit includes mechanisms to: impose on
redeeming fund investors the cost of their redemptions; absorb credit
losses; address regulatory thresholds that may give rise to cliff
effects; and reduce liquidity transformation. The report includes
considerations on how authorities can prioritise and combine these
options.
In terms of next steps, FSB members are assessing, or will assess,
MMF vulnerabilities in their jurisdiction and will address them using
the framework and policy toolkit in this report, in line with their
domestic legal frameworks. The FSB recognises that individual
jurisdictions need flexibility to tailor measures to their specific
circumstances. At the same time, as shown by the experience of March
2020, there are important cross-border considerations to be kept in
mind. International coordination and cooperation on implementing policy
reforms is critical to mitigate spillovers and avoid regulatory
arbitrage.
The FSB will, working with the International Organization of
Securities Commissions (IOSCO), review progress made by member
jurisdictions in adopting reforms to enhance MMF resilience. The review
process involves a stocktake by the end of 2023 of the measures adopted
by FSB member jurisdictions, followed up with an assessment by 2026 of
the effectiveness of these measures in addressing risks to financial
stability.
IOSCO plans to revisit its Policy Recommendations for Money Market Funds
in light of the framework and policy toolkit in this report. Moreover,
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 short-term funding
markets.
Notes to editors
The FSB published in November 2020 a Holistic Review of the March Market Turmoil,
which lays out a comprehensive and ambitious work programme for
strengthening the resilience of the NBFI sector while preserving its
benefits.
The final report with policy proposals to enhance MMF resilience reflects public feedback received on a consultative version of the report, which the FSB published in June 2021. The FSB also published today an overview of the responses to its public consultation.