Following significant liquidity strains—particularly among money market mutual funds—at the outset of the COVID-19 pandemic last March, the Financial Stability Board will publish a report in July outlining “consequential policy proposals” to improve MMF resilience, Federal Reserve Vice Chairman for Supervision Randal Quarles said at an industry event today.
Quarles—who chairs the FSB—said that the proposals will also focus on reducing the need for government intervention and taxpayer support to end future MMF runs, and will “consider the relationship between MMFs and short-term funding markets, with a particular focus on commercial paper and certificate of deposit markets and the impact of dealer behavior.” FSB will also continue work on other open-end funds, margining and bond market structure and liquidity, Quarles said.
Additionally, he noted that “the disruptions in bond markets also raised questions about the role of leveraged investors and the willingness and capacity of dealers to intermediate in times of stress. Work is underway to gather data and analyze dealer behavior to develop a comprehensive view on their impact on financial market functioning and determine whether policy responses are necessary.”
Under Quarles’ leadership, the FSB has been conducting a broader initiative to understand vulnerabilities within both the banking sector and in nonbank financial intermediation, or NBFI—the FSB’s preferred term for “shadow banking.” In addition to ensuring MMF resilience, Quarles said he also intends to focus FSB’s efforts on the resilience and resolvability of central counterparties, and will also increase efforts to enhance cross-border payments.