The Financial Stability Board today put forth several policy proposals aimed at increasing the resilience of money market funds, which experienced extreme volatility in the early days of the COVID-19 pandemic. The recommendations were published for comment earlier this year by the FSB.
To reduce the likelihood of destabilizing redemptions, the FSB recommended actions including implementing swing pricing, implementing a minimum balance at risk and creating a capital buffer; removing ties between regulatory thresholds and imposition of fees and gates and the removal of stable net asset value. To mitigate the effects of large redemptions, the FSB recommended placing limits on assets and developing additional liquidity requirements and escalation procedures.
“Policies aimed at enhancing the resilience of MMFs could be accompanied by additional reforms in two areas,” the FSB noted. “The first involves policies such as stress testing and transparency requirements on [short-term funding markets] and their participants…The second area involves measures that aim at improving the functioning of the underlying STFMs.”
In a letter today outlining the FSB’s efforts to increase resilience in nonbank financial intermediation, FSB Chairman Randal Quarles signaled that in coordination with the International Organization of Securities Commissions, the FSB will “by end-2023 take stock of progress made by jurisdictions, and by 2026 assess the effectiveness of the measures taken” with regard to MMF reform.