The Consultation Report, published on June 30, includes the Financial Stability Board (FSB) policy proposals to enhance money market fund (MMF) resilience that aims to address MMFs vulnerabilities identified as the susceptibility for sudden and disruptive redemptions and the potential challenges in selling assets to meet significant redemptions because the funds hold financial instruments that have limited liquidity, particularly under stressed conditions.
To address those vulnerabilities and enhance MMF resilience, the FSB’ policy proposals consider the following options:
Imposing on redeeming investors the cost of their redemptions which can be accomplished by the mechanism of swing pricing requiring fund managers ‘to reduce the fund’s NAV when outflows exceed a “swing threshold”, i.e. the funds redemption costs will be supported by redeeming investors.
Absorbing losses by requiring funds to (1) have a minimum balance at risk (MBR), a small fraction of each investor’s shares that cannot be redeemed immediately, (2) maintain a capital buffer that could be held in an escrow account financed by fund managers or by outside investors/sponsors.
Reducing threshold effects through the removal of (1) ties between regulatory thresholds and imposition of fees and gate and (2) stable NAV for a variable NAV.
Reducing liquidity transformation by (1) putting a limit on eligible assets for MMFs and requiring them to invest a higher portion of their assets in more liquid instruments or (2) subjecting MMFs to additional liquidity requirements and escalation procedures when regulatory thresholds are breached.
The Consultation Report also assesses the potential impacts of each option on the behaviour of MMF investors, fund managers and sponsors, as well as their implications for the underlying markets.
Responses to the consultation should be sent by 16 August and the final report is scheduled to be published in October 2021.