Call for overhaul of money market funds: report

Washington

US policymakers need to consider major changes to make money market funds less vulnerable to investor runs, a working group led by the Treasury Department said Tuesday, stopping short of making specific recommendations.

The regulatory group laid out several potential changes to those markets, which the US government intervened to stabilise after big outflows prompted by the US coronavirus outbreak in March.

Ideas included setting stricter rules around fund redemptions, or higher capital buffers for such funds, but the group said it was not favoring any specific approach, and simply wanted to spur discussion.

"The events of March 2020 show that more work is needed to reduce the risk that structural vulnerabilities . . . will lead to or exacerbate stresses in short-term funding markets," stated the report by the Presidential Working Group on Financial Markets. The report could kick off a broader effort to overhaul the funds. Former Federal Reserve Chair Janet Yellen, whom President-Elect Joe Biden has tapped to lead his Treasury Department, is expected to review of so-called "shadow banking", which includes such funds, analysts said.

In March, short-term funding seized up with a massive sell-off in US markets, including Treasuries. Among institutional and retail prime money market funds, which allow daily redemptions while holding less liquid short-term assets, outflows as a percentage of fund assets exceeded that of the September 2008 crisis.

The crunch prompted the Fed to buy US$1.6 trillion in Treasuries and other bonds to stabilise the markets. It continues to buy around US$80 billion monthly. Top officials have warned that liquidity could collapse again if that support is withdrawn. REUTERS