Money market funds are in the sights of global regulators. Does the industry need a thorough review? Or are policy-makers looking to fix a market that is not broken?
This OMFIF policy paper provides a thorough review of what happened in the money markets in March 2020, and whether the current ideas mooted by a host of national and international regulators would have the desired effects. We have spoken to a wide range of policy-makers, regulators, lawyers, academics and market participants and taken on board their views. This paper is the result of that research.
There is clearly a disconnect between how policy-makers view money market funds, and what the funds themselves believe to be the issues at play in the markets in which they operate. At the very least, this demands a period of constructive dialogue between the parties – which this paper aims to encourage and facilitate. Such a dialogue would avoid a rush to judgement about a financial market segment that plays an important role for companies in reducing their borrowing costs and for investors in diversifying their exposure and increasing their returns.
Some of the key findings of this paper include:
– Money market funds are capital markets instruments, and should not be regulated like deposits;
– While there were liquidity issues created by a once-in-a-century economic shock, there was no bailout – no taxpayer money was lost in 2020 (or, indeed, in 2008) because of MMFs;
– While some regulatory initiatives post financial crisis in the US and Europe helped the functioning of the market in 2020, the tie between weekly liquid asset threshold and potential imposition of a fee or gate backfired, and in fact exacerbated outflows from MMFs.