FSB offers proposals to boost the resilience of money market funds

The Financial Stability Board (FSB) has issued a series of policy proposals that seek to bolster money market funds (MMF) resilience.

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Recommendations designed to address the potential for destabilizing redemptions include initiating swing pricing and a minimum balance at risk while creating a capital buffer. FSB also recommends removing ties between regulatory thresholds, imposition of fees and gates and removing stable net asset value.

“Policies aimed at enhancing the resilience of MMFs could be accompanied by additional reforms in two areas,” the FSB indicated. “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.”

The FSB would take stock of progress made by jurisdictions by 2023 and by 2026 assess the effectiveness of the measures taken regarding MMF reform, according to FSB Chairman Randal Quarles, in coordination with the International Organization of Securities Commissions.

“As the global economy continues to recover from the outbreak of COVID-19 and the attendant containment measures put in place by many governments, the Financial Stability Board has shifted its focus from crisis management to reflecting on the important lessons we have learned and sharpening our focus on the road ahead,” Quarles wrote. “The work we are submitting to the G20 focuses on these lessons for financial stability. This body of work presents promising tools to address vulnerabilities, identifies concrete steps that can be taken to improve the resilience of non-bank financial intermediation (NBFI) and reflects consensus around areas for continued vigilance.”