Summary of document history
The March 2020 market turmoil exposed vulnerabilities in MMFs that need to be addressed.
This report sets out policy proposals to enhance money market fund (MMF) resilience, including with respect to the appropriate structure of the sector and of underlying short-term funding markets. It reflects public feedback received on a consultative version of the report, which the FSB published in June 2021. The policy proposals form part of the FSB’s work programme on non-bank financial intermediation and are intended to inform jurisdiction-specific reforms and any necessary adjustments to the policy recommendations for MMFs issued by IOSCO. Enhancing MMF resilience will help address systemic risks and minimise the need for future extraordinary central bank interventions to support the sector.
MMFs are subject to two broad types of vulnerabilities that can be mutually reinforcing: they are susceptible to sudden and disruptive redemptions, and they may face challenges in selling assets, particularly under stressed conditions. The prevalence of these vulnerabilities in individual jurisdictions may depend on market structures, use and characteristics of MMFs.
The report considers the likely effects of a broad range of policy options to address these vulnerabilities, by examining how these options would affect the behaviour of MMF investors, fund managers and sponsors, as well as the options’ broader effects on short-term funding markets, including through impacts on the use of potential substitutes for MMFs. Policy options are grouped according to the main – though not necessarily the only – mechanism through which they aim to enhance MMF resilience.
The policy toolkit includes mechanisms to: impose on redeeming fund investors the cost of their redemptions; absorb credit losses; address regulatory thresholds that may give rise to cliff effects; and reduce liquidity transformation.
The report also includes considerations on how to prioritise options in the context of identified vulnerabilities; and how authorities can combine options to address all MMF vulnerabilities prevalent in their jurisdiction.
FSB members are assessing, or will assess, MMF vulnerabilities in their jurisdiction and will address them using the framework and policy toolkit in this report, in line with their domestic legal frameworks. The FSB recognises that individual jurisdictions need flexibility to tailor measures to their specific circumstances. At the same time, as shown by the experience of March 2020, there are important cross-border considerations to be kept in mind. International coordination and cooperation on implementing policy reforms is critical to mitigate spillovers and avoid regulatory arbitrage.
In addition, the FSB will, working with IOSCO, review progress made by member jurisdictions in adopting reforms to enhance MMF resilience. The review process involves a stocktake to be completed by the end of 2023 of the measures adopted by FSB member jurisdictions, including their evidence-based explanation of relevant MMF vulnerabilities and policy choices made. This stocktake will be followed up with an assessment of the effectiveness of these measures in addressing risks to financial stability by 2026.
IOSCO plans to revisit its 2012 Policy Recommendations for Money Market Funds in light of the framework and policy toolkit in this report.
Finally, in response to the feedback from the public consultation, the FSB and IOSCO intend to carry out follow-up work, complementing MMF policy reforms, to enhance the functioning and resilience of short-term funding markets.