The Technical Committee of the International Organization of Securities Commissions (IOSCO) has issued a report asking for comments on the possible risks money market funds may pose to systemic stability as well as on certain potential policy options to address these risks.
The report states that money market funds are viewed as "a diversified and safe alternative to bank deposits" and are an important cash management tool for institutions and retail investors. In addition, the report notes that money market funds are important providers of short-term funding to financial institutions, businesses and governments. The report acknowledges that radically shrinking the money market fund industry would leave investors with fewer investment alternatives "and could direct a concentration of assets towards the banking sector or unregulated or less regulated substitute products." Nevertheless, the report identifies runs on money market funds as a potential systemic risk, and seeks comments on potential regulatory options to address the perceived risk.
The paper contains a number of "preliminary conclusions," including:
"first of all, although important reforms have already been adopted and implemented to address some of the shortcomings identified during the crisis, several areas of risk remain; notably, MMFs must now comply with strict criteria in terms of credit quality and liquidity management, thereby reducing their scope for credit, maturity or liquidity transformation, but are still vulnerable to runs, particularly in case of a credit event. Moreover, their importance and interconnectedness with the rest of the financial system make their safety paramount for financial stability at large.
secondly, policy options will have to be carefully weighed in the context of their potential impact on financial stability and market functioning. Several important and complex issues will have to be considered, such as the impact on competition and diversity, moral hazard, impact on the short-term funding markets and other potential disruptive effects as well as regulatory obstacles and/or practical implementation challenges."
The policy options that are identified in the report are largely similar to those previously identified in the Presidents' Working Group report of 2010, such as moving to a variable NAV, imposing a variety of capital buffers, private insurance options, redemption restrictions, and the establishment of a private emergency liquidity facility.
Comments on the report are due by May 28, 2012.
The full report can be found here: http://www.iosco.org/library/pubdocs/pdf/IOSCOPD379.pdf
The President's Working Group report can be found here: http://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf