“I saw Tantalum in excruciating torments, in a puddle of water that reached his chin. He was tortured with thirst, but could not drink, for every time he leaned over greedily the water was swallowed up and vanished, and at his feet there was only black earth, dried up by some God.
Money market mutual funds can be like Hades’s tempting pool of water. They provide easy access to your money at better rates than you can get from a bank. Investors have invested nearly $ 5,000 billion in the United States and nearly $ 9 trillion globally. But in a crisis like those of 2008 and 2020, the liquidity of money market funds can dry up before your eyes. There was a “rush for money” in March 2020 when the pandemic halted. Investors have attempted to withdraw money from blue chip funds, which hold assets such as bank and corporate commercial papers, and transfer the money to banks or other money market funds that hold public debt.
Investors in prime funds “have therefore not been able to sell their holdings quickly at current prices and at the desired scale,” said a June 30 report from the Financial Stability Board. March 2020 marked “the second time in 12 years that European and American authorities have had to intervene to support the sector,” said Randal Quarles, current FSB chairman and also vice chairman of supervision at the Federal Reserve, in a statement. communicated. press briefing on the report.
The Financial Stability Board is an international body of high-level decision-makers that coordinates national regulatory efforts. His report, “Policy proposals to improve the resilience of money market funds, sets out two divergent paths for money market funds. Either way would improve the stability of the funds, but a choice must be made as the two approaches are in conflict.
A fork in the road is to make money market funds more liquid like. If so, regulation would focus on protecting investors from risk by ensuring that they don’t lose money and still have immediate access to it. This could involve requiring a capital cushion, i.e. ensuring that funds hold more assets than they owe depositors. Regulators can also require funds to hold only the shortest, highest quality and most liquid assets. The downside of the cash-like approach is the harm it would do to institutions on the other side of the ledger – the riskiest borrowers whose paper would no longer be eligible to be held by market funds. monetary.
The other fork is to forgo the promise that money market funds are the functional equivalent of checking accounts and instead treat them as investments, which are inherently risky. The emphasis would be on ensuring that all investors in a fund bear losses fairly. If this is the choice, one option to increase resilience would be to adopt swing pricing, which discourages races on a fund by stipulating that any investor who attempts to withdraw a lot of money at once should bear the costs. resulting costs. such a sudden redemption imposed on the fund. A related reform would be to declare that all money market funds, and not just those intended for institutional clients, must have floating net asset values. Investors would be aware that they could withdraw less than a dollar for every dollar invested. This would remove the incentive to be the first to withdraw funds in an emergency, such as in past bank runs.
Some reforms make sense, regardless of the path chosen. For example, the Financial Stability Board seems to agree that a regulatory change made in the wake of the global financial crisis backfired in 2020. The change gave funds the right to charge fees or “portals”. »(Withdrawal limits) if the percentage of highly liquid assets their portfolios holdings have fallen below a certain threshold. Some investors withdrew their money when they saw funds approaching that threshold, so the rule exacerbated the rushes rather than calmed them down.
Money market funds are only an actor in the short-term money market, and not the most volatile. The Investment Company Institute urges the Financial Stability Board and national regulators to come up with a “holistic” solution that addresses the whole system, not just money market funds. It makes sense.
Nonetheless, decisions will have to be made about what money market funds should be. Like cash? Or as an investment? “Regardless of the direction of change,” says the Financial Stability Board report, “the authorities will need to ensure that the mix of options is consistent in its objectives and design.”