Money market fund reforms could sink the sector



In a new report, Moody’s said that while the FSB’s proposals would make money market funds safer, they “also raise questions about whether [these funds] may remain a commercially viable fund product if the proposals are implemented.

The report noted that money market funds were found to be susceptible to investor leakage during the global financial crisis and again when the pandemic first struck in March 2020.

In both cases, he says, “the buybacks of [money market funds] did not weaken until the intervention of central banks.

Therefore, reforms to improve the capacity of funds to cope with redemptions would likely reduce the need for intervention and help reduce systemic risk.

Yet at the same time, measures to make funds safer for the financial system could also reduce their appeal to investors and therefore to the asset managers who issue them, suggests the report.

“Some of the FSB reform options are aimed at strengthening the sector by imposing redemption fees on investors or improving [funds’] loss-absorbing capacity, ”the report says. “Others would reduce [funds’] liquidity transformation or limit unfavorable “threshold” effects, such as preventive withdrawals when fund liquidity decreases to levels where redemption restrictions come into play. ”

While these options would likely enhance the resilience of funds during times of stress, the reforms “would also make them less attractive to investors and sponsors,” Moody’s said.

“For example, measures such as swing pricing and minimum at-risk balances would make [funds’] less liquid stocks, potentially deterring some investors. They would also lead to costly operational challenges that could, in some cases, [funds] not economical for their sponsors, ”he said.

The FSB consultation ends on August 16. He plans to release his final recommendations in October.



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