U.S. financial regulators issued a report offering general policy measures to make money market funds more resilient.
The President's Working Group on Financial Markets report, released Tuesday, reviewed the "sharp stress" experienced by short-term funding markets related to COVID-19 in March "and an overall flight to liquidity and quality among investors," it said.
The report discusses potential policy measures but not specific recommendations. Those measures include:
- Internalizing liquidity costs of investors' redemptions, particularly in stress periods.
- Decoupling regulatory thresholds from consequences such as gates or fees.
- Improving the fund's ability to use available liquidity in times of stress.
Deputy Treasury Secretary Justin Muzinich said in a statement with the report that money markets experienced significant outflows in March that forced Treasury and the Federal Reserve to step in to prevent a destabilizing run.
Prime and tax-exempt MMFs have been supported by official sector intervention twice over the past 12 years, and many reforms implemented after the global financial crisis increased market stability, the report noted. But the events of March 2020 showed that more work is needed to reduce the risk that remaining structural vulnerabilities in prime and tax-exempt money market funds will stress short-term funding markets, the report said.
"We must now consider reforms to ensure this vulnerability does not threaten financial stability in the future," Mr. Muzinich said.