Money-market funds should have limits imposed on the riskiness of their investments and should conduct regular stress tests, a global body of markets regulators said.
“Funds should not take direct or indirect exposures to equities or commodities,” the International Organization of Securities Commissions said in a report on its website today. The funds, which invest in short-term debt, should hold buffers of liquid assets to prevent runs, IOSCO said.
“Some important measures have been taken to reform the MMF industry,” IOSCO said in the report. “These funds may still present vulnerabilities which could have broader consequences for the financial system.”
Regulators have pressed to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run and helped freeze credit markets. The crisis calmed only after the U.S. Treasury guaranteed shareholders against losses.
Money-market funds have about $4.7 trillion under management and make up a significant part of the so-called shadow-banking industry. Shadow banking must be reined in by regulators as it is “potentially very unstable,” Adair Turner, chairman of the U.K. Financial Services Authority, said earlier this year.
The recommendations from IOSCO include increased disclosure to investors of how funds value their investments and how they would act in times of financial stress.
Regulators should be able to stop outflows in “exceptional situations,” which “may have implications for the broader financial system,” according to the report.
Mary Schapiro, chairman of the a U.S. Securities and Exchange Commission, gave up on a plan in August to strengthen regulation of the funds after three of the agency’s five commissioners told her they wouldn’t vote to issue it for public comment.
Today’s report was backed by all members of IOSCO aside from a “majority of the Commissioners of the U.S. Securities and Exchange Commission,” IOSCO said in the statement.
“All the recommendations are important for the safety and robustness of the money-market fund industry,” IOSCO said.
“However, the implementation of some recommendations may need to be phased in, in order to avoid disruptive impacts on the MMF industry and the functioning of the financial system at large.”
IOSCO brings together market regulators from more than 100 countries to coordinate rule-making and share information.
Paul Schott Stevens, president of the Investment Company Institute, said IOSCO drew a misinformed conclusion that money market funds with a constant net asset value are more susceptible to runs than funds with floating values.
“This misinformed claim fuels flawed regulatory proposals, including options of imposing capital requirements and redemption holdbacks, and a strongly expressed preference for floating or VNAV funds,” Stevens said in a statement today. “The report failed to include any recommendations that would improve the transparency of money market fund portfolio holdings for the benefit of investors and regulators.”
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