The US Securities and Exchange Commission’s biggest round of reforms in years for the $5.5 trillion money-fund industry fall short of fixing what ultimately caused markets to seize up in the pandemic turmoil, according to Bank of America Corp.
(Bloomberg) — The US Securities and Exchange Commission’s biggest round of reforms in years for the $5.5 trillion money-fund industry fall short of fixing what ultimately caused markets to seize up in the pandemic turmoil, according to Bank of America Corp.
Final rules passed on Wednesday increased minimum daily and weekly liquidity, removed the threshold that imposes costs on withdrawals and instituted a fee for large redemptions for primary funds that invest in commercial paper. While these measures may discourage rapid outflows and prevent a dilution in remaining shareholders’ assets, markets still remain vulnerable to sudden freezes that forced the Federal Reserve to intervene in early 2020 for the second time in 12 years.
The March 2020 “money market stress was driven by a ‘dash for cash’ and insufficiently liquid secondary market” for commercial paper, strategists Mark Cabana and Katie Craig wrote in a note to clients. “The only way to thaw the market would be through official sector intervention.”
In the wake of the early-pandemic market turmoil, reports from global regulators blamed money funds for freezing vital financial markets, resulting in calls for new rules aimed at penalizing investors trying to retrieve their money quickly during a crisis. While the industry and official sector was largely in agreement that the some of the changes instituted in 2016 didn’t prevent the kind of outflows that occurred in March 2020, officials pushed for new rules aimed at discouraging runs.
SEC Chair Gary Gensler in comments Wednesday focused on investor redemptions and the need to shore up that part of the market.
When markets enter times of stress, some investors — fearing dilution or illiquidity — may try to escape the bear,” he said. “We have observed this play out in times of stress, including during the 2008 financial crisis and the dash for cash in March 2020. Left unchecked, such stress can undermine these critical funds.”
The 2008 financial crisis exposed major issues with money funds, which are supposed to be ultra-safe havens for individuals and companies to park cash, and regulators spent years implementing measures intended to slow withdrawals during times of stress.
But the round of changes instituted in 2016 didn’t prevent the kinds of outflows that occurred in March 2020. Instead, panicked investors yanked billions from prime money funds money funds in less than two months, helping upend the entire commercial-paper market that provides a life-line to companies seeking to raise short-term cash.
Bank of America strategists suggested alternative solutions such as deepening liquidity in the commercial paper market, improving dealers ability to intermediate in markets and even creating conditions where official sector intervention would be more acceptable. Without these changes, they warn that money managers could still be inclined to sell CP and certificates of deposit in times of strife like they tried to do in 2020, even with higher liquidity thresholds.
“Future investor behavior in an acute flight to quality episode could see prime MMF or other short-duration asset managers rapidly sell CP & CD again, even with the higher liquidity thresholds,” they wrote. “Limited dealer balance sheet capacity could then see another market freeze.”
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.