MNI POLICY: US Regulators Eye Potential Money Market Reforms

Federal Reserve and SEC officials said Tuesday they are considering new money market regulations after turmoil sparked by the coronavirus pandemic signaled that decade-old reforms didn't work.

"The events of this past March show that those reforms may not be enough," Deputy Treasury Secretary Justin Muzinich told a New York Fed conference.

"While policymakers were able to avert a run, it is worth asking whether there are ways to enhance the liquidity resources available to funds without using a bright line test or whether there are ways to draw a line without creating a first-mover advantage," Muzinich said.

"One might ask whether we have exchanged one psychological bright line for another," he added. "While the 2008 episode centered on 'breaking the buck,' in 2020 market participants worried that a fund dipping below the 30% weekly liquid assets threshold could similarly accelerate fund redemptions."

The Fed's Money Market Mutual Fund Liquidity Facility created in March was critical to restoring financial market functioning, Muzinich said, but high demand for fund withdrawals was due to different metrics than those during the 2008 financial crisis.

NEW STRESS

"There is no doubt that we need to reexamine the reforms of the last time," SEC Chairman Jay Clayton said at a different event Tuesday.

Past reforms "were a step in the right direction, particularly with regards to liquidity, but we still saw that stress when the CP market dried up" in March, Clayton said.

The Fed's vice chair for supervision Randal Quarles said Tuesday "The jury is still out what more there might need to be done with respect to regulation given the events in March and April."

"Right now it's all hands on deck" and policymakers are still working to counter the the coronavirus, said Jelena McWilliams, chairwoman of the Federal Deposit Insurance Corporation, but when data is available and a thorough analysis is complete "ultimately Congress will have to take a look."