IOSCO examines risks posed by money market funds

The report notes that, with over US$4.7 trillion in assets under management as of third quarter 2011, these funds account for over 20% of the assets of collective investment schemes worldwide, and that they represent a significant source of credit and liquidity. “Their importance and interconnectedness with the rest of the financial system make their safety crucial for financial stability at large,” it notes, adding that this risk was revealed during the global financial crisis.

“Although [money market funds] did not cause the crisis, their performance during the financial turmoil highlighted their potential to spread or even amplify a crisis,” it says. And so, the Financial Stability Board has asked IOSCO to carry out a review of potential regulatory reforms for these funds that would mitigate their susceptibility to runs and other systemic risks.

In its report, IOSCO analyzes the features of money market funds that make them vulnerable to risk, and explains some of the implications for policy. It seeks comment on a variety of policy options including: mandating a move to variable net asset value, or other alternatives, in an effort to lower the expectation that funds can’t suffer losses, reducing the risk of a run when a fund fails to live up to those expectations; reforms to valuation and pricing frameworks to increase price transparency; liquidity management measures to ensure that fund managers can meet redemptions; and, reforms to reduce the reliance on credit ratings and encourage the establishment of stronger internal credit risk assessment practices.

Comments on the consultation report are due by May 28. IOSCO has been asked to develop policy recommendations by July of this year.