The Covid-19 crisis has exposed cracks in financial market architecture and highlighted new areas for reform, says the International Organization of Securities Commissions (IOSCO).
The group of global securities regulators published a report analyzing the the money
market fund (MMF) sector during the market turmoil that emerged with the onset of the pandemic in March.
The report found market conditions in March affected the functioning of the short-term funding markets and “led to significant strains in the MMF sector, raising questions about its resilience.”
Rising cash needs and a “flight to safety” among investors drove many of the market effects, but the effects “varied considerably” by fund type, structure and currency, IOSCO said.
“Outflows from MMFs holding primarily non-public, mostly [U.S.-dollar] debt were significant,” the organization found. “In contrast, the market saw historic inflows into MMFs holding primarily U.S. government instruments.”
Other factors that may have driven outflows included “the need to meet increased margin calls, collateral management and general business expenses,” the report stated.
“In particular, redemption requests by non-financial corporates may have been significant, because many other sources of revenue dried up as a result of the crisis,” it said.
The review also concluded that interventions by central banks, as well as securities and prudential regulators, “helped ease the financial strains.”
The episode also exposed “continuing vulnerabilities” in certain types of non-public funds and the need for further reform, IOSCO said.
Areas of possible future reform include “the broader ecosystem and the functioning of the money markets, the behaviour of MMF investors and elements of regulatory frameworks that may have played a role in accelerating flows out of certain types of non-public MMFs.”
Recently, Fitch Ratings suggested that regulators may try to enact post-pandemic reforms designed to facilitate money market liquidity, including measures targeting securities dealers.
IOSCO also published a review of recommendations made in 2012 to strengthen the resilience of MMFs and found that “participating jurisdictions have generally implemented” reforms in line with those recommendations.