Turmoil in money market mutual funds sparked by the coronavirus pandemic shows that decade-old reforms to the industry may not be enough to avert major outflows during a future crisis, Deputy U.S. Secretary Justin Muzinich said on Tuesday.
Muzinich said in remarks to a New York Federal Reserve conference that the Money Market Mutual Fund Liquidity Facility created in March was critical to restoring financial market functioning as broad shutdowns of the U.S. economy got underway.
But high demand for fund withdrawals was due to different metrics than those operating during the 2008 financial crisis, he said.
In 2008, the Reserve Primary Fund "broke the buck" when its net asset value fell below $1 as a banking crisis accelerated, causing a stampede of fund withdrawals that were quelled only by a U.S. Treasury backstop for over $3 trillion in fund assets.
The 2010 Dodd-Frank financial reform legislation required money market mutual funds to hold 30% of their assets in instruments that are liquid within a week, among other reforms. But Muzinich said that when some funds neared this threshold in March, withdrawal requests accelerated.
"The events of this past March show that those reforms may not be enough," Muzinich said. "For example, one might ask whether we have exchanged one psychological bright line for another."
Muzinich said such lines have the potential to create "run dynamics" in markets as they are approached. But he stopped short of calling for further specific reforms.
"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 added.
Low yields on U.S Treasuries and other debt have forced big money fund sponsors to waive fees just to keep investors in their products this year, or to close them to new investors, much as they did a decade ago after the financial crisis.
A notable step came Aug. 27 when Vanguard Group Inc said it would convert its $123 billion Vanguard Prime Money Market Fund into a government fund and rename it Vanguard Cash Reserves.
"Vanguard believes it's better to seek to provide clients with a higher yield through lower expenses on a secure government portfolio than incurring risk in the prime market," it said in a statement at the time.
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