WASHINGTON/BOSTON, Sept 29 (Reuters) - Turmoil in money
market mutual funds sparked by the coronavirus pandemic shows
that decade-old reforms to the $4.4 trillion industry may not be
enough to avert major outflows during a future crisis, Deputy
U.S. Treasury Secretary Justin Muzinich said on Tuesday.
The remarks were the latest to raise expectations a new
round of rulemaking may be on the way for money funds, which
faced turbulence this spring as the COVID-19 pandemic shook Wall
Street before Washington officials stepped in.
Muzinich told 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,
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
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.
Peter Crane, founder of money fund research company Crane
Data, said the remarks add to expectations new rules will be
created for money funds, sometimes seen as rivals by more
"Certainly from the looks of it new money fund regulations
might be coming," Crane said.
He also noted a Sept. 24 speech by Dalia Blass, the top fund
regulator of the U.S. Securities and Exchange Commission, who
said her division will analyze the events of March and look to
build a resilient market "while preserving the important role of
money market funds in the short-term funding markets."
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.
(Reporting by David Lawder and by Ross Kerber; editing by John
Stonestreet and Richard Pullin)