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May 28, 2020

Finish the Job: Regulate Money Market Funds

Earlier this month, Better Markets called on regulators to “finish the job of regulating money market funds so they are no longer so vulnerable to crisis and dependent on taxpayer bailouts.”

Better Markets’ demand was in response to an interim final rule announced by federal bank regulatory agencies on March 18 to encourage banks to participate in a rescue program, or “liquidity facility,” recently launched by the Federal Reserve Board. It’s known as the Money Market Mutual Fund Liquidity Facility or MMLF. Under the MMLF, the Boston Fed will extend loans to banks on favorable terms so they can buy assets from money market funds (MMFs) that are under huge stress and need cash. The problem has arisen because many investors have been pulling their money out of some MMFs to cope with the COVID-19 pandemic. The rule encourages banks to participate in the rescue effort by making sure the loans they receive from the Fed and the assets they buy from the MMFs don’t change their capital and liquidity requirements under other banking rules.

In its comment letter, Better Markets wrote that the proposed interim final rule itself is a “reasonable measure” and that its criticism is not with the rule but with the “indefensible failure of the appropriate regulators” to make sure that money market funds would no longer need bailouts or backstops as they did during the 2008 crisis.

A foreseeable, predictable, and indeed predicted run has materialized in MMF markets, causing liquidity pressures, fire sales, downward price spirals, and other contagions,” says Dennis Kelleher, President and CEO of Better Markets.

“If regulators at the SEC had done their job after this happened during the 2008 crash,  taxpayers would not be bailing MMFs out again now. Then it was for $3.4 trillion; today, it’s $4.7 trillion,” Kelleher says. “This is indefensible. Adding insult to injury, the solutions to vulnerable MMFs are well-known: a floating NAV, capital buffers, and other measures to require them to internalize the costs that they externalize to taxpayers, as Better Markets has argued repeatedly in the past.”

Read the full comment letter.



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