The International Organization of Security Commissions released a paper yesterday entitled, "Peer Review of Regulation of Money Market Funds: Final Report," which reviews the progress of money market fund regulations globally. The Review's "Executive Summary" explains, "This report (Report) sets out the findings of the review (Review) by the International Organization of Securities Commissions (IOSCO) of the progress in adopting legislation, regulation and other policies in relation to money market funds (MMFs) in the following areas (Reform Areas): a. Scope of the regulatory reform -- explicit definition of MMFs in regulation; b. Limitations to the types of assets of, and risks taken by, MMFs; c. Valuation practices of MMFs; d. Liquidity management for MMFs; e. MMFs that offer a stable Net Asset Value (NAV) -- addressing the risks and issues which may affect the stability of MMFs that offer a stable NAV; f. Use of ratings by the MMF industry; g. Disclosure to investors; and h. Repos -- MMF practices in relation to repurchase agreement transactions."
IOSCO writes, "Using the most current data available at the Reporting Date (March 31, 2015), the global MMF market is dominated by 5 jurisdictions (the U.S., France, Luxembourg, Ireland and China) which together account for just under 90% of global assets under management in MMFs. Assets under management in MMFs declined and then have been stable in the U.S. and each of the European jurisdictions since 2009, with dramatic growth evident in China (particularly since 2011)."
On "Background," they explain, "The run on some MMFs during the financial crisis alerted regulators to their systemic relevance. Although MMFs did not cause the financial crisis, the crisis highlighted their potential to spread or even amplify a financial crisis. The G20 expressed concerns regarding the stability of the MMF industry and the risks it may pose to the broader financial system. The Financial Stability Board (FSB) requested that IOSCO undertake a review of potential regulatory reforms of MMFs as part of efforts to strengthen the oversight and regulation of the shadow banking system and to carry out the G20 endorsed objective to mitigate the susceptibility of MMFs to runs and other systemic risks."
IOSCO continues, "In October 2012, IOSCO published its report "Policy Recommendations for Money Market Funds, which contains 15 key policy recommendations relating to the Reform Areas.... In September 2013, the G20 Leaders in St Petersburg called for IOSCO to launch a peer review and to report on progress regarding MMF regulatory reforms in late 2014. Pursuant to the G20 Leaders' request and consistent with the FSB's Coordination Framework for Monitoring the Implementation of Agreed G20/FSB Financial Reforms, IOSCO agreed to conduct a review consisting of an implementation progress report on the current regulatory reform efforts of participating jurisdictions, with the possibility of a separate review being conducted once national or regional implementation of regulatory reform is deemed sufficiently underway."
The 53-page paper comments in its "Key Findings," "Overall, the Review found that as at the Reporting Date, participating jurisdictions had made progress in introducing implementation measures across the 8 Reform Areas. Implementation progress varied between jurisdictions and Reform Areas. For the Largest Jurisdictions, only the U.S. reported having final implementation measures in all Reform Areas, with China and the EU members still in the process of developing and finalizing relevant reforms. For jurisdictions with smaller MMF markets, implementation progress was less advanced, with only four other participating jurisdictions (Brazil, India, Italy and Thailand, the first 3 being FSB members) reported having final implementation measures in all Reform Areas."
It adds, "The Review's main findings by Reform Area are: On Definition of MMFs (Reform Area (a)), almost all participating jurisdictions (including each of the Largest Jurisdictions) reported having introduced an express definition under their CIS regulation. On Limitations to asset types and risks (Reform Area (b)), implementation was generally well progressed.... Further progress was needed in some jurisdictions on requirements about imposing credit limits and defining both limits on the average weighted term to maturity (WAM) and the weighted average life (WAL) of the portfolio of a MMF. On Valuation (Reform Area (c)), implementation is generally well progressed.... Of the Largest Jurisdictions, China is currently in the process of introducing further reforms for their MMFs for this Reform Area. On Liquidity management (Reform Area (d)), implementation progress was less advanced and uneven, perhaps reflecting that pre-crisis, most jurisdictions did not have requirements in this area.... Of the Largest Jurisdictions, only the U.S. reported implementing all measures in this Reform Area."
The findings continue, "On MMFs that offer a stable NAV (Reform Area (e)), further work is needed. Twelve jurisdictions reported continuing to permit stable NAV MMFs, including 4 of the 5 Largest Jurisdictions (China, Ireland, Luxembourg and the US). Participating jurisdictions which continue to permit stable NAV MMFs have generally chosen to progress implementation measures that aim to reinforce a stable NAV MMF's resilience and ability to face significant redemptions.... On Disclosure to investors (Reform Area (g)), implementation was generally well progressed on valuation practices and procedures to deal with significant market stress."
IOSCO will do further monitoring starting in 2016, the paper explains. It says, "This will be an opportunity to report progress jurisdictions have made in their MMF reforms since the Review. This further Review will be limited to the 15 jurisdictions that the Review Team has identified as having a 'significant MMF industry' as set out in Annexure A in which final implementation measures are still to come into force in one or more Reform Areas. It will report on the status of implementation of those remaining measures." (Note: Global regulation of money fund markets will be a big topic of discussion at our upcoming European Money Fund Symposium, which takes place Sept. 17-18 in Dublin. We hope to see you there!)
