(Adds further details on proposal starting from 4th paragraph)
Written by Hugh Jones and David Milliken
LONDON (Reuters) – Money market funds will be cut “significantly” to cope with market volatility, the Bank of England said on Tuesday, as money market funds struggled to “dash to cash” during the coronavirus pandemic. He said it is necessary to hold large amounts of liquid assets. Pandemic.
The BoE’s Monetary Policy Committee said the 250 billion pound ($300 billion) money market fund sector, widely used by businesses to raise day-to-day funding and secure overnight cash, must be made more resilient to shocks. He said that there is.
In a statement, the BoE’s Monetary Policy Committee said: “Increasing liquidity significantly beyond what is currently needed is the most effective way to increase the resilience of money market funds and reduce risks to financial stability. There is a high possibility that it will.”
According to the FPC, staff analysis suggests that assets with maturity within seven days should account for at least 50-60% of the fund’s total assets. In comparison, current levels across the sector are between 45% and 55%.
Money market funds are part of a broader non-bank sector that has grown to account for around half of global financial assets since the 2008 global financial crisis, but they are more opaque and complex than banks, making them risk-taking for regulators. This makes it difficult to identify potential infections. expand.
When the economy went into pandemic lockdown in March 2020, central banks needed to inject liquidity into the market as MMFs struggled in the face of high redemptions; It said many other parts of the country were also under stress.
The BoE, along with global watchdogs such as the Financial Stability Board and the US Securities and Exchange Commission, have become increasingly concerned about the need to address the sector’s opacity and liquidity vulnerabilities.
The UK needs to work with the European Union in regulating MMFs, given that most pound-denominated MMFs are listed in EU centers such as Luxembourg.
Earlier this year, the central bank pushed through tighter liquidity rules for debt-driven investment funds (LDIs) used by pension funds, after being forced to intervene in the sector last September.
In its special report on shaping the FPC’s approach to risk assessment in market-based finance, the FPC said it may strengthen and review the way it prioritizes risk assessments.
It also includes the possibility of requiring additional resilience standards for non-banks, a vast sector that includes investment funds, hedge funds, private equity, pension funds and insurance companies. “Potential role” may also be considered.
The non-bank sector has long resisted being treated the same as banks under regulations such as capital buffers, and regulators have largely focused on strengthening liquidity.
($1 = 0.8155 pounds) (Reporting: Huw Jones and David Milliken)
