After Fidelity Investments’ August shuttering of two institutional prime money market funds and a related move from Vanguard last month for its retail prime fund, Federal Reserve Vice Chairman for Supervision Randal Quarles has indicated that tougher rules for these funds may be warranted.
In prepared remarks for a speech before the Institute of International Finance on Thursday, Quarles said the runs on prime money funds this March after the World Health Organization declared a pandemic “were particularly disappointing since in many ways they resembled runs that we saw in these markets during the [global financial crisis].”
One of those runs resulted in a prime money market fund, the Reserve Fund, breaking the buck as its share price fell below $1, which prompted the Securities and Exchange Commission to institute rule changes governing money market funds.
Since late 2016, only government money market funds have been allowed to maintain a fixed $1 share price. Prime money market funds, which invest in floating-rate debt and commercial paper of non-Treasury entities, have a floating rate net asset value. That change prompted many large asset managers to convert some prime money market funds to government money market funds.
(Related: How Vanguard Overhauled a Prime Money Fund)
During the financial downturn in March and April, the Fed developed lending facilities to support the commercial paper market and primary and secondary corporate credit markets, but those supports may not be enough now, according to Quarles, who also lamented elevated redemptions from corporate bond funds.
“The Fed and other financial agencies have accomplished a lot in requiring or encouraging market participants to rely less on unstable short-term funding, but it is worth asking whether there may be other steps needed to secure these very important sources of liquidity.”
Late last month SEC Chairman Jan Clayton expressed a similar sentiment. “There’s no doubt that we need to reexamine the reforms of the last time,” said Clayton, speaking on a virtual panel about the reforms enacted in 2016 though adopted in late 2014.