Major U.S. regulators pledge to seek reforms for money markets
Leading regulators pledge to push reforms in a key corner of U.S. financial markets that the Federal Reserve and Treasury had to rush to support after it was disrupted during the coronavirus outbreak in the spring of 2020
Members of the Financial Stability Supervisory Board discussed reforms targeting so-called short-term funding markets, which include money market mutual funds holding trillions of dollars.
The Supervisory Board is an interagency group led by Treasury Secretary Janet Yellen, who said the 2020 crisis prompted “extreme political interventions” from the Federal Reserve and Treasury to restore order to the market.
Federal Reserve Chairman Jerome Powell, also a board member, said the 2020 crisis was sparked by a “money rush” that prompted the Fed to step in with relief funding to calm the turmoil .
“The rapid redemptions of money market funds resulted and in turn exacerbated the pressures on liquidity,” he told the panel.
Powell said that after the Fed created a liquidity facility for money market mutual funds with $ 10 billion in backing from the Treasury Department, “the turmoil has subsided, conditions in the markets have subsided. Short-term financing has improved and access to credit has increased.
The board received a closed-door briefing from Securities and Exchange Commission staff on the comments it has gathered on reforms to pursue to make short-term funding markets more resilient in times of financial crisis.
SEC Chairman Gary Gensler told the group at its public meeting that he asked SEC staff to prepare recommendations that can be voted on by the five SEC members. Yellen said she fully supports the SEC’s efforts to reform the current system.
Board members also expressed concern that the global financial system is not evolving fast enough to prepare for the transition from LIBOR, the London interbank offered rate, which has been the benchmark interest rate for billions of dollars in financial contracts.
Regulators have supported a move from the LIBOR rate to the Guaranteed Overnight Funding Rate, or SOFR, by the end of this year.
But Yellen and other officials expressed concern that not enough was not being done to prepare for the transition from LIBOR to SOFR.
“More needs to be done to facilitate an orderly transition,” Yellen told the panel. “While significant progress is being made in some segments of the market, other segments, including business loans, are well behind where they should be at this point in the transition.”