Fitch commends money market reform proposals

The latest round of proposed money market fund reforms should help the sector from a credit perspective, Fitch Ratings says.

When the pandemic hit, some money market funds suffered large outflows and short-term credit markets experienced liquidity issues too.

The episode prompted global policymakers to revisit their efforts to enhance fund regulation in the wake of the global financial crisis. This resulted in a variety of proposals designed to further strengthen fund liquidity, and to facilitate the use of liquidity management tools in times of market stress.

In a new report, Fitch said that reforms now being proposed in the U.S., Europe and China — intended to address the liquidity issues that arose during the initial onset of the pandemic — should boost the rating headroom for money market funds generally.

Fitch said that proposals from the European Securities and Markets Authority (ESMA), “should strengthen [money market funds’] resilience against market volatility…”

It also said that proposals from U.S. regulators should also benefit funds’ credit rating room, but that the sector still faces certain vulnerabilities.

“We believe [money market funds] may remain vulnerable to severe outflow scenarios unless market structure changes are enacted to facilitate trading of short-term securities,” it noted.

Fitch predicted the market should have time to adapt to the reforms, as it expects there will be prolonged periods to finalize and implement the measures.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.