Top regulators are pledging to push reforms in a key corner of US financial markets, which the Federal Reserve and Treasury had to rush to support in the spring of 2020 after being twisted during the coronavirus outbreak
Members of the Financial Stability Oversight Council discussed reforms aimed at so-called short-term funding markets, which include money market mutual funds holding trillions of dollars.
The Oversight Council, an interagency group headed by Treasury Secretary Janet Yellen, said the 2020 crisis prompted “excessive policy intervention” by the Federal Reserve and the Treasury to restore order in the market.
Federal Reserve Chairman Jerome Powell, who is also a member of the council, said the 2020 crisis was triggered by a “dash for cash”, prompting the Fed to seek back-up financing to calm the turmoil. Inspired to move on.
“Faster redemptions in money market funds resulted in increased liquidity pressures,” he told the panel.
Powell said that after the Fed created a money market mutual fund liquidity facility with $10 billion backed by the Treasury Department, “the unrest subsided, conditions in short-term funding markets improved and access to credit increased.”
The council received a closed-door briefing from Securities and Exchange Commission staff on gathered comments on what reforms need to be pursued to make short-term funding markets more resilient during the time of the financial crisis.
SEC Chairman Gary Gensler told the group during their open meeting that he has instructed SEC staff to prepare recommendations that can be voted on by the five-member SEC. Yellen said she fully supports the SEC’s efforts to improve the current system.
Council members also expressed concern that the global financial system was not moving fast enough to prepare for the transition away from LIBOR, with the London Interbank offering a rate of interest for trillions of dollars in financial contracts. The rate has been the benchmark.
Regulators have favored moving from the LIBOR rate to the secured overnight financing rate, or SOFR, by the end of this year.
But Yellen and other officials expressed concern that not enough was yet being done to prepare for the switch 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 trade credit, are far behind where they should be at this stage of transition.”