Bank of England calls on money market funds to bolster liquidity levels

investmentweek.co.uk:

The call from the FPC came as it identified liquidity mismatch in money market funds as a «key vulnerability» in 2015 and 2021.

In a report about risks in market-based finance, the FPC identified money market funds as a «significant threat» to financial stability due to their interconnectedness with financial institutions, open-ended funds, pension funds and insurance companies, which rely on these funds to manage short-term liquidity and meet margin calls.

The call from the FPC came as it identified liquidity mismatch in money market funds as a «key vulnerability» in 2015 and 2021.

The committee explained that, during the dash-for-cash in March 2020, money market funds saw large outflows as investors redeemed their shares to obtain liquidity and make necessary payments elsewhere, often to meet margin calls on derivatives.

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However, had money market funds suspended redemptions following the large outflows in reaction to the pandemic, and had they not benefitted from the intervention of public authorities, the FPC said «there would have been a significant threat to financial stability in the UK and other jurisdictions».

This was because suspending redemptions from money market funds would have not only impacted the financial institutions and instruments that use them, but it would have also created a «direct averse impact on the economy», leaving corporates and local authorities unable to access their cash to pay creditors, taxes or wages.

«Vulnerabilities in money market funds can also have knock-on effects on the price and availability of cash in stress for market participants looking to borrow on a very short-term basis», it said.

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