(Adds background, additional quotes from Muzinich, context on
fund industry)
By David Lawder
WASHINGTON, Sept 29 (Reuters) - Turmoil in money market
mutual funds sparked by the coronavirus pandemic shows that
decade-old reforms to the industry may not be enough to avert
major outflows during a future crisis, Deputy U.S. Secretary
Justin Muzinich said on Tuesday.
Muzinich said in remarks to a New York Federal Reserve
conference that the Money Market Mutual Fund Liquidity Facility
created in March was critical to restoring financial market
functioning as broad shutdowns of the U.S. economy got underway.
But high demand for fund withdrawals was due to different
metrics than those operating during the 2008 financial crisis,
he said.
In 2008, the Reserve Primary Fund "broke the buck" when its
net asset value fell below $1 as a banking crisis accelerated,
causing a stampede of fund withdrawals that were quelled only by
a U.S. Treasury backstop for over $3 trillion in fund assets.
The 2010 Dodd-Frank financial reform legislation required
money market mutual funds to hold 30% of their assets in
instruments that are liquid within a week, among other reforms.
But Muzinich said that when some funds neared this threshold in
March, withdrawal requests accelerated.
"The events of this past March show that those reforms may
not be enough," Muzinich said. "For example, one might ask
whether we have exchanged one psychological bright line for
another."
Muzinich said such lines have the potential to create "run
dynamics" in markets as they are approached. But he stopped
short of calling for further specific reforms.
"While policymakers were able to avert a run, it is worth
asking whether there are ways to enhance the liquidity resources
available to funds without using a bright-line test, or whether
there are ways to draw a line without creating a first-mover
advantage," Muzinich added.
Low yields on U.S Treasuries and other debt have forced big
money fund sponsors to waive fees just to keep investors in
their products this year, or to close them to new investors,
much as they did a decade ago after the financial crisis.
A notable step came Aug. 27 when Vanguard Group Inc said it
would convert its $123 billion Vanguard Prime Money Market Fund
into a government fund and rename it Vanguard Cash
Reserves.
"Vanguard believes it's better to seek to provide clients
with a higher yield through lower expenses on a secure
government portfolio than incurring risk in the prime market,"
it said in a statement at the time.
(Reporting by David Lawder; additional reporting by Ross
Kerber; editing by John Stonestreet)