Sunday, November 18, 2012

As Part of Shadow Banking Oversight, Financial Stability Board Urges Floating NAV for Money Market Funds

As part of its recommendations to strengthen the shadow banking system, the Financial Stability Board endosred the reform that stable NAV money market funds should be converted into floating NAV where workable. The FSB believes that the safeguards required to be introduced to reinforce stable NAV money market funds’ resilience to runs where such conversion is not workable should be functionally equivalent in effect to the capital, liquidity, and other prudential requirements on banks that protect against runs on their deposits.

In the view of the Board, money market funds form a large element within the shadow banking system by providing short-term non-deposit funds to the regular banking system, and also funding separate non-bank chains of credit intermediation. During the crisis, moreover, certain types of money market funds experienced investor runs, some of which necessitated large scale support from sponsors or the official sector to maintain stability in the money fund sector. Also, the money market funds that faced runs typically offered stable or constant net asset value (NAV) to their investors, fostering an expectation that their claims were similar to bank deposits.

The Board also recommended that money market funds comply with the general principle of fair value when valuing their assets. Amortised cost method should only be used in limited circumstances. Such money market fund valuation practices should be reviewed by a third party as part of their periodic reviews of the funds accounts.
Further, the FSB said that money market fund documentation should include the absence of a capital guarantee and the possibility of principal loss. The funds should disclose to investors all necessary information regarding their practices in relation to valuation and the applicable procedures in time of stress.