Issue no. 22: ICMA Regulatory Policy Newsletter

Euro Commercial Paper
market
Liquidity regulation: The IMF has published How to Address
the Systemic Part of Liquidity Risk, as Chapter 2 of its
April 2011 Global Financial Stability Report. This stresses
why more needs to be done to develop macroprudential
techniques to measure and mitigate systemic liquidity risks
and offers some initial thoughts about how to do it. A priority
should be to design some type of assessment capturing the
negative effect that one institution’s liquidity risk management
decisions could inflict on the rest of the financial system. This
would allow financial institutions to bear more of the burden
they place on central banks and governments. This can be
achieved through a macroprudential tool that could be in
the form of a capital surcharge, a fee, a tax, or an insurance
premium. But such a tool presupposes that policymakers
have a robust methodology for measuring systemic liquidity
risk and each institution’s contribution to this risk.
The chapter proposes three different approaches, all three of
which capture the risks across time and across institutions,
to measure systemic liquidity risk; and macroprudential
tools to mitigate it. The chapter further emphasizes that the
regulatory approach to addressing systemic liquidity risk
should be multipronged and include:
•
•
measures to make funding markets work better by
strengthening the infrastructure underpinning them;
requiring greater oversight and regulation of non-bank
financial institutions that contribute to systemic liquidity risk;
• closer international coordination and greater disclosure of
financial information on relevant funding markets and the
maturity of assets and liabilities; and
•
better evaluation of the overall cost effectiveness of
various macroprudential tools.
SHORT-TERM MARKETS
Money market funds: On 10 May, the SEC hosted a roundtable
discussion on money market funds (MMFs) and systemic
risk, which addressed:
• the potential for money market funds to pose a systemic
risk to broader financial markets – what makes money
market funds vulnerable to runs and how should the role
of money market funds be viewed through the prism of
systemic risk analysis; and
• possible options for further regulatory reform and their
implications, including floating NAV, bank regulation,
and options that reflect a hybrid of these regulatory
approaches: a private liquidity bank; mandatory reserve
or capital requirements; and liquidity fees.
As per its 4 April press release Fitch has updated its global
rating criteria for MMFs. The criteria update, which is part of
Fitch’s periodic review of all rating criteria, provides added
transparency in light of the globally evolving regulatory
landscape for MMFs. The report clarifies and updates certain
elements of Fitch’s MMF rating criteria. However, the core
analytical framework, as outlined by Fitch in October 2009,
remains unchanged. As such, no rating actions are expected
as a result of the updated criteria. Key changes to the criteria
include:
• expanded rating criteria to encompass the portfolio
and operating parameters of MMFs rated AAmmf and
Ammf, which may be particularly relevant in light of the
pan-European definition of MMFs;
• updated diversification criteria for direct, indirect and
collateralised exposures in MMFs, including exposures to
the fund’s sponsor or parent;
• an update of those assets recognised for daily and/or
weekly liquidity and explicit recognition of committed
liquidity facilities, when available; and
• clarified treatment of counterparty risk in repurchase
agreements.
ICMA Regulatory Policy Newsletter Third Quarter 2011 | 15