Fed Signals Prime Money Market Funds Need Stiffer Rules

The Federal Reserve is signaling that the coronavirus disruptions that hit financial markets in March indicate prime money market funds and other sources of short-term funding may need tougher rules.

“The runs on prime money funds and commercial paper were particularly disappointing,” Fed Vice Chairman of Supervision Randal Quarles said in prepared remarks for a Thursday speech. He added that “it is worth asking whether there may be other steps needed to secure these very important sources of liquidity.”

Quarles, speaking at an Institute of International Finance event, also said that this years tumult raises questions about whether regulations imposed on money market funds after the 2008 financial crisis “fell short.” Quarles said the Financial Stability Board, a group of global financial regulators he heads, will be examining this issue.

Prime money market funds -- attractive to individuals who are seeking cash-like investments that offer a little extra yield -- mostly hold corporate debt securities such as commercial paper.

The funds have been losing assets as the Fed aggressively pushes low interest rates and after the Securities and Exchange Commission tightened rules in 2014 by forcing them to price their shares in a way that reveals fluctuations. The SEC regulations didnt prevent runs on prime funds in March that prompted the Fed to prop them up with an emergency lending facility.

(Adds background on rules, starting in fourth paragraph)