Andrew Bailey: Taking our second chance to make MMFs more resilient Speech by Mr Andrew Bailey, Governor of the Bank of England, at the International Swaps and Derivatives Association (ISDA) 35th Annual General Meeting, 12 May 2021. * * *  Introduction Thank you for inviting me to speak today. I want to start by thanking ISDA for the important work you do, and in recent times particularly Scott O’Malia and his colleagues for working with central banks and regulators to manage the transition away from Libor. Your support on this complex transition has been hugely important. You may be relieved to hear that I am not going to talk about Libor today. I did speak on the subject yesterday, it’s on the Bank of England’s website if you are interested (Bailey, 2021). Instead, I am going to speak about another important part of our current work and a priority for the global Financial Stability Board (FSB), namely Money Market Funds (MMFs). The FSB analysed last March’s so-called “dash for cash” in their Holistic Review published at the end of last year, highlighting a number of vulnerabilities in non-bank finance and setting out some considerations for reforms required to tackle the issues we saw in that episode (FSB, 2020). MMFs were one of the issues at the top of that list. MMFs also played a role in amplifying the stress we saw during the Global Financial Crisis, so this is the second time they have proven not to be sufficiently resilient.
It is worth spending a moment on this point because it has an important parallel in the issues concerning money market funds. Banks are primarily funded by deposits, where the contract is understood to be to return the full value of the deposit plus whatever the interest rate is – usually “on demand” and without delay. Banks are held to high standards by regulators – including through liquidity and capital requirements, and regular stress tests – to ensure that they are well placed to be able to honour depositors’ demands. Central bank liquidity operations, resolution arrangements and deposit insurance further reinforce confidence in this promise to return the deposit. Thanks to the post financial crisis reforms, bank deposits are therefore cash or moneylike in most states of the world. At the other end of this spectrum are investment funds of many sorts. Most are not meant to be cash-like, in the sense that the promise is to return the fruits of the investment strategy, which may be more or less than the amount invested. Cash-like certainty of value is not part of the contract. If only it was that simple. There are at least two problems which are evident in how this system operates – or possibly two variants of the same problem. First, there are instruments which at least in some of their existing forms are neither one thing nor the other – neither properly cashlike nor properly investment-like. Second, there are instruments which are meant to be investment-like but which become regarded as cash-like.