FSB Sets 2013 Deadline for New Money-Market Fund Rules

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FSB Chairman Mark J. Carney
Mark J. Carney, governor of the central bank of Canada and chairman of the Financial Stability Board (FSB). Photographer: Chris Ratcliffe/Bloomberg

Global regulators set a September 2013 deadline to present tougher rules for money-market mutual funds, repurchase agreements and other so-called shadow banking activities as part of a broader push to reduce risk in the financial system.

The Financial Stability Board also said that it would issue draft rules next year targeted at non-bank institutions whose failure would roil the global economy.

“Vigilant oversight of shadow banking activities will be required to respond to inevitable market mutations,” the FSB said in an e-mailed report. “The approach is designed to be proportionate to financial stability risks.”

While watchdogs have reined in excessive risk-taking by banks in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008, they are concerned that lenders might use shadow banking to evade the clampdown. The Basel-based FSB has estimated that global shadow-banking activities were worth about $60 trillion in 2010, as much as 30 percent of the total financial system.

Supervisors class shadow banking activities as those that allow banks to carry out business off balance sheet, as well as those which allow investors to bypass lenders and the functions they traditionally fulfill on the markets.

Securitization Structures

Institutions identified by regulators as shadow banks also include some exchange traded funds, securitization structures, and monoline insurers, which specialize in products that apply to financial investments.

The FSB said it would seek views on draft recommendations “shortly.” Final rules will be submitted to leaders of the Group of 20 nations at a summit in St. Petersburg, Russia, next year.

Mark Carney, chairman of the FSB, told reporters in Mexico City that regulators are holding “intense discussions” on a series of potential measures such as liquidity requirements or “quasi-capital” requirements.

“There are a range of tools in the policy toolkit that could ensure the shadow banking system is taken out of the shadows,” Carney said.

The FSB brings together regulators, central bankers and finance ministry officials from the G-20. The FSB set out its plans following a meeting of G-20 finance ministers and central bank governors in Mexico City that ended today.

G-20 finance chiefs said they will act by the end of this year to resolve a transatlantic clash over rules for over-the-counter derivatives.

Regulation Gaps

The G-20 “agreed to put in place the legislation and regulation for OTC derivative reforms promptly and act by end-2012 to identify and address conflicts, inconsistencies and gaps in our respective national frameworks,” policy makers said in their statement.

The FSB also extended a deadline for regulators and too-big-to-fail banks to agree on “operational resolution plans” setting out how the institutions could be wound down if they fail.

Progress on the plans is “uneven,” the FSB said. The deadline for completing the plans has been extended from the start of next year to mid-2013, the group said.

Separately, the FSB said regulators would present draft measures by mid-2014 for reducing references in financial regulations to assessments by credit-ratings companies.

The proposals will offer alternative benchmarks to credit ratings that financial institutions could use to assess their compliance with supervisory rules, the FSB said.

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