Money-market funds should have limits imposed on the riskinessof their investments and should conduct regular stress tests, aglobal body of markets regulators said.

“Funds should not take direct or indirect exposures to equitiesor commodities,” the International Organization of SecuritiesCommissions said in a report on its website today. The funds, whichinvest in short-term debt, should hold buffers of liquid assets toprevent runs, IOSCO said.

“Some important measures have been taken to reform the MMFindustry,” IOSCO said in the report. “These funds may still presentvulnerabilities which could have broader consequences for thefinancial system.”

Regulators have pressed to make money funds safer since theSeptember 2008 collapse of the $62.5 billion Reserve Primary Fund,which triggered an industrywide run and helped freeze creditmarkets. The crisis calmed only after the U.S. Treasury guaranteedshareholders against losses.

Money-market funds have about $4.7 trillion under management andmake up a significant part of the so-called shadow-bankingindustry. Shadow banking must be reined in by regulators as it is“potentially very unstable,” Adair Turner, chairman of the U.K.Financial Services Authority, said earlier this year.

The recommendations from IOSCO include increased disclosure toinvestors of how funds value their investments and how they wouldact in times of financial stress.

Regulators should be able to stop outflows in “exceptionalsituations,” which “may have implications for the broader financialsystem,” according to the report.

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SEC Opposition

Mary Schapiro, chairman of the a U.S. Securities and ExchangeCommission, gave up on a plan in August to strengthen regulation ofthe funds after three of the agency's five commissioners told herthey wouldn't vote to issue it for public comment.

Today's report was backed by all members of IOSCO aside from a“majority of the Commissioners of the U.S. Securities and ExchangeCommission,” IOSCO said in the statement.

“All the recommendations are important for the safety androbustness of the money-market fund industry,” IOSCO said.

“However, the implementation of some recommendations may need tobe phased in, in order to avoid disruptive impacts on the MMFindustry and the functioning of the financial system at large.”

IOSCO brings together market regulators from more than 100countries to coordinate rule-making and share information.

Paul Schott Stevens, president of the Investment CompanyInstitute, said IOSCO drew a misinformed conclusion that moneymarket funds with a constant net asset value are more susceptibleto runs than funds with floating values.

“This misinformed claim fuels flawed regulatory proposals,including options of imposing capital requirements and redemptionholdbacks, and a strongly expressed preference for floating or VNAVfunds,” Stevens said in a statement today. “The report failed toinclude any recommendations that would improve the transparency ofmoney market fund portfolio holdings for the benefit of investorsand regulators.”

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