Stablecoin rules are a hot topic for people in the money markets

(Bloomberg) – Money market funds – facing a third round of clampdowns since the financial crisis – question whether Washington should pay more attention to less transparent investment vehicles to avoid turmoil in lending markets short term.

Cryptocurrency stablecoins, for example, are often backed by assets, including treasury bills and short-term corporate IOUs. They’ve been labeled money-fund-like instruments, but aren’t held to the same disclosures and requirements as the $4.5 trillion industry, according to some fund managers speaking at Crane’s Money Fund Symposium in Minneapolis. tuesday. This mismatch could pose a risk to the stability of financial markets as digital asset prices plummet, they say.

“It’s ironic, we’re talking about money market reform and here you have this ultra-short bond space and there’s no set standard,” said Robert Sabatino, head of global liquidity at UBS Asset Management, referring to the relative lack of regulation. currently in place around stablecoins.

A sweeping bill from a bipartisan Senate duo earlier this month would toughen rules on some of the hottest issues facing the crypto industry, including sanctions compliance, stablecoin oversight, and energy consumption. Additionally, it has been reported that the United States Securities and Exchange Commission is investigating whether trading the algorithmic stablecoin TerraUSD before its crash last month violated federal investor protection regulations.

Stablecoins have been embraced by traders and investors as a store of wealth to protect portfolios against market volatility. The largest and most popular of these, Tether, has come under intense scrutiny from federal and state regulators. The number of dollar-pegged Tethers, or USDT, in circulation has dropped significantly in recent months as price instability has prompted traders to sell these tokens and switch to another stablecoin. Total USDT circulation fell to $67 billion, according to data from CoinGecko, from a peak of over $83 billion in early May. The total market value of stablecoins is around $155 billion, according to data from CoinMarketCap.

What worries initial market participants is that Tether invests in the same types of instruments as money market funds, but is subject to less rigorous disclosure.

“We are reviewing Tether’s disclosures and taking them at face value,” said Teresa Ho, strategist at JPMorgan Chase & Co. “No one knows what is behind Tether’s reserve wallet.”

At the same time, a so-called crypto winter is chilling the digital asset industry. Companies like Coinbase Global Inc., Gemini Trust Co. and Crypto.com have laid off staff. The price of Bitcoin has fallen around 30% over the past month.

New rules

Meanwhile, the SEC is expected to announce proposed changes to the money market fund industry by the end of the year, which include requiring stable net asset value funds to float in a rate environment. negatives – in a bid to avoid the kind of turmoil seen in March 2020. Panicked investors drained billions from money market funds in a matter of weeks, helping to seize the commercial paper market, where many companies obtain financing at short term.

This is one of the biggest points of contention. The other is something called swing pricing, which would require investors to pay fees. In comment letters to the SEC, fund managers said it would likely end so-called prime funds, pools of money that can invest in corporate and government papers. And indeed, some managers have already closed this part of their business in anticipation of the changes that are taking place.

“They want financial stability and then they want to take out the best product that has the most transparency,” said Dennis Gepp, chief investment officer and managing director of Federated Hermes UK. “That’s where financial stability starts and they have to be very careful what they wish for.”

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Jessica C. Bell