Update from Fed: Money Markets Supported, Risk Management Encouraged

Where commercial paper has gone, money markets will now go. Earlier today, the Federal Reserve Board announced its creation of the Money Market Investor Funding Facility, or MMIFF, a program that “will support a private-sector initiative designed to provide liquidity to U.S. money market investors.” To facilitate “an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors,” the Federal Reserve Bank of New York will provide senior secured funding to a series of special-purpose vehicles. “Eligible assets,” denominated in U.S. dollars, include certificates of deposit and commercial paper issued by “highly rated financial institutions” and having remaining maturities of no more than 90 days. For now, “eligible investors” include U.S. money market mutual funds, though other U.S. money market investors might be added later. By boosting the secondary market for money market instruments, the MMIFF is intended to improve the liquidity positions of money market investors, making it easier for them to meet redemption requests and encouraging them to invest in money market instruments. The new program complements the previously announced Commercial Paper Funding Facility, which will go into action next Monday, purchasing “highly rated, U.S. dollar-denominated, three-month, unsecured and asset-backed commercial paper issued by U.S. issuers.” In other Fed news, a speech yesterday by Federal Reserve Board of Governors member Randall Kroszner might indicate how the Fed will try to shape the post-2008 financial world. Titled “Strategic Risk Management in an Interconnected World,” Kroszner’s speech to the annual conference of the Risk Management Association, in Baltimore, emphasized what he phrased as “the necessity for institutions to improve the linkage between overall corporate strategy and risk management.” Noting the widespread failures of risk management in the lead-up to the current financial/credit crisis, Kroszner said, “It is absolutely clear that many financial institutions need to undertake a fundamental review of risk management.… Risk management shortcomings need to be addressed not only to improve the health and viability of individual institutions, but also to maintain stability for the financial system as a whole.” Kroszner specifically cited “Observations on Risk Management Practices during the Recent Market Turbulence” as a useful report. The document was prepared by the Senior Supervisors Group, which consists of senior financial supervisors from the United States, United Kingdom, France, Germany and Switzerland. One specific prediction Kroszner made is that “there may be less opportunity to pursue activities that were quite prolific under the previous “originate-to-distribute” model, such as securitizations, given current disruptions or longer-term uncertainties about the reliability of market liquidity.” Finally, yesterday’s Fed auction of $150 billion in 28-day credit through the Term Auction Facility saw a total of $113.271 billion in propositions submitted and accepted. The loans will settle on Thursday and will mature on Nov. 20. The stop-out rate was 1.110 percent, and the bid/cover ratio was 0.76. There were 74 bidders.