Three Regulatory Takeaways from Monday’s Stock Market Drop
byJohn Heltman

WASHINGTON — The sharp drop in the stock and commodities markets on Monday raised some critical questions for policymakers, touching on everything from whether asset managers are systemically risky to if the central bank would now delay raising interest rates. The upheaval was not necessarily unexpected, as several analysts and even Federal Reserve Board Chair Janet Yellen had warned in May that she was concerned that U.S. stocks were “generally quite high.” Still, the volatility underscored several pressing issues regulators are grappling with. Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that the main concern coming out of Monday’s rout was not related to stocks per se but related to the performance of emerging market mutual funds, leveraged emerging market exchange-traded funds and emerging market bond funds. If investors start pulling their money out of those kinds of vehicles — which have been popular as investors have sought higher yields amid the low interest rate environment in the U.S. — it could spur runs, which in turn could spread to other markets. Unfortunately, there is no way to know how exposed banks and asset managers are to those kinds of funds. “Most of that is not publicly reported, so there’s no way to tell that until markets close,” Petrou said. “We’ve been seeing last night — and, of course, last week — some big redemptions.” Petrou said it was a foregone conclusion that the Fed is not going to raise rates in September, but said that the real question is whether the central bank will follow the lead of some European central banks and offer negative rates — that is, charge depositors to take their cash out of the market. That scenario would be unprecedented and one for which the U.S. financial system is utterly unprepared, she said. “Can they push rates negative? Would the Fed do that?” Petrou said. “I know some folks at the Fed who are looking into the abyss and thinking about it, because there’s not a lot else they could do.”