What do you get when you finally have a global proposal to govern money-market funds (MMFs), a gigantic 2020 Fed intervention backing up a sector that also needed help in 2008, and an overnight reverse-repo program (ONRRP) trending towards a trillion?  Tough U.S. MMFs standards, that’s what.

Two in-depth FedFin reports this week assessed both the length and breadth of the Financial Stability Board’s consultation and its impact on the agency-debt market.  These both make it clear that the FSB has now decided against another round of toe-to-toe combat with the asset-management industry.  After the 2008 crisis and the fund rescues that followed, global regulators fought for systemic-designation criteria, activity-and-practice identifiers, and other standards to bring the sector under what it strongly insisted was inappropriate, unnecessary, and unduly bank-like standards.  So matters rested until the aforesaid 2020 crisis.

COVID of course wasn’t the fault of MMFs, but the fragility it uncovered did as much damage to their reputation as to that of previously-somnolent national health authorities.  Revisiting the battlefield in hopes of not also repeating its defeats, the FSB thus proposes to give national jurisdictions an array of options to govern MMFs in hopes some of them will then do something.  Some jurisdictions will take a pass, but these won’t include the U.S.

The Fed has been on the MMF warpath since 2008, losing a pitched battle with the SEC only after the Obama Treasury Department’s FSOC unsuccessfully sought to get the Commission to do much of what the Fed wanted.  Janet Yellen was steeped in these battles and, while her FSOC can no more order the SEC around than Jack Lew’s, it now has an SEC chairman, Gary Gensler, whose staff co-chaired the FSB report and agrees with the Fed about the need for significant reform, if not necessarily on the reforms the Fed might prefer.

But, even if none of these conditions existed, there’s a huge new consideration that didn’t play into the last round of U.S. MMF debate:  the ONRRP.  According to a recent analysis, the ONRRP will house about $1 trillion until at least this August, positioning the Fed as both the lender and buyer of next-to-last resort.  This isn’t exactly what central banks are supposed to be, as the Fed well knows.  However, it has built the ONRRP and then expanded it just as it built its huge portfolio and then grew it still bigger because money markets have had a persistent habit of outfoxing the Fed.

For reasons partly of the making of the Fed’s ultra-accommodative policy at a time of acute economic inequality and partly due to huge Treasury issuances, rates left to their own devices would quickly go nominally negative.  This the Fed cannot abide so it wiggles and wriggles and recrafts facilities and transmission channels with which it’s deeply uncomfortable to make itself increasingly not just the lender and buyer, but also market-maker on which everyone counts whenever things get even a bit dicey.  Market corrections are thus a thing of the past along with the end of moral hazard to which the Fed dedicated itself after the last great financial crisis.

But, no matter how the ONRRP fits into the monetary-policy picture, it’s now a Federal Reserve fixture the central bank can no more figure out how to retire than it can any of the other features of its post-2008 playbook.  The Fed is as aware as large banks that the ONRRP has created a backstop for MMFs which lack any of the regulatory costs attendant to the gathering of bank deposits or even the offering of like-kind funds within bank holding companies.  Ideally, the Fed would simply shutter the ONRRP’s open window, but it knows it can’t and, even if it did, the MMF risk evident in the last two crises would remain.

Which of the FSB’s preferred options comes to be required in the U.S. remains to be seen.  The SEC will naturally gravitate to options that funds can at least sort-of live with while the Fed and its friends at the FSOC table will do their natural gravitation towards rules — e.g., capital buffers — beloved in the bank rulebook. Where the gravitating stops and the rules land remains to be seen.

We’ll also see whether, if the Fed isn’t happy with the SEC’s final standards, it adopts a few of its own to insulate banks from MMF inter-connectedness.  The FSOC tried this in 2016 after it was thwarted by the SEC.  The FSOC might well do so again given its disquiet with bank MMF sponsorship even if comforted by the SEC this time around.

We’ll also find out whether, if Treasury doesn’t think the SEC has done enough, it renews demands for systemic designation of the biggest asset managers.  What I do know is that this time the Fed and FSOC won’t give up.