Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report, 8938-8952 [2021-02704]
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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
rule change.5 On September 2, 2020, the
Commission instituted proceedings
under Section 19(b)(2)(B) of the Act 6 to
determine whether to approve or
disapprove the proposed rule change.7
On November 6, 2020, the Exchange
filed Amendment No. 1 to the proposed
rule change, which replaced and
superseded the proposed rule change as
originally filed.8 On December 2, 2020,
the Commission extended the period for
consideration of the proposed rule
change to February 3, 2021.9 On
February 1, 2021, the Exchange
withdrew the proposed rule change
(SR–NASDAQ–2020–028).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–02707 Filed 2–9–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. IC–34188; File No. S7–01–21]
Request for Comment on Potential
Money Market Fund Reform Measures
in President’s Working Group Report
Securities and Exchange
Commission.
AGENCY:
ACTION:
Request for comment.
The Securities and Exchange
Commission (the ‘‘SEC’’ or the
‘‘Commission’’) is seeking comment on
potential reform measures for money
market funds, as highlighted in a recent
report of the President’s Working Group
on Financial Markets (‘‘PWG’’). Public
comments on the potential policy
measures will help inform consideration
of reforms to improve the resilience of
money market funds and broader shortterm funding markets.
SUMMARY:
Comments may be
submitted by any of the following
methods:
ADDRESSES:
5 See Securities Exchange Act Release No. 89344,
85 FR 44951 (July 24, 2020). The Commission
designated September 6, 2020 as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
approve or disapprove, the proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 89739,
85 FR 55708 (September 9, 2020).
8 Amendment No. 1 is available at https://
www.sec.gov/comments/sr-nasdaq-2020-028/
srnasdaq2020028.htm.
9 See Securities Exchange Act Release No. 90549,
85 FR 79048 (December 8, 2020).
10 17 CFR 200.30–3(a)(12).
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/submitcomments.htm); or
• Send an email to rule-comments@
sec.gov. Please include File No. S7–01–
21 on the subject line.
Paper Comments
• Send paper comments to Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number S7–01–21. This file number
should be included on the subject line
if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method of submission. The
Commission will post all comments on
the Commission’s website (https://
www.sec.gov). Typically, comments are
also available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Due to pandemic
conditions, however, access to the
Commission’s public reference room is
not permitted at this time. All
comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make publicly
available.
Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this request for comment. A
notification of the inclusion in the
comment file of any such materials will
be made available on the Commission’s
website. To ensure direct electronic
receipt of such notifications, sign up
through the ‘‘Stay Connected’’ option at
www.sec.gov to receive notifications by
email.
DATES: Comments should be received on
or before April 12, 2021.
FOR FURTHER INFORMATION CONTACT:
Adam Lovell or Elizabeth Miller, Senior
Counsels; Angela Mokodean, Branch
Chief; Thoreau Bartmann, Senior
Special Counsel; Viktoria Baklanova,
Senior Financial Analyst; or Brian
Johnson, Assistant Director, at (202)
551–6792, Division of Investment
Management, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–8549.
SUPPLEMENTARY INFORMATION:
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I. The President’s Working Group
Report
The PWG has studied the effects of
the growing economic concerns related
to the COVID–19 pandemic in March
2020 on short-term funding markets
and, in particular, on money market
funds.1 The results of this study are
included in the report issued on
December 22, 2020 and attached to this
release as an Appendix (the ‘‘Report’’).2
The Report provides an overview of
prior money market fund reforms in
2010 and 2014, as well as how different
types of money market funds have
evolved since the 2008 financial crisis.3
The Report then discusses events in
certain short-term funding markets in
March 2020, focusing on money market
funds. In reviewing the events of March
2020, the Report discusses significant
outflows from prime and tax-exempt
money market funds that occurred and
how these funds experienced, and began
to contribute to, general stress in shortterm funding markets before the Federal
Reserve, with the approval of the
Department of the Treasury, established
facilities to support short-term funding
markets, including money market funds.
The Report observes that these events
occurred despite prior reform efforts to
make money market funds more
resilient to credit and liquidity stresses
and, as a result, less susceptible to
redemption-driven runs. Accordingly,
1 The PWG is chaired by the Secretary of the
Treasury and includes the Chair of the Board of
Governors of the Federal Reserve System, the Chair
of the SEC, and the Chair of the Commodity Futures
Trading Commission. For a detailed discussion of
the structure and significance of short-term funding
markets and the effects of the COVID–19 shock, as
well as the effects of monetary and fiscal measures,
see SEC staff report, ‘‘U.S. Credit Markets
Interconnectedness and the Effects of COVID–19
Economic Shock,’’ (October 2020) (‘‘SEC Staff
Interconnectedness Report’’), available at https://
www.sec.gov/files/US-Credit-Markets_COVID-19_
Report.pdf. The SEC Staff Interconnectedness
Report also discusses the effects of the March 2020
market stress on money market funds, including
heavy outflows from prime and tax-exempt money
market funds and significant inflows for
government money market funds.
2 The Report is also available at https://
home.treasury.gov/system/files/136/PWG-MMFreport-final-Dec-2020.pdf.
3 See Money Market Fund Reform, Investment
Company Act Release No. 29132 (Feb. 23, 2010) [75
FR 10060 (Mar. 4, 2010)] (amending rule 2a–7
under the Investment Company Act of 1940 (the
‘‘Act’’) to, among other things, enhance
transparency and reduce credit, liquidity, and
interest rate risks of money market fund portfolios);
Money Market Fund Reform; Amendments to Form
PF, Investment Company Act Release No. 31166
(July 23, 2014) [79 FR 47736 (Aug. 14, 2014)]
(amending rule 2a–7 under the Act to address risks
stemming from investor runs, including a floating
NAV requirement for all prime and tax-exempt
money market funds sold to institutional investors
and the provision of new gate and fee tools for all
prime and tax-exempt money market funds,
including retail funds).
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the Report concludes that the events of
March 2020 show that more work is
needed to reduce the risk that structural
vulnerabilities in prime and tax-exempt
money market funds will lead to or
exacerbate stresses in short-term
funding markets. The Report discusses
various reform measures that policy
makers could consider to improve the
resilience of prime and tax-exempt
money market funds and broader shortterm funding markets. Many of the
measures discussed in the Report could
be implemented by the Commission
under our existing statutory authority,
while others may require coordinated
action by multiple agencies or the
creation of new private entities.4
Moreover, relevant money market funds
could likely implement some of the
potential reform measures fairly
quickly, while other measures would
involve longer-term structural changes.
II. Request for Comment
The Commission requests comments
on the Report. Comments received will
enable the Commission and other
relevant financial regulators to consider
more comprehensively the potential
policy measures the Report identifies
and help inform possible money market
fund reforms.5 Following the comment
period, we anticipate conducting
discussions with various stakeholders,
interested persons, and regulators to
discuss the options in the Report and
the comments we receive.
We request comment on the potential
policy measures described in the Report
both individually and in combination.
We also request comment on the
effectiveness of previously-enacted
money market fund reforms, and the
effectiveness of implementing policy
measures described in the Report in
addition to, or in place of, previouslyenacted reforms. Commenters should
address the effectiveness of the
measures in: (1) Addressing money
market funds’ structural vulnerabilities
that can contribute to stress in shortterm funding markets; (2) improving the
resilience and functioning of short-term
funding markets; and (3) reducing the
likelihood that official sector
interventions will be needed to prevent
or halt future money market fund runs,
or to address stresses in short-term
funding markets more generally.
Commenters also may address the
potential impact of the measures on
money market fund investors, fund
managers, issuers of short-term debt,
and other stakeholders. In addition, we
are interested in comments on other
topics commenters believe are relevant
to further money market fund reform,
including other approaches for
improving the resilience of money
market funds and short-term funding
markets generally. We encourage
commenters to submit empirical data
and other information in support of
their comments.
By the Commission.
Dated: February 4, 2021.
Vanessa A. Countryman,
Secretary.
Report of the President’s Working
Group on Financial Markets
Overview of Recent Events and
Potential Reform Options for Money
Market Funds
December 2020
Table of Contents
Paragraph
Nos.
I. Overview ................................................................................................................................................................................................
II. Background ...........................................................................................................................................................................................
A. Money Market Funds—Structure, Asset Types, and Investor Characteristics .........................................................................
B. 2010 and 2014 Reforms ................................................................................................................................................................
C. State of the Money Market Fund Industry Following the 2008 Financial Crisis .....................................................................
III. Events in March 2020 .........................................................................................................................................................................
A. Stresses in Short-Term Funding Markets ...................................................................................................................................
B. Stresses on Prime and Tax-Exempt Money Market Funds and Other Money-Market Investment Vehicles ..........................
C. Taxpayer-Supported Central Bank Intervention .........................................................................................................................
IV. Potential Policy Measures to Increase the Resilience of Prime and Tax-Exempt Money Market Funds .....................................
A. Removal of Tie between MMF Liquidity and Fee and Gate Thresholds ..................................................................................
B. Reform of Conditions for Imposing Redemption Gates ..............................................................................................................
C. Minimum Balance at Risk ............................................................................................................................................................
D. Money Market Fund Liquidity Management Changes ...............................................................................................................
E. Countercyclical Weekly Liquid Asset Requirements ..................................................................................................................
F. Floating NAVs for All Prime and Tax-Exempt Money Market Funds ......................................................................................
G. Swing Pricing Requirement .........................................................................................................................................................
H. Capital Buffer Requirements ........................................................................................................................................................
I. Require Liquidity Exchange Bank Membership ...........................................................................................................................
J. New Requirements Governing Sponsor Support .........................................................................................................................
I. Overview
In March 2020, short-term funding
markets came under sharp stress amid
growing economic concerns related to
the COVID–19 pandemic and an overall
flight to liquidity and quality among
investors. Instruments underlying these
markets include short-term U.S.
Treasury securities, short-term agency
4 For example, certain policy measures discussed
in the Report, such as requiring prime and taxexempt money market funds to be members of a
private liquidity exchange bank, may require
rulemaking by the Commission as well as regulatory
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securities, short-term municipal
securities, commercial paper (‘‘CP’’),
and negotiable certificates of deposit
issued by domestic and foreign banks
(‘‘NCDs’’). Money market funds
(‘‘MMFs’’) are significant participants in
these markets, facilitating investment by
a broad range of individuals and
institutions in the relevant short-term
instruments. Because these short-term
instruments tend to have relatively
stable values and MMFs offer daily
redemptions, investors in MMFs often
expect to receive immediate liquidity
with limited price volatility. However,
in times of stress, these expectations
may not match market conditions,
causing investors to seek to liquidate
action from the Federal Reserve or other banking
regulators.
5 A Commission staff statement also requested
comment on the Report. See Staff Statement on the
President’s Working Group Report on Money
Market Funds (Dec. 23, 2020), available at https://
www.sec.gov/news/public-statement/blass-pwgmmf-2020-12-23. With the issuance of this
Commission request for comment, commenters are
encouraged to submit comments to File No. S7–01–
21 by following the instructions at the beginning of
this release.
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their positions in MMFs. These investor
actions, which are motivated by both
the expectation-market condition
mismatch and the structural
vulnerabilities of MMFs, can amplify
market stress more generally.6
The economic and public policy
considerations raised by this dynamic
among investors, MMFs, and short-term
funding markets are multi-faceted and
significant. The orderly functioning of
short-term funding markets is essential
to the performance of broader financial
markets and our economy more
generally. It is the role of financial
regulators to identify and address
market activities that have the potential
to impair that orderly functioning.
Crafters of public policy and financial
regulation also must recognize that the
broad availability of short-term funding
is critical to short-term funding markets
and, for many decades, prime and taxexempt MMFs have been an important
source of demand in these markets
although their market share has
decreased and assets shifted toward
government MMFs in the past decade.
In addition, the participation of retail
investors in MMFs raises considerations
of fairness and consumer confidence,
particularly in times of unanticipated
stress, that can affect regulatory and
public policy responses.
These dynamics and policy
considerations were brought into stark
relief in March 2020. While government
MMFs saw significant inflows during
this time, the prime and tax-exempt
MMF sectors faced significant outflows
and increasingly illiquid markets for the
funds’ assets. As a result, prime and taxexempt MMFs experienced, and began
to contribute to, general stress in shortterm funding markets in March 2020.
For example, as pressures on prime and
tax-exempt MMFs worsened, two MMF
sponsors intervened to provide support
to their funds. It did not appear that
these funds had idiosyncratic holdings
or were otherwise distinct from similar
funds and, accordingly, it was
reasonable to conclude that other MMFs
could need similar support in the near
term. These events occurred despite
multiple reform efforts over the past
6 For a more detailed discussion of the structure
and significance of short-term funding markets and
the effects of the COVID–19 shock, as well as the
effects of monetary and fiscal measures, see SEC
staff report, ‘‘U.S. Credit Markets
Interconnectedness and the Effects of COVID–19
Economic Shock,’’ (October 2020) (‘‘SEC Staff
Interconnectedness Report’’), available at https://
www.sec.gov/files/US-Credit-Markets_COVID-19_
Report.pdf; Board of Governors of the Federal
Reserve System, ‘‘Financial Stability Report,’’
(November 2020) at pp. 13–14, available at https://
www.federalreserve.gov/publications/files/
financial-stability-report-20201109.pdf.
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decade to make MMFs more resilient to
credit and liquidity stresses and, as a
result, less susceptible to redemptiondriven runs. When the Federal Reserve
quickly took action in mid-March by
establishing, with Treasury approval,
the Money Market Mutual Fund
Liquidity Facility (‘‘MMLF’’) and other
facilities to support short-term funding
markets generally and MMFs
specifically, prime and tax-exempt
MMF outflows subsided and short-term
funding market conditions improved.7
Prime and tax-exempt MMFs have
been supported by official sector
intervention twice over the past twelve
years. In September 2008, there was a
run on certain types of MMFs after the
failure of Lehman Brothers caused a
large prime MMF that held Lehman
Brothers short-term instruments to
sustain losses and ‘‘break the buck.’’ 8
During that time, prime MMFs
experienced significant redemptions
that contributed to dislocations in shortterm funding markets, while
government MMFs experienced net
inflows. Ultimately, the run on prime
MMFs abated after announcements of a
Treasury guarantee program for MMFs
and a Federal Reserve facility designed
to provide liquidity to MMFs.9
Subsequently, the Securities and
Exchange Commission (‘‘SEC’’) adopted
reforms (in 2010 and 2014) that were
designed to address the structural
7 The MMLF makes loans available to eligible
financial institutions secured by high-quality assets
the financial institution purchased from MMFs. The
MMLF also received $10 billion in credit protection
from the Treasury’s Exchange Stabilization Fund.
Other relevant Federal Reserve facilities include,
among others: (1) The Commercial Paper Funding
Facility (‘‘CPFF’’), which provides a liquidity
backstop to U.S. issuers of commercial paper; and
(2) the Primary Dealer Credit Facility (‘‘PDCF’’),
which provides funding to primary dealers in
exchange for a broad range of collateral.
8 A number of other funds that suffered losses in
2008 avoided breaking the buck because they
received sponsor support. See Money Market Fund
Reform; Amendments to Form PF, Investment
Company Act Release No. 31166 (July 23, 2014) [79
FR 47736 (Aug. 14, 2014)] (‘‘SEC 2014 Reforms’’) at
Section II.B.4, available at https://www.sec.gov/
rules/final/2014/33-9616.pdf; See also Steffanie A.
Brady, Kenechukwu E. Anadu, and Nathaniel R.
Cooper, ‘‘The Stability of Prime Money Market
Mutual Funds: Sponsor Support from 2007 to
2011,’’ Federal Reserve Bank of Boston Supervisory
Research and Analysis Working Papers (2012),
available at https://www.bostonfed.org/
publications/risk-and-policy-analysis/2012/thestability-of-prime-money-market-mutual-fundssponsor-support-from-2007-to-2011.aspx. For a
description of the term ‘‘break the buck,’’ see
Section II.A, below.
9 For a more detailed discussion of the MMFrelated events in 2008, see Report of the President’s
Working Group on Financial Markets, ‘‘Money
Market Fund Reform Options,’’ (October 2010)
(‘‘2010 PWG Report’’), available at https://
www.treasury.gov/press-center/press-releases/
Documents/10.21%20PWG%20Report
%20Final.pdf.
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vulnerabilities that became apparent in
2008.
Because prime and tax-exempt MMFs
again have shown structural
vulnerabilities that can create or
transmit stress in short-term funding
markets, it is incumbent upon financial
regulators to examine the events of
March 2020 closely, and in particular
the role, operation, and regulatory
framework for these MMFs, with a view
toward potential improvements. In
addition, absent regulatory reform or
other action that alters market
expectations, these prior official sector
interventions may have the consequence
of solidifying the perception among
investors, fund sponsors, and other
market participants that similar support
will be provided in future periods of
stress.
With that history and context, this
report by the President’s Working Group
on Financial Markets (‘‘PWG’’) begins
the important process of review and
assessment.10 After providing
background on MMFs and prior reforms,
the report discusses events in certain
short-term funding markets in March
2020, focusing on MMFs. The report
then discusses various measures that
policy makers could consider to
improve the resilience of MMFs and
broader short-term funding markets.11
This report is meant to facilitate
discussion. The PWG is not endorsing
any given measure at this time.
II. Background
A. Money Market Funds—Structure,
Asset Types, and Investor
Characteristics
MMFs are a type of mutual fund
registered under the Investment
Company Act of 1940 (the ‘‘Act’’) and
regulated under rule 2a–7 of the Act.
MMFs offer a combination of limited
principal volatility, liquidity, and
payment of short-term market returns,
which make them a popular cash
management vehicle for both retail and
institutional investors. These funds also
serve as an important source of shortterm financing for businesses and
financial institutions, as well as federal,
state, and local governments.
Overall, MMFs tend to invest in shortterm, high-quality debt instruments that
typically are held to maturity and
10 The PWG is chaired by the Secretary of the
Treasury and includes the Chair of the Board of
Governors of the Federal Reserve System, the Chair
of the Securities and Exchange Commission, and
the Chair of the Commodity Futures Trading
Commission.
11 Given jurisdictional differences, this report is
not intended to cover events in other jurisdictions
or to suggest a uniform international approach to
policy changes.
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fluctuate very little in value under
normal market conditions. However,
from fund to fund, MMFs vary
significantly. They hold different types
of investments, serve investors of
different types (i.e., institutional and
retail), and pursue different investment
objectives. For example, tax-exempt
MMFs hold short-term state and local
government and municipal securities,
while government MMFs almost
exclusively hold obligations of the U.S.
government, including obligations of the
U.S. Treasury and federal agencies and
instrumentalities, as well as repurchase
agreements collateralized fully by
government securities. Traditionally,
prime MMFs invest mostly in private
debt instruments, including CP and
NCDs. With regard to investor
characteristics, there are three types of
MMFs: (1) Retail MMFs, which are
limited to retail investors; (2) publiclyoffered institutional MMFs, which are
held primarily by institutional investors
and offered broadly to the public; and
(3) non-publicly-offered institutional
MMFs.12 Variations in portfolio
holdings also correspond with investorspecific factors such as taxing
jurisdictions and, to some extent, risk/
return preferences.
Another significant difference among
different types of MMFs is how they
price the purchase and redemption of
their shares. All government MMFs, as
well as retail prime and retail taxexempt MMFs, are permitted to price
their shares at a stable net asset value
(‘‘NAV’’) per share (typically $1.00)
without regard to small variations in the
value of the assets in their portfolios.
These MMFs must periodically compare
their stable NAV per share to the
market-based value per share of their
portfolios (or ‘‘market-based price’’). If
the deviation between these two values
exceeds one-half of one percent (50
basis points), the fund’s board must
consider what action, if any, to take,
including whether to adjust the fund’s
share price. If the repricing is below the
fund’s $1.00 share price, the event is
commonly called ‘‘breaking the buck.’’
In light of the importance investors
place on a stable $1.00 share price, such
an action can lead to a loss of
confidence in the fund and, if it is
expected to extend beyond one fund,
could lead to a loss of confidence in all
similar funds. As discussed below,
following the SEC’s 2014 reforms,
institutional prime and institutional taxexempt MMFs are required to price their
shares using a floating NAV, which
12 For example, funds not offered to the public
include ‘‘central’’ funds that asset managers use for
internal cash management.
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reflects the market value of the fund’s
investments and any changes in that
value, thus reducing the risk of an
adverse signaling effect from ‘‘breaking
the buck.’’
As investors commonly use MMFs for
principal preservation and as a cash
management tool, many MMF investors
may have a low tolerance for losses and
liquidity limitations. However, MMFs
offer shareholder redemptions on at
least a daily basis (and in some cases at
a stable NAV), even though a potentially
significant portion of portfolio assets
may not be converted into cash in that
timeframe without a reduction in value.
When the MMF does have to sell
portfolio assets at a discount, the fund’s
remaining shareholders generally bear
those losses. These factors can lead to
greater redemptions if investors believe
they will be better off by redeeming
earlier than other investors—a so-called
‘‘first mover’’ advantage—when there is
a perception that the fund may suffer a
loss in value or liquidity. Historically,
amid periods of stress for MMFs,
institutional investors, who may have
large holdings and the resources to
monitor risks carefully, have redeemed
shares more rapidly and extensively
than retail investors.
B. 2010 and 2014 Reforms
The SEC has implemented a number
of reforms over the past decade aimed
at making MMFs more resilient to credit
and liquidity stresses and addressing
structural vulnerabilities in MMFs that
were evident in the 2008 financial
crisis, particularly the substantial
reforms the SEC adopted in 2010 and
2014.13 The 2010 reforms focused on,
among other things, enhancing
transparency and reducing credit,
liquidity, and interest rate risks of fund
portfolios to make MMFs more resilient
and, in the case of stable NAV funds,
less likely to break the buck. For
example, the amendments introduced
new liquidity requirements: At the time
an MMF acquires an asset, it must hold
at least 10 percent of its total assets in
daily liquid assets (‘‘DLA’’) and at least
30 percent of its total assets in weekly
liquid assets (‘‘WLA’’).14 These
13 See Money Market Fund Reform, Investment
Company Act Release No. 29132 (Feb. 23, 2010) [75
FR 10060 (Mar. 4, 2010)] (‘‘SEC 2010 Reforms’’),
available at https://www.sec.gov/rules/final/2010/
ic-29132.pdf; SEC 2014 Reforms.
14 All MMFs are subject to these DLA and WLA
standards, except tax-exempt MMFs are not subject
to DLA standards due to the nature of the markets
for tax-exempt securities and the limited supply of
securities with daily demand features. If a MMF’s
portfolio does not meet the minimum DLA or WLA
standards, it is not in violation of rule 2a–7.
However, it may not acquire any assets other than
DLA or WLA until it meets these minimum
standards.
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requirements are designed to work in
combination and ensure that a MMF has
the legal right to receive enough cash
within one or five business days to
satisfy redemption requests. To address
credit risks, the amendments added a
new 120-day limit on funds’ portfolio
weighted average life to limit exposure
to credit spreads, as well as a reduction
in the limit on funds’ portfolio weighted
average maturity from 90 days to 60
days to limit interest rate risk.15 The
2010 reforms increased transparency by
requiring MMFs to publicly disclose
portfolio holdings each month. In
addition, the amendments addressed
other important issues such as stress
testing, orderly fund liquidation, and
repurchase agreements.
The SEC’s subsequent 2014 reforms
focused on the structural vulnerabilities
that make MMFs susceptible to runs and
provided tools intended to slow runs
should they occur.16 These reforms
included a floating NAV requirement for
all prime and tax-exempt MMFs sold to
institutional investors as a means of
mitigating first mover advantages for
investors who redeem from these funds
when the value of their assets decline.
Under the floating NAV requirement,
these MMFs must sell and redeem their
shares at prices based on the current
market-based value of the assets in their
underlying portfolios rounded to the
fourth decimal place (e.g., $1.0000).
Prior to the 2014 reforms, rule 2a–7
Daily liquid assets are: Cash; direct obligations of
the U.S. government; certain securities that will
mature (or be payable through a demand feature)
within one business day; or amounts
unconditionally due within one business day from
pending portfolio security sales. See rule 2a–7(a)(8).
Weekly liquid assets are: Cash; direct obligations
of the U.S. government; agency discount notes with
remaining maturities of 60 days or less; certain
securities that will mature (or be payable through
a demand feature) within five business days; or
amounts unconditionally due within five business
days from pending security sales. See rule 2a–
7(a)(28).
15 See SEC staff report, ‘‘Response to Questions
Posed by Commissioners Aguilar, Paredes, and
Gallagher,’’ (November 2012) at pp. 18–30,
available at https://www.sec.gov/news/studies/2012/
money-market-funds-memo-2012.pdf.
16 Prior to the 2014 reforms, the Financial
Stability Oversight Council (‘‘FSOC’’) proposed
recommendations regarding MMF reforms to
address structural vulnerabilities of MMFs that the
SEC’s 2010 reforms did not address. These
proposed recommendations, which FSOC made
pursuant to Section 120 of the Dodd-Frank Act,
included alternatives on a floating NAV, a riskbased NAV buffer of 3 percent to provide explicit
loss-absorption capacity, and a minimum balance at
risk. See Financial Stability Oversight Council,
‘‘Proposed Recommendations Regarding Money
Market Mutual Fund Reform,’’ (November 2012)
(‘‘FSOC Proposed Recommendations’’), available at
https://www.treasury.gov/initiatives/fsoc/
Documents/Proposed%20Recommendations
%20Regarding%20Money%20Market%20Mutual
%20Fund%20Reform%20-%20November%2013,
%202012.pdf.
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permitted these funds to maintain a
stable NAV per share like all other
MMFs.
In addition, to provide tools to slow
an investor run should it occur, the
2014 reforms provided new fee and gate
tools for all prime and tax-exempt
MMFs, including retail funds.17 Under
the fee and gate provisions, boards of
these MMFs are permitted to impose
liquidity (redemption) fees of up to 2
percent or to temporarily suspend
redemptions if the fund’s WLA falls
below the 30 percent minimum
required. In addition, funds must
impose a 1 percent liquidity fee if WLA
falls below 10 percent of total assets,
unless the fund’s board determines that
imposing the fee is not in the best
interests of the fund. Liquidity fees
provide investors continued access to
cash redemptions but may reduce the
incentive to redeem. Gates, on the other
hand, stop redemptions altogether for
up to ten business days but may cause
investors to seek a first mover advantage
and redeem in advance of the
imposition of gates.
Further, the 2014 amendments
enhanced transparency for MMF
investors and provided information
about important MMF events more
uniformly and efficiently. For instance,
the amendments required MMFs to
promptly report certain significant
events in filings with the SEC, including
the imposition or removal of fees or
gates, portfolio security defaults, the use
of sponsor support, and a fall in a retail
or government MMF’s market-based
price per share below $0.9975. The 2014
reforms also generally required website
disclosure of these events, as well as
daily website disclosure of a fund’s
DLA, WLA, market-based NAV, and net
flows. In addition, the reforms
addressed MMF diversification and
valuation practices.
C. State of the Money Market Fund
Industry Following the 2008 Financial
Crisis
Since 2008, the composition of the
MMF sector has changed substantially,
and the industry continued to evolve
through 2020. Chart 1 provides
information about changes in net assets
by type of MMF, while Chart 2 provides
more detail about subcategories of prime
and tax-exempt MMFs (i.e., retail and
institutional funds). As of September 30,
2020, total industry net assets were $4.9
trillion, down slightly from an all-time
high of $5.2 trillion in May 2020 (see
Chart 1).
BILLING CODE 8011–01–P
17 Government MMFs are permitted (but not
required) to adopt fee and gate provisions.
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The assets of government MMFs (the
blue line in Chart 1), which were under
$1 trillion in August 2008, have grown
considerably since then. Much of the
growth occurred in 2016, when
government MMF assets increased more
than $1 trillion as investors shifted
money from prime and tax-exempt
MMFs, which were required, starting in
October 2016, to implement the more
significant aspects of the 2014
reforms.19 In March 2020, government
MMF assets increased by $840 billion to
$3.6 trillion, and their assets reached
nearly $4.0 trillion at the end of April.
As of September 2020, government
MMFs accounted for 77 percent of
industry net assets.
The net assets of prime MMFs (the red
line in Chart 1) contracted substantially
in the year leading up to the October
2016 deadline for implementing the
2014 MMF reforms and were $550
billion in December 2016. By February
2020, these funds’ assets had recovered
to $1.1 trillion, but their assets fell $125
billion on net in March. As of
18 The 2014 amendments introduced a regulatory
definition of a retail MMF (and implemented it in
2016). Because data on institutional and retail
MMFs prior to October 2016 may not be entirely
comparable with current statistics, Chart 2 does not
include data on retail and institutional MMFs prior
to October 2016.
The drop in prime retail MMF assets in
September 2020 is the result of a large prime retail
MMF converting to a government MMF.
19 The compliance date for the floating NAV
requirement for institutional prime and
institutional tax-exempt MMFs and for the fee and
gate provisions for all prime and tax-exempt funds
was October 14, 2016.
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September 2020, prime MMFs
accounted for around 20 percent of
industry net assets.
Net assets in tax-exempt MMFs (the
dashed green line in Chart 1) have also
declined since 2008, when these funds
had net assets exceeding $500 billion.
Tax-exempt funds’ assets fell $120
billion in the year before October 2016
and were about $135 billion at the end
of 2016. By February 2020, tax-exempt
fund assets were about $140 billion, and
they declined $9 billion in March 2020.
The vast majority of tax-exempt MMF
net assets are in retail funds (see Chart
2). Tax-exempt MMFs represent under
three percent of total industry net assets
as of September 2020.
III. Events in March 2020
Amid escalating concerns about the
economic impact of the COVID–19
pandemic in March 2020, market
participants sought to rapidly shift their
holdings toward cash and short-term
government securities. This rapid shift
in asset allocation preferences placed
stress on various components of shortterm funding markets, including prime
and tax-exempt MMFs, the repo
markets, the CP market, and short-term
municipal securities markets (including
the market for variable-rate demand
notes (‘‘VRDNs’’)). As discussed in more
detail below, pressures on prime and
tax-exempt MMFs again revealed
structural vulnerabilities in MMFs that
led to increased redemptions and, in
turn, began to contribute to and increase
the general stress in short-term funding
markets.
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A. Stresses in Short-Term Funding
Markets
Private short-term debt markets. In
markets for private short-term debt
instruments, such as CP and NCDs,
conditions began to deteriorate rapidly
in the second week of March. Spreads
for instruments held by MMFs began
widening sharply (see Chart 3).
Specifically, spreads to overnight
indexed swaps (‘‘OIS’’) for AA-rated
nonfinancial CP reached new historical
highs, while spreads for AA-rated
financial CP and A2/P2-rated
nonfinancial CP widened to the highest
levels seen since the 2008 financial
crisis. Along with widening spreads,
new issuance of CP and NCDs declined
markedly and shifted to short tenors.
For instance, the share of CP issuance
with overnight maturity climbed
steadily to nearly 90 percent on March
23.
Pricing and liquidity concerns at
MMFs were driven by, and began to
contribute to, these market stresses.
Widening spreads in short-term funding
markets put downward pressure on the
prices of assets in prime MMFs’
portfolios, and redemptions from MMFs
likely contributed to stress in these
markets, as prime funds reduced their
CP holdings disproportionately
compared to other holders. At the end
of February, prime MMFs offered to the
public owned about 19 percent of
outstanding CP.20 From March 10 to
20 Total CP outstanding at the end of February
2020 was $1.1 trillion (source: Federal Reserve).
Holdings of publicly-offered prime funds are based
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March 24, these funds cut their CP
holdings by $35 billion. This reduction
accounted for 74 percent of the $48
billion overall decline in outstanding CP
over those two weeks.21 In addition,
MMFs with WLAs close to 30 percent
were likely reluctant to purchase assets
with maturities of more than 7 days that
would not qualify as WLA to avoid
going below the regulatory
requirements.22 Beyond MMFs, there
were also other factors contributing to
stress in CP markets, including outflows
from other investment vehicles that
invest in these markets (see below).
Some market participants have
suggested that another contributing
factor to stress in CP markets was that
dealers in CP markets (as well as issuing
dealers and banks) were experiencing
their own liquidity pressures and limits
on their willingness to intermediate in
money markets.23 Historically, however,
because the vast majority of CP typically
is held to maturity, dealers have not had
a substantial role in making secondary
markets in CP. This is also the case for
other private short-term debt
instruments that prime MMFs hold.
Thus, there was no reason to expect
dealers to take a materially increased
intermediation role in these assets in
March. There are also a large number of
individual issues (i.e., CUSIPs) in the
private short-term debt markets, which
adds complexity to intermediation.24 In
contrast to the private short-term debt
markets, Treasury and agency securities
markets have fewer CUSIPs, large daily
trading volumes, and more liquid
secondary markets, with primary
dealers and others playing a large daily
intermediation role in these markets.
Short-term municipal debt markets.
Conditions in short-term municipal debt
markets also worsened rapidly in midMarch. Similar to the relationship
between the CP market and prime
MMFs discussed above, stresses in
short-term municipal markets
contributed to pricing pressures and
outflows for tax-exempt MMFs which,
in turn, contributed to increased stress
in municipal markets. Beginning on
March 12, tax-exempt MMFs
experienced unusually large
redemptions, with outflows accelerating
over the next week. In response, taxexempt funds reduced their holdings of
VRDNs by about 16 percent ($15 billion)
in the two weeks from March 9 to March
23, with primary dealer VRDN
inventories nearly tripling in the week
ending March 18. VRDNs have a
demand or tender feature that allows
tax-exempt MMFs to require the tender
agent to repurchase the security at par
plus accrued interest. When a taxexempt MMF tenders a VRDN, a
remarketing agent typically remarkets
the VRDN to other investors at a higher
yield (and thus a lower price).
The redemption stresses on taxexempt MMFs likely contributed to
worsening conditions in short-term
municipal debt markets. The SIFMA 7day municipal swap index yield, a
benchmark weekly rate in these
markets, shot up 392 basis points on
on data from iMoneyNet. Total prime MMF
holdings of CP, including internal funds that are not
offered to the public, were 29 percent of
outstanding CP at the end of February 2020 (source:
SEC Form N–MFP).
21 About $6 billion of the reduction in MMF
holdings of CP during this time was pledged as
collateral to the MMLF.
22 Funds with WLAs below the 30 percent
minimum threshold are prohibited from purchasing
assets that are not WLAs, including CP and NCDs
with maturities exceeding 7 days. On March 17 and
18, one prime MMF offered to institutional
investors reported WLAs below 30 percent.
23 For example, large customer sales increased
dealers’ inventories of Treasuries and mortgagebacked securities. Facing balance sheet constraints
and internal risk limits amid the elevated volatility,
dealers cut back on intermediation more generally.
24 According to DTCC’s Money Market Kinetics
report as of March 31, 2020 (available at https://
www.dtcc.com/money-markets), the 12-month
average of daily settlements for fixed and floating
rate CP was approximately $80 billion, although
only a small share of this volume appears to have
been secondary market transactions, and further
analysis of secondary market activity is needed. As
previously noted, there was approximately $1.1
trillion of total CP outstanding at the end of
February 2020.
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March 18, as remarketing agents offered
VRDNs at higher yields in response to
tax-exempt MMFs putting back their
notes to tender agents. The spike in the
SIFMA index yield caused a drop in
market-based NAVs of tax-exempt
MMFs (which mostly have stable,
rounded NAVs).
B. Stresses on Prime and Tax-Exempt
Money Market Funds and Other MoneyMarket Investment Vehicles
As part of the general deterioration in
short-term funding market conditions,
prime and tax-exempt MMFs
experienced heavy redemptions
beginning in the second week of March
2020. Outflows increased quickly,
peaking on March 17 for prime funds
(the day the Federal Reserve announced
the CPFF) and on March 23 for taxexempt funds (one business day after
the Federal Reserve’s MMLF was
expanded to include tax-exempt
securities).25
Institutional prime fund outflows.
Among institutional prime MMFs
offered to the public, outflows as a
percentage of fund size exceeded those
in the September 2008 crisis. However,
the dollar amount of outflows from
these funds was much smaller in March
2020, in part because their assets on the
eve of the pandemic were less than onequarter of their size on the eve of the
2008 crisis. Over the two-week period
from March 11 to 24, net redemptions
from publicly-offered institutional
prime funds totaled 30 percent (about
$100 billion) of the funds’ assets, and
these funds’ outflows exceeded 5
percent of their assets on three
consecutive days beginning on March
17. For comparison, in September 2008,
the highest outflows from these funds
over a two-week period were about 26
percent (about $350 billion) of assets.26
A sizable portion of the institutional
prime fund sector’s assets are in funds
25 The following discussion provides data on the
size of the largest outflows from different types of
MMFs during a given two-week (10 business day)
period in March. These two-week periods do not
necessarily coincide. For example, the two-week
period for institutional prime funds begins two days
before that for retail prime funds, in part because
institutional prime funds experienced heavy
redemptions earlier than retail prime funds. Using
data for one-week periods provides qualitatively
similar results. For comparison purposes, we also
provide data on outflows for a standard two-week
period from March 9 to March 20 for all types of
MMFs, based on SEC Form N–MFP weekly data.
26 Data on daily MMF flows are from iMoneyNet.
SEC Form N–MFP provides an official source of
weekly flows data (for weeks ending on Fridays).
For the two weeks from March 9 to 20, outflows
from institutional prime funds that are offered to
the public (as proxied by their presence in
commercial databases) totaled $90 billion (27
percent of assets). Form N–MFP weekly flows data
are not available for the September 2008 crisis.
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that are not offered to the public.27
These non-public funds had smaller
outflows than their publicly-offered
counterparts, indicating that, on
average, the former do not demonstrate
the same vulnerabilities as funds that
are offered publicly to a broad range of
unaffiliated institutional investors. This
difference may be attributable to
investor characteristics as much as or
more than the nonpublic nature of the
offering. Outflows from non-public
institutional prime funds totaled 6
percent ($17 billion) of assets from
March 9 to March 20.28
Retail prime fund outflows. Although
outflows from retail prime MMFs as a
share of assets in March exceeded retail
prime MMF outflows during the 2008
crisis, the March outflows from retail
prime MMFs were smaller than
outflows from institutional prime
MMFs. The redemptions from retail
prime MMFs in March began a couple
of days after those for institutional
funds. Net redemptions totaled 9
percent (just over $40 billion) of assets
over the two weeks from March 13 to
26.29 In September 2008, the heaviest
retail outflows over a two-week period
totaled 5 percent of assets. Retail prime
funds had about 60 percent more assets
in 2008 than in February 2020, so
outflows were similar in dollar terms in
both crises.30 Some retail prime MMFs
experienced declining market-based
prices in March, but none of these funds
reported a market-based price below
$0.9975. Moreover, retail prime MMF
flows in March 2020 appear to have
been unrelated to market-based prices,
as funds with lower market-based prices
did not experience larger outflows than
other retail prime MMFs.
Tax-exempt fund outflows and
declining market-based prices. Outflows
from tax-exempt MMFs, which are
largely retail funds, were 8 percent ($11
billion) of assets during the two weeks
from March 12 to 25.31 In 2008, when
tax-exempt MMF assets were more than
four times larger than in February 2020,
such funds had outflows of 7 percent
(almost $40 billion) of assets in one twoweek period. In March, some retail tax27 See footnote 12 and accompanying text for an
explanation of publicly-offered funds versus nonpublic funds.
28 Source: SEC Form N–MFP.
29 Source: iMoneyNet daily data. Similarly, data
from SEC Form N–MFP show retail prime fund
outflows of 7 percent of assets ($33 billion) over the
two week period from March 9 to 20.
30 See footnote 18 (explaining that data on
institutional and retail MMFs prior to 2016 may not
be entirely comparable with current statistics).
31 Source: iMoneyNet daily data. Similarly, data
from SEC form N–MFP show tax-exempt fund
outflows of 8 percent of assets ($11 billion) over the
two weeks from March 9 to 20.
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8945
exempt MMFs also had declining
market-based prices. Although none of
these funds broke the buck, one fund
reported a market-based price below
$0.9975. As with retail prime MMFs,
there does not appear to have been a
relationship between a decline in a
particular retail tax-exempt MMF’s
market-based price and the size of its
outflows.
Declining WLAs and relation to fees
and gates. As prime funds experienced
heavy redemptions, their WLAs
declined, and some funds’ WLAs
(which must be disclosed publicly each
day) approached or fell below the 30
percent minimum threshold that SEC
rules require. Investor redemptions,
which may have been further
exacerbated by declining WLAs, can put
additional pressure on fund liquidity
during times of stress. As previously
noted, when a fund’s WLA falls below
30 percent, the fund can impose fees or
gates on redemptions. Market
participants reported concerns that the
imposition of a fee or gate by one fund,
as well as the perception that a fee or
gate would be imposed by one fund,
could spark widespread redemptions
from other funds, leading to further
stresses in the underlying markets.
Although one institutional prime fund
(with assets that declined from $3.8
billion at the end of February to $1.5
billion at the end of March) had WLAs
below the 30 percent minimum, it did
not impose a fee or gate in March.
Preliminary research indicates that
prime fund outflows accelerated as
WLAs declined, suggesting that the
potential imposition of a fee or gate
when a fund’s WLA drops below 30
percent encouraged institutional
investors to redeem before that
threshold was crossed.32 Additionally,
some market participants and observers
have suggested that investors’ potential
motivation to redeem as a MMF moves
toward the 30 percent threshold is
primarily driven by concerns about
gates, rather than liquidity fees, because
MMF investors have a low tolerance for
being unable to access cash on demand.
Sponsor support. As strains on prime
and tax-exempt MMFs worsened, two
fund sponsors provided support for
their funds. They did so by purchasing
securities from three prime institutional
MMFs and making a capital
contribution to one tax-exempt fund.
Other investment vehicles that invest
in securities and other instruments
32 See Lei Li, Yi Li, Marco Macchiavelli, and Xing
(Alex) Zhou, ‘‘Runs and Interventions in the Time
of COVID–19: Evidence from Money Funds,’’
working paper (2020), available at https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3607593.
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similar to MMFs. Other investment
vehicles that invest in instruments held
by MMFs also experienced outflows and
stress in March. Short-term investment
funds (‘‘STIFs’’) operated by banks,
which have assets of about $300 billion,
had outflows in March and experienced
related stress.33 Ultra-short corporate
bond mutual funds, which had assets of
$200 billion in February 2020, had
outflows of $33 billion (16 percent of
assets) in March.34 In addition, in the
two weeks from March 12 to 25,
outflows from European dollardenominated MMFs investing in assets
similar to U.S. prime MMFs (so-called
offshore MMFs, which are largely
domiciled in Ireland and Luxembourg),
totaled 25 percent (about $95 billion) of
assets.35
Prime and tax-exempt MMFs’ role in
short-term funding markets’ stress.
Short-term funding markets are
interconnected with other market
segments, and stress in one market can
lead to stress in others. Prime and taxexempt MMFs were not the sole
contributors to the pressures in shortterm funding markets.36 However, it
appears that MMF actions were
particularly significant relative to
market size. For example, as noted
above, prime funds reduced their CP
holdings disproportionately compared
to other holders.37
C. Taxpayer-Supported Central Bank
Intervention
On March 18, 2020, the Federal
Reserve, with the approval of the
Secretary of the Treasury, authorized
the MMLF, which began to operate on
March 23.38 The MMLF provides nonrecourse loans to U.S. depository
institutions and bank holding
33 The
Office of the Comptroller of the Currency
(‘‘OCC’’), which oversees national banks operating
STIFs, issued an interim final rule and an
administrative order allowing STIFs to extend their
dollar-weighted average portfolio maturity and
dollar-weighted average portfolio life maturity to
alleviate pressure on STIF management’s ability to
comply with these maturity limits in light of
stressed market conditions. See Short-Term
Investment Funds, 85 FR 16888 (Mar. 25, 2020),
available at https://www.occ.gov/news-issuances/
federal-register/2020/85fr16888.pdf.
34 Source: Morningstar data.
35 Source: iMoneyNet data.
36 For example, leveraged non-bank entities, such
as hedge funds using Treasury collateral and real
estate investment trusts using agency mortgagebacked security collateral, may have also
contributed to pressure in short-term funding
markets. See, e.g., FSOC Annual Report 2020 at p.
5, available at https://home.treasury.gov/system/
files/261/FSOC2020AnnualReport.pdf.
37 See paragraph accompanying footnote 20.
38 Information about the MMLF is available on the
Federal Reserve’s website at https://
www.federalreserve.gov/monetarypolicy/mmlf.htm.
The Federal Reserve Bank of Boston operates the
MMLF.
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companies to finance their purchases of
specified eligible assets from MMFs
under certain conditions. The nonrecourse nature of the loan protects the
borrower from any losses on the asset
pledged to secure the MMLF loan. The
Federal Reserve, along with the OCC
and Federal Deposit Insurance
Corporation (‘‘FDIC’’), also took steps to
neutralize the effects of purchasing
assets through the MMLF on risk-based
and leveraged capital ratios and
liquidity coverage ratio requirements of
financial institutions to facilitate
participation in the facility.39 The
MMLF program, in combination with
other programs, was intended to
stabilize the U.S. financial system by
allowing MMFs to raise cash to meet
redemptions and to foster liquidity in
the markets for the assets held by
MMFs, including the markets for CP,
NCDs, and short-term municipal
securities.40 The Department of the
Treasury provided $10 billion of credit
protection to the Federal Reserve in
connection with the MMLF from the
Treasury’s Exchange Stabilization
Fund.41 MMLF utilization ramped up
quickly to a peak of just over $50 billion
in early April, or about 5 percent of net
assets in prime and tax-exempt MMFs at
the time.
Outflows from prime MMFs abated
fairly quickly after the Federal Reserve’s
announcement of programs and other
actions to support short-term funding
markets and the flow of credit to
households and businesses more
generally, including its initial
announcement of the MMLF on March
18.42 Overall market conditions also
39 See Regulatory Capital Rule: Money Market
Mutual Fund Liquidity Facility, 85 FR 16232
(March 23, 2020), available at https://
www.federalregister.gov/documents/2020/03/23/
2020-06156/regulatory-capital-rule-money-marketmutual-fund-liquidity-facility; Liquidity Coverage
Ratio Rule: Treatment of Certain Emergency
Facilities, 85 FR 26835 (May 6, 2020), available at
https://www.federalregister.gov/documents/2020/
05/06/2020-09716/liquidity-coverage-ratio-ruletreatment-of-certain-emergency-facilities.
40 The MMLF would not have worked in
isolation, and other programs and monetary policy
responses would not have worked as well without
the MMLF. See SEC Staff Interconnectedness
Report; Marco Cipriani et al., ‘‘Municipal Debt
Markets and the COVID–19 Pandemic,’’ (June 29,
2020), available at https://
libertystreeteconomics.newyorkfed.org/2020/06/
municipal-debt-markets-and-the-covid-19pandemic.html.
41 The CARES Act also temporarily removed
restrictions on Treasury’s authority to use the
Exchange Stabilization Fund to guarantee money
market funds. See section 4015 of the CARES Act.
This authority has not been used.
42 See, e.g., ‘‘Federal Reserve Issues FOMC
Statement’’ (March 15, 2020), available at https://
www.federalreserve.gov/newsevents/pressreleases/
monetary20200315a.htm; ‘‘Federal Reserve Actions
to Support the Flow of Credit to Households and
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began to improve. For example, in the
CP market, the share of CP issuance
with overnight maturity began to fall on
March 24 and spreads to OIS for most
types of term CP started narrowing a few
days later. After the expansion of the
MMLF to include municipal securities
on March 20 (and VRDNs on March 23),
tax-exempt MMF outflows eased and
conditions in short-term municipal debt
markets improved. Beyond the MMLF,
several other Federal Reserve actions
and announcements in March likely
contributed to these improved
conditions. For example, the Federal
Open Market Committee lowered the
target range for the federal funds rates
twice in March by a total of 150 basis
points. A large increase in open market
purchases of Treasury securities and
agency mortgage-backed securities was
announced on March 15, and
establishments of the PDCF and the
CPFF were announced on March 17.
While stress affected a variety of
money market instruments and
investment vehicles, the broad policy
responses from the Federal Reserve,
including the availability of secondary
market liquidity for MMFs through the
MMLF, appeared to have had the
intended broad calming effect on shortterm funding markets. For instance,
although European dollar-denominated
MMFs are not eligible to participate in
the MMLF, outflows from these funds
abated shortly after the MMLF began
operations. The resulting stability in
short-term funding markets, along with
the fiscal stimulus provided by the
CARES Act and the expectation of
continued accommodative monetary
policy, facilitated stability in the capital
markets more generally.
IV. Potential Policy Measures To
Increase the Resilience of Prime and
Tax-Exempt Money Market Funds
While many of the post-2008 MMF
reforms added stability to MMFs, the
events of March 2020 show that more
work is needed to reduce the risk that
Businesses’’ (March 15, 2020), available at https://
www.federalreserve.gov/newsevents/pressreleases/
monetary20200315b.htm; ‘‘Federal Reserve Board
Announces Establishment of a Commercial Paper
Funding Facility (CPFF) to Support the Flow of
Credit to Households and Businesses’’ (March 17,
2020), available at https://www.federalreserve.gov/
newsevents/pressreleases/monetary20200317a.htm;
‘‘Federal Reserve Board Announces Establishment
of a Primary Dealer Credit Facility (PDCF) to
Support the Credit Needs of Households and
Businesses’’ (March 17, 2020), available at https://
www.federalreserve.gov/newsevents/pressreleases/
monetary20200317b.htm; ‘‘Federal Reserve Board
Broadens Program of Support for the Flow of Credit
to Households and Businesses by Establishing a
Money Market Mutual Fund Liquidity Facility
(MMLF)’’ (March 18, 2020), available at https://
www.federalreserve.gov/newsevents/pressreleases/
monetary20200318a.htm.
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structural vulnerabilities in prime and
tax-exempt MMFs will lead to or
exacerbate stresses in short-term
funding markets. The following
discussion sets forth potential policy
measures that could address the risks
prime and tax-exempt MMFs pose to
short-term funding markets. This report
is meant to facilitate discussion. The
PWG is not endorsing any given
measure at this time.
These potential policy measures differ
in terms of the scope and breadth of
regulatory changes they would require.
For example, many of the potential
reforms would apply only to prime and
tax-exempt MMFs, while reforms such
as swing pricing could apply to mutual
funds more generally. Moreover, some
potential reforms would involve
targeted amendments to SEC rules,
which relevant MMFs could likely
implement fairly quickly, while others
would involve longer-term structural
changes or may require coordinated
action by multiple agencies. The
different measures are not necessarily
mutually exclusive, nor are they equally
effective at mitigating the vulnerabilities
of prime and tax-exempt MMFs. Policy
makers could combine certain measures
within a single set of reforms. Some
policy measures listed below have been
raised for consideration previously,
including in the PWG’s October 2010
report on MMF reform options and the
FSOC’s 2012 proposed
recommendations on MMF reform, and
warrant renewed consideration in light
of recent MMF stresses.
This report focuses on reform
measures for MMFs only. It is important
to recognize MMFs’ role in the market
events in March 2020 and to examine
measures that would address concerns
and structural vulnerabilities specific to
MMFs. Although they are beyond the
scope of this report, and as discussed
generally above, there were other
stresses in short-term funding markets
in March 2020 that may have
contributed to the pressure on MMFs.
As discussed in more detail below,
the potential policy measures for prime
and tax-exempt MMFs explored in this
report are:
• Removal of Tie between MMF
Liquidity and Fee and Gate Thresholds;
• Reform of Conditions for Imposing
Redemption Gates;
• Minimum Balance at Risk (‘‘MBR’’);
• Money Market Fund Liquidity
Management Changes;
• Countercyclical Weekly Liquid
Asset Requirements;
• Floating NAVs for All Prime and
Tax-Exempt Money Market Funds;
• Swing Pricing Requirement;
• Capital Buffer Requirements;
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• Require Liquidity Exchange Bank
(‘‘LEB’’) Membership; and
• New Requirements Governing
Sponsor Support.
Overarching goals for MMF reform. As
a threshold matter, it should be
recognized that the various policy
reforms, individually and in
combination, should be evaluated in
terms of their ability to effectively
advance the overarching goals of reform.
That is:
• First, would they effectively
address the MMF structural
vulnerabilities that contributed to stress
in short-term funding markets?
• Second, would they improve the
resilience and functioning of short-term
funding markets?
• Third, would they reduce the
likelihood that official sector
interventions and taxpayer support will
be needed to halt future MMF runs or
address stresses in short-term funding
markets more generally?
Assessment of the MMF reform
options. An assessment of the
effectiveness of reform options in
achieving these goals should take into
account: (a) How each option would
address MMF structural vulnerabilities
and contribute to the overarching goals;
(b) the effect of each option on shortterm funding markets and the MMF
sector more broadly, including through
its effects on the resilience, functioning,
and stability of short-term funding
markets, as well as whether the reform
option would trigger the growth of
existing investment strategies and
products, or the development of new
strategies and products, that could
either exacerbate or mitigate market
vulnerabilities; and (c) potential
drawbacks, limitations, or challenges
specific to each reform option. The
reform options considered in this report
seek to achieve the goals in different
ways. For example, some are intended
to address the liquidity-related stresses
that were evident in March 2020, while
others also touch on potential creditrelated concerns. This menu of options
reflects the possibility that future
financial stress events may affect the
liquidity of short-term investments,
their credit quality, or both.
(a) How the reform options would
seek to achieve the goals.
(1) Internalize liquidity costs of
investors’ redemptions, particularly in
stress periods. Some options would
impose a cost on redeeming investors
that rises as liquidity stress increases to
reflect the costs of redemptions for the
fund. These options, particularly swing
pricing and the MBR, could reduce or
eliminate first-mover advantages for
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redeeming investors and protect
investors who do not redeem.
(2) Decouple regulatory thresholds
from consequences such as gates, fees,
or a sudden drop in NAV. Some
options, such as those that revise fee
and gate thresholds or introduce the
floating NAV for retail prime and taxexempt MMFs, could eliminate or
diminish the importance of thresholds
(such as 30 percent WLA or an NAV of
$0.995) that may spur investor
redemptions. By diminishing the
importance of thresholds, these options
could also give MMFs greater flexibility,
for example, to tap their own liquid
assets to meet redemptions.
(3) Improve MMFs’ ability to use
available liquidity in times of stress. In
March 2020, some prime and taxexempt MMFs may have avoided using
their liquid assets to meet redemptions.
Options such as countercyclical WLA
requirements or revisions to fee and gate
thresholds could make MMFs more
comfortable in deploying their liquid
assets in times of stress.
(4) Commit private resources ex ante
to enable MMFs to withstand liquidity
stress or a credit crisis. When prime and
tax-exempt MMFs have encountered
serious strains, official sector
interventions have followed quickly.
Options such as capital buffers, explicit
sponsor support, and the LEB could
provide committed private resources to
supply liquidity or absorb losses and
thus reduce the likelihood that official
sector support would be needed to calm
markets.
(5) Further improve liquidity and
portfolio risk management. Changes to
liquidity management requirements
could include raising required liquidasset buffers. Other options could
motivate more conservative risk
management by explicitly making fund
sponsors or others responsible for
absorbing any heightened liquidity
needs or losses in their MMFs.
(6) Clarify that MMF investors, rather
than taxpayers, bear market risks.
Government support has repeatedly
provided emergency liquidity to prime
and tax-exempt funds and also has
obscured the risks of liquidity and
credit shocks for MMFs. Some options,
such as the floating NAV for retail prime
and tax-exempt MMFs, swing pricing,
and the MBR could make risks to
investors more apparent.
(b) Effects on short-term funding
markets. The reform options are
intended to reduce the structural
vulnerabilities of MMFs, which could
make them a more stable source of
short-term funding for financial
institutions, businesses, and state and
local governments. This would improve
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the stability and resilience of short-term
funding markets.
At the same time, some of the reform
options would likely diminish the size
of prime and tax-exempt MMFs, which
would also affect the functioning of
short-term funding markets. A shrinkage
of MMFs could reduce the supply of
short-term funding for financial
institutions, businesses, and state and
local governments. Making prime and
tax-exempt MMFs less desirable as cashmanagement vehicles also could cause
investors to move to less regulated and
less transparent mutualized cashmanagement vehicles that are also
susceptible to runs that cause stress in
short-term funding markets.
A reduction in the size of prime and
tax-exempt MMFs may not necessarily
be inappropriate if, for example, the
growth of these funds has reflected in
part the effects of implicit taxpayer
subsidies and other externalities (that is,
broader economic costs of runs that are
not borne by investors or the funds). In
addition, if these MMFs remain run
prone, a reduction in the size of the
industry could mitigate the effects of
future runs from these funds on shortterm funding markets.
The aftermath of the 2014 MMF
reforms provides a precedent for the
consequences of a substantial reduction
in the size of prime and tax-exempt
funds, although a future experience
could differ. In the year before the
October 2016 implementation deadline
for those reforms, aggregate prime MMF
assets shrank by $1.2 trillion (69
percent) and tax-exempt MMF assets
declined about $120 billion (47
percent). Nonetheless, to the extent that
spreads for instruments held by these
MMFs were affected, they generally
widened only temporarily, and investor
migration to other mutualized cashmanagement vehicles was largely
limited to shifts to government MMFs.
(Over the next three years, prime MMFs
regained about half of the 2015–2016
decline.)
These considerations are important,
because some of the reform options
could reduce the size of the prime and
tax-exempt fund sectors by:
• Reducing attractiveness of prime
and tax-exempt MMFs for investors. The
costs associated with some options,
such as capital buffers and LEB
membership, may reduce the funds’
yields. The MBR would limit the
liquidity of their shares in some
circumstances. The floating NAV
requirement and swing pricing would
make NAVs more volatile and MMF
shares less cash-like. And investors may
view some policies, such as swing
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pricing and the MBR, as unfamiliar,
restrictive, and complicated.
• Increasing costs associated with
MMF sponsorship. Some options, such
as the introduction of capital buffers,
required LEB membership, and explicit
sponsor support, could raise operating
costs for sponsors. Other options, such
as swing pricing and MBR, may also
have sizable implementation costs.
Increased costs and operational
complexity could lead to increased
concentration and a reduction in the
overall size of the MMF industry.
(c) Potential drawbacks, limitations,
and challenges specific to each option.
Evaluation of the reform options also
should take into account potential
drawbacks, limitations, and challenges
of each option, such as implementation
challenges or limits on an option’s
ability to achieve the desired goals. The
report discusses these considerations for
each option below.
Several specific policy options are
described below, along with a high-level
analysis of the potential benefits and
drawbacks of each option.
gates and fees would reduce the salience
of these thresholds and could diminish
the incentive for preemptive runs.
• This may improve the usability of
WLA buffers by making MMFs more
comfortable in deploying their liquid
assets in times of stress.
Potential drawbacks, limitations, and
challenges:
• While this option would remove a
focal point that may trigger runs, it
would do little otherwise to mitigate run
incentives.
• If MMFs maintain fewer liquid
assets (by holding WLA levels closer to
30 percent) as a result of this change,
the funds may be less equipped to
manage significant redemptions without
engaging in fire sales.
• Permitting funds to impose fees or
gates without reference to a specific
threshold may cause broader contagion
if investors fear the imposition of fees or
gates in other funds that otherwise
would have been seen as safe.
A. Removal of Tie Between MMF
Liquidity and Fee and Gate Thresholds
Liquidity fees and redemption gates
are intended to give MMF boards tools
to stem heavy redemptions by imposing
a fee to reduce shareholders’ incentives
to redeem or by stopping redemptions
altogether for a period of time.
Currently, MMF boards have discretion
to impose fees or gates when WLAs fall
below 30 percent of total assets and
generally must impose a fee of 1 percent
if WLAs fall below 10 percent, unless
the board determines that such a fee
would not be in the best interest of the
fund or that a lower or higher (up to 2
percent) liquidity fee is in the best
interests of the fund.
Definitive thresholds for permissible
imposition of liquidity fees and
redemption gates may have the
unintended effect of triggering
preemptive investor redemptions as
funds approach the relevant thresholds.
Some preliminary research suggests that
redemptions accelerated in March 2020
from funds with declining WLAs.43
Removing the tie between the 30
percent and 10 percent WLA thresholds
and the imposition of fees and gates is
one possible reform. Fund boards could
be permitted to impose fees or gates
when doing so is in the best interest of
the fund, without reference to any
specific level of liquidity.
Potential benefits:
• Removing the tie between the WLA
thresholds and funds’ ability to impose
Reforming rules regarding redemption
gates to reduce the likelihood that gates
may be imposed could diminish
investors’ incentives to engage in
preemptive runs. For example, funds
could be required to obtain permission
from the SEC or notify the SEC prior to
imposing gates. Alternatively, fund
boards could be required to consider
liquidity fees before gates, making it less
likely that gates would be imposed.
Another option could be to lower the
WLA threshold at which gates could be
imposed to, for example, 10 percent.
Gate rules also could be reformed to
make gates ‘‘soft’’ or ‘‘partial.’’ With soft
gates, for example, if redemptions on a
particular day exceed a certain amount,
a fund could reduce each investor’s
redemption pro rata to bring total
redemptions below that amount, with
remaining redemption amounts deferred
to the next business day (and continuing
daily deferrals until all redemption
requests are satisfied). This affords
investors at least some liquidity, in
contrast to the complete curtailment of
liquidity when a fund suspends all
redemptions.
Potential benefits:
• Reforming the rules around gates
might reduce concerns that gates will be
imposed immediately upon a breach of
the 30 percent WLA requirement and
reduce the salience of that threshold,
particularly if investors are more
concerned about gates than fees.
• Gates could still be imposed, but
only in very dire conditions when runs
on funds are likely anyway.
43 See
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• This may improve the usability of
WLA buffers by making MMFs more
comfortable in deploying their liquid
assets in times of stress.
• A ‘‘soft’’ or ‘‘partial’’ gate could
reduce disruptions caused by the
imposition of a gate by allowing
shareholders to redeem a portion of
shares as normal, with a portion held for
a limited time to help the fund slow the
rate of redemptions during stress
periods without engaging in fire sales.
Potential drawbacks, limitations, and
challenges:
• If thresholds remain, they could
still be focal points for runs on MMFs.
• While this option could reduce the
salience of a threshold that may trigger
runs, it would do little otherwise to
mitigate run incentives.
• Reducing the likelihood that a gate
may be imposed could reduce the
potential utility of gates as a tool to slow
investor redemptions.
• Providing the SEC a role in granting
permission for imposition of gates may
result in less timely action than the
current framework involving the MMF’s
board, particularly if multiple MMFs
seek SEC permission in a short period
of time, which could allow runs to
continue or accelerate. Absent a
threshold, it could be challenging to
develop objective criteria in advance for
quickly approving or denying such
requests in a consistent and appropriate
manner amid a fast-moving crisis.
• If MMFs maintain fewer liquid
assets (by holding WLA levels closer to
30 percent) as a result of this change,
the funds may be less equipped to
manage significant redemptions without
engaging in fire sales.
• Like other gates, a ‘‘soft’’ (or
‘‘partial’’) gate may spur preemptive
runs, but a soft gate may be less effective
at slowing runs than a full gate, as
investors can continue to redeem even
after a soft gate has been imposed.
• ‘‘Soft’’ or ‘‘partial’’ gates could
introduce accounting and
administrative complexities.
C. Minimum Balance at Risk
An MBR is a portion of each
shareholder’s recent balances in a MMF
that would be available for redemption
only with a time delay to ensure that
redeeming investors still remain
partially invested in the fund over a
certain time period. As such, even if the
investor redeems all of her available
shares, she would still share in any
losses incurred by the fund during that
timeframe. A ‘‘strong form’’ of MBR
would also put a portion of redeeming
investors’ MBRs first in line to absorb
any losses, which creates a disincentive
to redeem. The size of the MBR would
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be a specified fraction of the
shareholder’s maximum recent balance
(less an exempted amount). An MBR
mechanism could be used in a floating
NAV fund to allocate losses only under
certain rare circumstances, such as
when the fund suffers a large drop in
NAV or is closed.
Potential benefits:
• A properly calibrated ‘‘strong’’ MBR
could reduce the vulnerability of MMFs
to runs.
• A strong MBR can internalize the
liquidity costs of investors’ redemptions
and thus reduce or eliminate the firstmover advantage for redeeming
investors. It would do so by
subordinating a portion of their shares
to put them at greater risk if the fund
suffers a loss. This can weigh against
incentives to redeem in a stress event,
so it can be particularly helpful as
liquidity costs rise.44
• The disincentive to redeem created
by an MBR strengthens mechanically as
stresses increase and put subordinated
shares at greater risk. Hence, the MBR
does not create a threshold effect that
might spur redemptions.
• Under a strong form of MBR, the
subordinated shares of redeeming
investors provide extra loss absorption
to protect the investments of nonredeeming investors.
• An MBR could provide more
transparency to shareholders regarding
their risk, as shareholders’ account
information could include their
balances and the size of their MBRs.
Potential drawbacks, limitations, and
challenges:
• The MBR could present
implementation and administration
challenges. For example, MMFs,
intermediaries, and service providers
would need to update systems to: (1)
Compute the MBR on an ongoing basis
for each shareholder account and
update the allocation of unrestricted,
holdback, or subordinated holdback
shares for each account to reflect any
additional subscriptions or redemptions
and the passage of time; and (2) prevent
a shareholder from redeeming holdback
or subordinated holdback shares in
transaction processing systems.45 In
44 See, for example, FSOC Proposed
Recommendations; Patrick E. McCabe, Marco
Cipriani, Michael Holscher, and Antoine Martin,
‘‘The Minimum Balance at Risk: A Proposal to
Mitigate the Systemic Risks Posed by Money Market
Funds,’’ Brookings Papers on Economic Activity
(Spring 2013), available at https://
www.brookings.edu/wp-content/uploads/2016/07/
2013a_mccabe.pdf.
45 Many MMF investors hold their shares through
intermediaries (such as broker-dealers, banks, trust
companies, and retirement plan administrators) that
establish omnibus accounts with the fund. An
intermediary’s omnibus account aggregates shares
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8949
addition, a ‘‘strong form’’ of MBR may
create the need to convert existing MMF
shares or issue new subordinated shares
to comply with typical state law
limitations on allocating losses to a
subset of shares in a single share class.
• An MBR mechanism may have
different and unequal effects on
investors in stable NAV and floating
NAV MMFs. During the holdback
period, investors in a stable NAV MMF
would only experience losses if the fund
breaks the buck, but investors in a
floating NAV MMF are always exposed
to changes in the fund’s NAV and
would continue to be exposed to such
risk for any shares held back.
• The MBR is an unfamiliar concept
in the fund industry that may result in
investor discomfort or confusion,
particularly when it is first introduced.
• Calibrating the appropriate size for
an MBR could be a challenge; an MBR
that is too small may not create
sufficient disincentives to redeem in
stress events, but one that is too large
would unnecessarily reduce the
liquidity of the fund’s shares.
D. Money Market Fund Liquidity
Management Changes
MMFs currently are subject to daily
and weekly liquid asset requirements
and must disclose the amount of daily
and weekly liquid assets each day on
the fund’s website. Changes to liquidity
management requirements could
include a new category of liquidity
requirements. For example, instead of
focusing solely on daily and weekly
liquid assets, creating an additional
category for assets with slightly longer
maturities (e.g., biweekly liquid assets)
could strengthen funds’ near-term
portfolio liquidity when short-term
funding markets become stressed.
As another alternative, an additional
threshold, such as a WLA threshold of
40 percent, could be set to augment
current liquidity buffers. If a fund’s
WLAs fell below this threshold,
penalties such as requiring the escrow
of fund management fees until the level
of WLA is restored could be imposed on
fund managers, rather than investors.
This effectively would require funds to
maintain a larger amount of WLAs than
currently required.
Potential benefits:
• An additional tier of liquidity may
make MMFs more resilient to significant
redemptions by ensuring they maintain
assets that will soon become WLAs.
Additional liquidity requirements also
held on behalf of its underlying clients or
beneficiaries, and the fund does not have access to
information about these underlying clients or
beneficiaries. As a result, intermediaries would be
involved in implementing MBR reforms.
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could limit ‘‘barbell’’ strategies (where a
fund offsets its short-term assets with
riskier longer-term assets that enhance
returns but increase the riskiness of the
fund’s portfolio).
• Rules to penalize fund managers
first for having inadequate portfolio
liquidity have the potential to diminish
the salience of WLA thresholds to
investors by ensuring that initial
consequences for crossing the
thresholds are not imposed directly on
investors.
Potential drawbacks, limitations, and
challenges:
• Requiring funds to purchase
additional near-term liquid assets or
maintain larger WLAs to avoid penalties
might encourage funds to take greater
risks in the less liquid parts of their
portfolios, particularly in a low interest
rate environment, absent other measures
to constrain this behavior.
• Imposing the escrow of fees or other
penalties on fund managers if WLAs do
not meet a new higher minimum
requirement could further diminish the
usability of WLA buffers by making
MMFs less comfortable in deploying
their liquid assets in times of stress.
• Further increases in liquid asset
requirements may provide funds only a
little extra time during a run, as
institutional prime fund outflows
exceeded 5 percent of assets per day at
the height of the run in March 2020.
• Additional liquid asset
requirements for MMFs could heighten
roll-over risks for issuers of short-term
debt that may see more demand for
issuance in shorter tenors. In addition,
to the extent that new investors would
replace MMFs in the tenors outside the
near-term liquidity requirements,
transparency regarding the nature of
these investors may be lower.
• It is not clear whether the required
escrow of fees or other penalties could
be imposed on fund managers in a way
that would not also affect MMF
investors (e.g., fund managers may
respond by reducing the amount of fees
they waive).
Additional considerations:
• Funds that purchase additional
near-term liquid assets or maintain
larger WLAs to avoid penalties may
generate lower yield compared to
similar investment products, which may
reduce investor demand for such funds.
As noted above, a reduction in the size
of the prime and tax-exempt MMF
sectors could affect the resilience and
functioning of short-term funding
markets in a variety of ways.
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E. Countercyclical Weekly Liquid Asset
Requirements
F. Floating NAVs for All Prime and TaxExempt Money Market Funds
During the market stress in March
2020, prime and tax-exempt MMFs that
were close to the 30 percent WLA
threshold may have avoided using their
liquid assets to meet redemptions.
MMFs’ incentives to maintain WLAs
well above the 30 percent minimum,
even in the face of significant outflows,
may include the desires to avoid: (1)
Prohibitions on purchasing assets that
are not WLAs; (2) raising investor
concerns about the potential imposition
of fees or gates; and (3) potential
scrutiny resulting from public
disclosure of low WLA amounts. A
countercyclical WLA requirement could
reduce some or all of these concerns.
Under this approach, minimum WLA
requirements could automatically
decline in certain circumstances, such
as when net redemptions are large or
when the SEC provides temporary relief
from WLA requirements. Any
thresholds linked to a fund’s minimum
WLA requirements (e.g., fee or gate
thresholds) would also move with the
minimum.
Potential benefits:
• A countercyclical WLA requirement
could reduce the salience of the 30
percent WLA threshold and may lessen
redemption pressures when a fund is
near that threshold.
• This may improve the usability of
WLA buffers by making MMFs more
comfortable in deploying their liquid
assets in times of stress.
Potential drawbacks, limitations, and
challenges:
• Funds that reduce WLAs in stress
events would be less equipped to
manage additional redemptions without
engaging in fire sales.
• Even if the WLA threshold is
reduced, threshold effects may still
motivate investors to redeem. In
addition, investors may still prefer to
redeem from funds that are approaching
or breaching the standard 30 percent
threshold, and reduced WLA minimums
may in fact call attention to potential
stress and prompt greater investor
outflows.
• The benefits of this change for
funds’ use of liquid assets may be
modest, as current rules do not preclude
funds from using WLAs to meet
redemptions or prohibit funds from
allowing their WLAs to fall below 30
percent.
• Appropriately calibrating a
countercyclical WLA requirement,
including determining whether it would
be an automatic mechanism or one that
the SEC has to adjust in a crisis, could
be challenging.
Retail prime MMFs and retail taxexempt MMFs currently can use a
rounded NAV and value portfolio assets
at their amortized cost, which permits
the funds to sell and redeem shares at
a stable share price (e.g., $1.00) without
regard to small variations in the value
of the securities in their portfolios. A
floating NAV requirement would ensure
that these MMFs instead sell and
redeem their shares at a price that
reflects the market value of a fund’s
portfolio and any changes in that value.
This would be consistent with floating
NAV requirements that currently apply
to institutional prime and institutional
tax-exempt MMFs. Although this option
would only affect retail MMFs, those
funds had large outflows in March 2020,
and outflows likely would have
continued or worsened without official
sector intervention.46
Potential benefits:
• The floating NAV eliminates the
salience of a MMF’s NAV dropping
more than 0.5 percent ($0.995). Unlike
stable NAV funds, MMFs with floating
NAVs cannot ‘‘break the buck.’’
• Stable NAVs can create an incentive
to redeem when MMF portfolios assets
lose value because redeeming investors
can receive more for their shares than
they are worth, while losses are
concentrated among non-redeeming
investors. In contrast, a floating NAV
mitigates that incentive to redeem as
losses are spread across all shareholders
on a pro rata basis whether they redeem
or not. Thus, a floating NAV
requirement may decrease retail prime
and tax-exempt MMFs’ vulnerabilities
to runs by mitigating the first mover
advantage for redeeming investors.
• Floating NAVs make portfolio risks
more transparent by making fluctuations
in share values readily observable,
which could better align investors’
expectations with the risks of portfolio
holdings.
Potential drawbacks, limitations, and
challenges:
• A floating NAV requirement would
not affect institutional MMFs, which
have historically been the most
vulnerable to runs but already have
floating NAVs.
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46 Retail prime MMFs and tax-exempt MMFs were
under stress during March 2020, with one taxexempt MMF receiving sponsor support, although
stress among retail funds was less severe than that
for institutional prime MMFs. See Section III.B,
above (explaining that outflows from retail prime
funds totaled 9 percent (or just over $40 billion) of
assets during the two weeks from March 13 to 26,
and outflows from tax-exempt MMFs—which are
largely retail funds—were 8 percent ($11 billion) of
assets during the two weeks from March 12 to 25).
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• Institutional prime MMFs with
floating NAVs still experienced runs in
March; floating NAVs do not prevent
runs.
Additional considerations:
• Floating NAVs could result in a
reduction in the size of retail prime and
retail tax-exempt MMF sectors by
making retail MMF shares less cash-like,
which could reduce investor demand.
As noted above, a reduction in the size
of the prime and tax-exempt MMF
sectors could affect the resilience and
functioning of short-term funding
markets in a variety of ways.
G. Swing Pricing Requirement
Under current rules, MMF investors
redeeming their shares in a prime or taxexempt fund typically do not incur the
costs associated with this redemption
activity. Instead, these costs are largely
borne by other investors in the fund,
and this contributes to a first-mover
advantage for those who redeem quickly
in a crisis. Swing pricing effectively
allows a fund to impose the costs
stemming from redemptions directly on
redeeming investors by adjusting the
fund’s NAV downward when net
redemptions exceed a threshold.47 That
is, when the NAV ‘‘swings’’ down,
redeeming investors receive less for
their shares. A swing pricing
requirement could help ensure that
redeeming shareholders bear liquidity
costs throughout market cycles (i.e., not
only in times of market stress). In the
United States, an optional swing pricing
framework is permissible for certain
mutual funds, but not for MMFs.
Although swing pricing is largely
untested for MMFs, it has been helpful
for other types of non-U.S. mutual
funds.48
Potential benefits:
• A properly calibrated swing pricing
mechanism could reduce the
vulnerability of MMFs to runs.
• Swing pricing can internalize the
liquidity costs of investors’ redemptions
and thus reduce or eliminate the firstmover advantage for redeeming
investors. By making redemptions
costly, swing pricing can weigh against
incentives to redeem in a stress event,
so it can be particularly helpful as
liquidity costs rise. Swing pricing also
47 If a fund has net inflows above the swing
threshold, swing pricing would instead adjust the
fund’s NAV upward.
48 See, for example, Jin, Dunhong, Marcin
Kacperczyk, Bige Kahraman, an Felix Suntheim,
‘‘Swing Pricing and Fragility in Open-end Mutual
Funds,’’ IMF Working Paper WP/19/227 (2019);
Association of the Luxembourg Fund Industry,
Swing Pricing Updae 2015 (Dec. 2015) (‘‘ALFI
Survey 2015’’) at 21, available at https://www.alfi.lu/
sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015FINAL.pdf.
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18:53 Feb 09, 2021
Jkt 253001
benefits investors who do not redeem by
reducing dilution to the value of a
fund’s shares and insulating these
investors from the effects of others’
redemption activity.
• Swing pricing can improve long-run
fund performance by reducing dilution.
• If swing pricing is available (and
used occasionally) in ‘‘normal’’ times,
its use can help investors understand
that they bear liquidity risks in a MMF.
Moreover, regular deployment of swing
pricing would make its use in stress
events less unsettling for investors.
Potential drawbacks, limitations, and
challenges:
• Eligible U.S. mutual funds have yet
to implement swing pricing, largely
because implementation would require
substantial reconfiguration of current
distribution and order-processing
practices. MMFs could face similar
challenges.
• Unlike other mutual funds, some
MMFs strike their NAVs more than once
per day and allow intraday purchases
and redemptions for any orders received
prior to a given NAV strike. The
potential management of swing pricing
considerations multiple times per day
could be particularly challenging in
times of market stress.
• It may be challenging to design and
calibrate a swing pricing mechanism
that can effectively internalize liquidity
costs for redeeming investors, especially
during stress events.
H. Capital Buffer Requirements
Capital (or ‘‘NAV’’) buffers, which
could be structured in a variety of ways,
can provide dedicated resources within
or alongside a fund to absorb losses and
can serve to absorb fluctuations in the
value of a fund’s portfolio, reducing the
cost to taxpayers in case of a run.49 For
a floating NAV fund, capital buffers
could be reserved to absorb the fund’s
losses only under certain rare
circumstances, such as when it suffers
a large drop in NAV or is closed.
Potential benefits:
• A capital buffer adds ex ante lossabsorption capacity to a MMF that
would mitigate MMF shareholders’ risk
of losses and their incentives to redeem
in a stress event.
• A buffer would mitigate the MMF
industry’s reliance on discretionary, ex
post sponsor support by assuring that
49 See, for example, Craig M. Lewis, ‘‘Money
Market Fund Capital Buffers,’’ (April 6, 2015),
available at https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=2687687; Samuel G.
Hanson, David S. Scharfstein, and Adi Sunderam,
‘‘An Evaluation of Money Market Fund Reform
Proposals,’’ (May 2014), available at https://
www.imf.org/external/np/seminars/eng/2013/mmi/
pdf/Scharfstein-Hanson-Sunderam.pdf.
PO 00000
Frm 00070
Fmt 4703
Sfmt 4703
8951
MMFs already have resources in place
to absorb losses.
• Owners of capital will have
incentives to mitigate risk-taking by the
fund. For example, if capital is provided
by the fund’s sponsor, the sponsor will
have an explicit incentive to manage
portfolio risks to preserve the capital.
Potential drawbacks, limitations, and
challenges:
• A capital buffer financed from
unaffiliated investors could be complex
to administer.
• Sizable capital buffers are costly to
finance, and building adequate capital
buffers from MMF income could take
substantial time, particularly in a low
interest rate environment, and could
disadvantage current MMF investors for
the benefit of future MMF investors.
• Calibrating the appropriate size for
a capital buffer could be a challenge;
MMFs would continue to be vulnerable
if the buffer is too small, but one that
is too large would be unnecessarily
costly.
• A capital requirement could
increase MMF industry concentration
because provision of initial capital
would be a substantial burden for some
asset managers and could cause them to
exit the industry. In addition, such a
requirement may favor bank-sponsored
funds.
Additional considerations:
• The costs of financing a capital
buffer would be borne by MMF sponsors
and investors, and these costs could
result in a reduction in the size of the
prime and tax-exempt MMF sectors. As
noted above, a reduction in the size of
these MMFs could affect the resilience
and functioning of short-term funding
markets in a variety of ways.
I. Require Liquidity Exchange Bank
Membership
To provide a liquidity backstop
during periods of market stress, prime
and tax-exempt MMFs could be
required to be members of a private
liquidity exchange bank. The LEB
would be a chartered bank. Under one
LEB proposal, MMF members and their
sponsors would capitalize the LEB
through initial contributions and
ongoing commitment fees. During times
of market stress, the LEB would
purchase eligible assets from MMFs that
need cash, up to a maximum amount
per fund. The LEB would not be
intended to provide credit support.
Potential benefits:
• The existence of a liquidity
backstop provided by an LEB could
diminish investors’ incentives to run.
• An LEB would commit private
resources, including bank capital, ex
ante to provide liquidity to MMFs. This
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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
framework could partially internalize
the costs of liquidity protection for the
MMF industry and reduce distortions
that can arise from an expectation of
official sector support in times of stress.
• Chartered banks generally have
access to Federal Reserve liquidity
through the discount window, although
the duration and extent of access is not
guaranteed. To the extent that the LEB
has access to the discount window, that
access may further mitigate liquidity
pressures on MMFs and reduce the
likelihood of fire sales.
• Pooling liquidity resources for
MMFs may offer efficiency gains. An
LEB would provide liquidity to MMFs
that need it, rather than requiring each
MMF to hold liquidity separately.
Potential drawbacks, limitations, and
challenges:
• Access to the LEB backstop during
times of market stress, without further
consideration of risk management
measures, could have moral hazard
effects that motivate some funds to take
greater risks in the less-liquid parts of
their portfolios.
• The LEB, which would not provide
traditional banking services, is not
intended to operate as a commercial
bank, and commercial banks are not
organized to buy assets from entities
facing financial difficulties. As such, it
is unclear whether such an entity would
be able to obtain a banking charter.
• Access to the discount window by
the LEB is not guaranteed, particularly
in the size and term that may be needed
to provide material liquidity support to
MMFs under stress.
• To the extent that liquidity
provided by the Federal Reserve
exceeds what is provided to a typical
commercial bank, the LEB would not be
significantly different from other types
of historical official sector support.
• As a bank, the LEB would be
subject to supervision and regulation,
including restrictions on transactions
with affiliate funds.50 In addition,
investors in the LEB may themselves
become bank holding companies. If an
investor became a bank holding
company, it would be subject to
consolidated supervision and
regulation, and would be required to
serve as a source of strength to the
LEB.51
• The LEB would need significant
capital to both be in a position to
provide meaningful liquidity for MMFs
in stress events and be seen as a credible
liquidity backstop. Building adequate
capacity from MMF income could take
several years, particularly in a low
50 12
51 12
U.S.C. 371c; 12 CFR 223.
U.S.C. 1841 et seq.
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18:53 Feb 09, 2021
Jkt 253001
interest rate environment. Moreover, the
need to comply with applicable
leverage-based capital requirements on a
continuous basis—even during periods
of peak usage under stress—could
render the LEB’s lending capacity
insufficiently robust in extremis.
• News that an LEB is running out of
capacity could accelerate runs.
• Requiring fund sponsors to provide
initial capital for an LEB would likely
favor large and bank-affiliated sponsors
and could cause some others to exit the
industry, thus increasing industry
concentration.
• Administering an LEB may raise
complex governance and fairness
concerns, particularly in times of stress.
Additional considerations:
• Requiring membership in an LEB
likely would impose a cost on sponsors
and reduce yields for investors, both of
which could result in a reduction in the
size of the prime and tax-exempt MMF
sectors. As noted above, a reduction in
the size of these MMFs could affect the
resilience and functioning of short-term
funding markets in a variety of ways.
J. New Requirements Governing Sponsor
Support
In times of market stress, sponsor
support has been a tool for stabilizing
MMF share prices and providing
liquidity. Support of funds was
relatively common during the 2008
financial crisis as a number of MMF
sponsors purchased large amounts of
portfolio securities from their MMFs or
provided capital support to their
MMFs.52 However, the discretionary
nature of sponsor support contributes to
uncertainty about who will bear risks in
periods of stress, including when there
is a run on a MMF. Moreover, the
inability of one sponsor to provide
support for a distressed fund accelerated
the run on MMFs in September 2008.
Currently, sponsors may provide
support to MMFs under certain
conditions established by rule 17a–9
under the Act, and must make public
disclosure of any ‘‘financial support’’ to
increase transparency about sponsor
involvement.53 However, bank sponsors
are subject to limits on transactions with
affiliates under section 23A of the
Federal Reserve Act. In March, the
Federal Reserve, in conjunction with the
52 See SEC 2014 Reforms, at paragraph
accompanying footnote 53; 2010 PWG Report. A
sponsor may also provide support when the fund
is not under stress. As one example, a sponsor may
provide support in a form of capital contribution to
maintain a fund’s stable NAV when liquidating a
fund that experienced small losses as assets
matured.
53 See Investment Company Act rule 17a–9 [17
CFR 270.17a–9]; SEC Form N–CR, Part C; and SEC
Form N–MFP, Item C.18.
PO 00000
Frm 00071
Fmt 4703
Sfmt 9990
FDIC and OCC, provided temporary
relief from these restrictions.54 The SEC
staff also issued a temporary no-action
letter in March to permit the purchase
of certain MMF securities by an affiliate
where reliance on rule 17a–9 could
conflict with sections 23A and 23B of
the Federal Reserve Act.55
A regulatory framework governing
sponsor support could clarify who bears
MMF risks by establishing when a
sponsor would be required to provide
support.56
Potential benefits:
• Explicit sponsor support, similar to
a capital buffer, would commit private
resources ex ante to absorb losses,
mitigate risks to MMF shareholders, and
reduce their incentives to redeem in a
stress event.
• Similar to a capital buffer financed
by MMF sponsors, explicit sponsor
support could strengthen sponsors’
incentives to reduce portfolio risks.
Potential drawbacks, limitations, and
challenges:
• Making sponsor support for MMFs
explicit would favor bank-sponsored
funds and would likely increase MMF
industry concentration.
• Making support explicit would
require new official sector oversight to
ensure that sponsors have resources to
provide support.
Additional considerations:
• Formalizing sponsor support would
impose an expected cost on sponsors
and likely would cause them to charge
higher fees to investors, which could
lead to a reduction in the size of the
prime and tax-exempt MMF sectors. At
the same time, explicit support could
boost demand for these funds by making
them less risky. As noted above,
changes in the size of these MMFs could
affect the resilience and functioning of
short-term funding markets in a variety
of ways.
[FR Doc. 2021–02704 Filed 2–9–21; 8:45 am]
BILLING CODE 8011–01–P
54 See Letters dated March 17, 2020, available at
https://www.federalreserve.gov/supervisionreg/
legalinterpretations/fedreserseactint20200317.pdf.
55 See Letter to Susan Olson, Investment
Company Institute (March 19, 2020), available at
https://www.sec.gov/investment/investmentcompany-institute-031920-17a.
56 This reform could also include changes to
obviate the need for future SEC staff no-action
letters relating to the interaction of rule 17a–9 and
certain banking law provisions, which may provide
more certainty with respect to sponsor support.
E:\FR\FM\10FEN1.SGM
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]]>Agencies
[Federal Register Volume 86, Number 26 (Wednesday, February 10, 2021)]
[Notices]
[Pages 8938-8952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02704]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-34188; File No. S7-01-21]
Request for Comment on Potential Money Market Fund Reform
Measures in President's Working Group Report
AGENCY: Securities and Exchange Commission.
ACTION: Request for comment.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (the ``SEC'' or the
``Commission'') is seeking comment on potential reform measures for
money market funds, as highlighted in a recent report of the
President's Working Group on Financial Markets (``PWG''). Public
comments on the potential policy measures will help inform
consideration of reforms to improve the resilience of money market
funds and broader short-term funding markets.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File No. S7-01-21 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-01-21. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov). Typically,
comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Due to pandemic conditions, however, access to the Commission's
public reference room is not permitted at this time. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make publicly available.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this request for
comment. A notification of the inclusion in the comment file of any
such materials will be made available on the Commission's website. To
ensure direct electronic receipt of such notifications, sign up through
the ``Stay Connected'' option at www.sec.gov to receive notifications
by email.
DATES: Comments should be received on or before April 12, 2021.
FOR FURTHER INFORMATION CONTACT: Adam Lovell or Elizabeth Miller,
Senior Counsels; Angela Mokodean, Branch Chief; Thoreau Bartmann,
Senior Special Counsel; Viktoria Baklanova, Senior Financial Analyst;
or Brian Johnson, Assistant Director, at (202) 551-6792, Division of
Investment Management, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION:
I. The President's Working Group Report
The PWG has studied the effects of the growing economic concerns
related to the COVID-19 pandemic in March 2020 on short-term funding
markets and, in particular, on money market funds.\1\ The results of
this study are included in the report issued on December 22, 2020 and
attached to this release as an Appendix (the ``Report'').\2\ The Report
provides an overview of prior money market fund reforms in 2010 and
2014, as well as how different types of money market funds have evolved
since the 2008 financial crisis.\3\ The Report then discusses events in
certain short-term funding markets in March 2020, focusing on money
market funds. In reviewing the events of March 2020, the Report
discusses significant outflows from prime and tax-exempt money market
funds that occurred and how these funds experienced, and began to
contribute to, general stress in short-term funding markets before the
Federal Reserve, with the approval of the Department of the Treasury,
established facilities to support short-term funding markets, including
money market funds. The Report observes that these events occurred
despite prior reform efforts to make money market funds more resilient
to credit and liquidity stresses and, as a result, less susceptible to
redemption-driven runs. Accordingly,
[[Page 8939]]
the Report concludes that the events of March 2020 show that more work
is needed to reduce the risk that structural vulnerabilities in prime
and tax-exempt money market funds will lead to or exacerbate stresses
in short-term funding markets. The Report discusses various reform
measures that policy makers could consider to improve the resilience of
prime and tax-exempt money market funds and broader short-term funding
markets. Many of the measures discussed in the Report could be
implemented by the Commission under our existing statutory authority,
while others may require coordinated action by multiple agencies or the
creation of new private entities.\4\ Moreover, relevant money market
funds could likely implement some of the potential reform measures
fairly quickly, while other measures would involve longer-term
structural changes.
---------------------------------------------------------------------------
\1\ The PWG is chaired by the Secretary of the Treasury and
includes the Chair of the Board of Governors of the Federal Reserve
System, the Chair of the SEC, and the Chair of the Commodity Futures
Trading Commission. For a detailed discussion of the structure and
significance of short-term funding markets and the effects of the
COVID-19 shock, as well as the effects of monetary and fiscal
measures, see SEC staff report, ``U.S. Credit Markets
Interconnectedness and the Effects of COVID-19 Economic Shock,''
(October 2020) (``SEC Staff Interconnectedness Report''), available
at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
The SEC Staff Interconnectedness Report also discusses the effects
of the March 2020 market stress on money market funds, including
heavy outflows from prime and tax-exempt money market funds and
significant inflows for government money market funds.
\2\ The Report is also available at https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-2020.pdf.
\3\ See Money Market Fund Reform, Investment Company Act Release
No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] (amending
rule 2a-7 under the Investment Company Act of 1940 (the ``Act'') to,
among other things, enhance transparency and reduce credit,
liquidity, and interest rate risks of money market fund portfolios);
Money Market Fund Reform; Amendments to Form PF, Investment Company
Act Release No. 31166 (July 23, 2014) [79 FR 47736 (Aug. 14, 2014)]
(amending rule 2a-7 under the Act to address risks stemming from
investor runs, including a floating NAV requirement for all prime
and tax-exempt money market funds sold to institutional investors
and the provision of new gate and fee tools for all prime and tax-
exempt money market funds, including retail funds).
\4\ For example, certain policy measures discussed in the
Report, such as requiring prime and tax-exempt money market funds to
be members of a private liquidity exchange bank, may require
rulemaking by the Commission as well as regulatory action from the
Federal Reserve or other banking regulators.
---------------------------------------------------------------------------
II. Request for Comment
The Commission requests comments on the Report. Comments received
will enable the Commission and other relevant financial regulators to
consider more comprehensively the potential policy measures the Report
identifies and help inform possible money market fund reforms.\5\
Following the comment period, we anticipate conducting discussions with
various stakeholders, interested persons, and regulators to discuss the
options in the Report and the comments we receive.
---------------------------------------------------------------------------
\5\ A Commission staff statement also requested comment on the
Report. See Staff Statement on the President's Working Group Report
on Money Market Funds (Dec. 23, 2020), available at https://www.sec.gov/news/public-statement/blass-pwg-mmf-2020-12-23. With the
issuance of this Commission request for comment, commenters are
encouraged to submit comments to File No. S7-01-21 by following the
instructions at the beginning of this release.
---------------------------------------------------------------------------
We request comment on the potential policy measures described in
the Report both individually and in combination. We also request
comment on the effectiveness of previously-enacted money market fund
reforms, and the effectiveness of implementing policy measures
described in the Report in addition to, or in place of, previously-
enacted reforms. Commenters should address the effectiveness of the
measures in: (1) Addressing money market funds' structural
vulnerabilities that can contribute to stress in short-term funding
markets; (2) improving the resilience and functioning of short-term
funding markets; and (3) reducing the likelihood that official sector
interventions will be needed to prevent or halt future money market
fund runs, or to address stresses in short-term funding markets more
generally. Commenters also may address the potential impact of the
measures on money market fund investors, fund managers, issuers of
short-term debt, and other stakeholders. In addition, we are interested
in comments on other topics commenters believe are relevant to further
money market fund reform, including other approaches for improving the
resilience of money market funds and short-term funding markets
generally. We encourage commenters to submit empirical data and other
information in support of their comments.
By the Commission.
Dated: February 4, 2021.
Vanessa A. Countryman,
Secretary.
Report of the President's Working Group on Financial Markets
Overview of Recent Events and Potential Reform Options for Money Market
Funds
December 2020
Table of Contents
Paragraph
Nos.
I. Overview................................................. 229
II. Background.............................................. 231
A. Money Market Funds--Structure, Asset Types, and 231
Investor Characteristics...............................
B. 2010 and 2014 Reforms................................ 232
1C. State of the Money Market Fund Industry Following 234
the 2008 Financial Crisis..............................
III. Events in March 2020................................... 236
A. Stresses in Short-Term Funding Markets............... 237
B. Stresses on Prime and Tax-Exempt Money Market Funds 239
and Other Money-Market Investment Vehicles.............
C. Taxpayer-Supported Central Bank Intervention......... 242
IV. Potential Policy Measures to Increase the Resilience of 243
Prime and Tax-Exempt Money Market Funds....................
A. Removal of Tie between MMF Liquidity and Fee and Gate 247
Thresholds.............................................
1B. Reform of Conditions for Imposing Redemption Gates.. 248
C. Minimum Balance at Risk.............................. 249
D. Money Market Fund Liquidity Management Changes....... 250
E. Countercyclical Weekly Liquid Asset Requirements..... 251
F. Floating NAVs for All Prime and Tax-Exempt Money 252
Market Funds...........................................
G. Swing Pricing Requirement............................ 253
H. Capital Buffer Requirements.......................... 254
I. Require Liquidity Exchange Bank Membership........... 255
J. New Requirements Governing Sponsor Support........... 256
I. Overview
In March 2020, short-term funding markets came under sharp stress
amid growing economic concerns related to the COVID-19 pandemic and an
overall flight to liquidity and quality among investors. Instruments
underlying these markets include short-term U.S. Treasury securities,
short-term agency securities, short-term municipal securities,
commercial paper (``CP''), and negotiable certificates of deposit
issued by domestic and foreign banks (``NCDs''). Money market funds
(``MMFs'') are significant participants in these markets, facilitating
investment by a broad range of individuals and institutions in the
relevant short-term instruments. Because these short-term instruments
tend to have relatively stable values and MMFs offer daily redemptions,
investors in MMFs often expect to receive immediate liquidity with
limited price volatility. However, in times of stress, these
expectations may not match market conditions, causing investors to seek
to liquidate
[[Page 8940]]
their positions in MMFs. These investor actions, which are motivated by
both the expectation-market condition mismatch and the structural
vulnerabilities of MMFs, can amplify market stress more generally.\6\
---------------------------------------------------------------------------
\6\ For a more detailed discussion of the structure and
significance of short-term funding markets and the effects of the
COVID-19 shock, as well as the effects of monetary and fiscal
measures, see SEC staff report, ``U.S. Credit Markets
Interconnectedness and the Effects of COVID-19 Economic Shock,''
(October 2020) (``SEC Staff Interconnectedness Report''), available
at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf;
Board of Governors of the Federal Reserve System, ``Financial
Stability Report,'' (November 2020) at pp. 13-14, available at
https://www.federalreserve.gov/publications/files/financial-stability-report-20201109.pdf.
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The economic and public policy considerations raised by this
dynamic among investors, MMFs, and short-term funding markets are
multi-faceted and significant. The orderly functioning of short-term
funding markets is essential to the performance of broader financial
markets and our economy more generally. It is the role of financial
regulators to identify and address market activities that have the
potential to impair that orderly functioning. Crafters of public policy
and financial regulation also must recognize that the broad
availability of short-term funding is critical to short-term funding
markets and, for many decades, prime and tax-exempt MMFs have been an
important source of demand in these markets although their market share
has decreased and assets shifted toward government MMFs in the past
decade. In addition, the participation of retail investors in MMFs
raises considerations of fairness and consumer confidence, particularly
in times of unanticipated stress, that can affect regulatory and public
policy responses.
These dynamics and policy considerations were brought into stark
relief in March 2020. While government MMFs saw significant inflows
during this time, the prime and tax-exempt MMF sectors faced
significant outflows and increasingly illiquid markets for the funds'
assets. As a result, prime and tax-exempt MMFs experienced, and began
to contribute to, general stress in short-term funding markets in March
2020. For example, as pressures on prime and tax-exempt MMFs worsened,
two MMF sponsors intervened to provide support to their funds. It did
not appear that these funds had idiosyncratic holdings or were
otherwise distinct from similar funds and, accordingly, it was
reasonable to conclude that other MMFs could need similar support in
the near term. These events occurred despite multiple reform efforts
over the past decade to make MMFs more resilient to credit and
liquidity stresses and, as a result, less susceptible to redemption-
driven runs. When the Federal Reserve quickly took action in mid-March
by establishing, with Treasury approval, the Money Market Mutual Fund
Liquidity Facility (``MMLF'') and other facilities to support short-
term funding markets generally and MMFs specifically, prime and tax-
exempt MMF outflows subsided and short-term funding market conditions
improved.\7\
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\7\ The MMLF makes loans available to eligible financial
institutions secured by high-quality assets the financial
institution purchased from MMFs. The MMLF also received $10 billion
in credit protection from the Treasury's Exchange Stabilization
Fund. Other relevant Federal Reserve facilities include, among
others: (1) The Commercial Paper Funding Facility (``CPFF''), which
provides a liquidity backstop to U.S. issuers of commercial paper;
and (2) the Primary Dealer Credit Facility (``PDCF''), which
provides funding to primary dealers in exchange for a broad range of
collateral.
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Prime and tax-exempt MMFs have been supported by official sector
intervention twice over the past twelve years. In September 2008, there
was a run on certain types of MMFs after the failure of Lehman Brothers
caused a large prime MMF that held Lehman Brothers short-term
instruments to sustain losses and ``break the buck.'' \8\ During that
time, prime MMFs experienced significant redemptions that contributed
to dislocations in short-term funding markets, while government MMFs
experienced net inflows. Ultimately, the run on prime MMFs abated after
announcements of a Treasury guarantee program for MMFs and a Federal
Reserve facility designed to provide liquidity to MMFs.\9\
Subsequently, the Securities and Exchange Commission (``SEC'') adopted
reforms (in 2010 and 2014) that were designed to address the structural
vulnerabilities that became apparent in 2008.
---------------------------------------------------------------------------
\8\ A number of other funds that suffered losses in 2008 avoided
breaking the buck because they received sponsor support. See Money
Market Fund Reform; Amendments to Form PF, Investment Company Act
Release No. 31166 (July 23, 2014) [79 FR 47736 (Aug. 14, 2014)]
(``SEC 2014 Reforms'') at Section II.B.4, available at https://www.sec.gov/rules/final/2014/33-9616.pdf; See also Steffanie A.
Brady, Kenechukwu E. Anadu, and Nathaniel R. Cooper, ``The Stability
of Prime Money Market Mutual Funds: Sponsor Support from 2007 to
2011,'' Federal Reserve Bank of Boston Supervisory Research and
Analysis Working Papers (2012), available at https://www.bostonfed.org/publications/risk-and-policy-analysis/2012/the-stability-of-prime-money-market-mutual-funds-sponsor-support-from-2007-to-2011.aspx. For a description of the term ``break the buck,''
see Section II.A, below.
\9\ For a more detailed discussion of the MMF-related events in
2008, see Report of the President's Working Group on Financial
Markets, ``Money Market Fund Reform Options,'' (October 2010)
(``2010 PWG Report''), available at https://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf.
---------------------------------------------------------------------------
Because prime and tax-exempt MMFs again have shown structural
vulnerabilities that can create or transmit stress in short-term
funding markets, it is incumbent upon financial regulators to examine
the events of March 2020 closely, and in particular the role,
operation, and regulatory framework for these MMFs, with a view toward
potential improvements. In addition, absent regulatory reform or other
action that alters market expectations, these prior official sector
interventions may have the consequence of solidifying the perception
among investors, fund sponsors, and other market participants that
similar support will be provided in future periods of stress.
With that history and context, this report by the President's
Working Group on Financial Markets (``PWG'') begins the important
process of review and assessment.\10\ After providing background on
MMFs and prior reforms, the report discusses events in certain short-
term funding markets in March 2020, focusing on MMFs. The report then
discusses various measures that policy makers could consider to improve
the resilience of MMFs and broader short-term funding markets.\11\ This
report is meant to facilitate discussion. The PWG is not endorsing any
given measure at this time.
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\10\ The PWG is chaired by the Secretary of the Treasury and
includes the Chair of the Board of Governors of the Federal Reserve
System, the Chair of the Securities and Exchange Commission, and the
Chair of the Commodity Futures Trading Commission.
\11\ Given jurisdictional differences, this report is not
intended to cover events in other jurisdictions or to suggest a
uniform international approach to policy changes.
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II. Background
A. Money Market Funds--Structure, Asset Types, and Investor
Characteristics
MMFs are a type of mutual fund registered under the Investment
Company Act of 1940 (the ``Act'') and regulated under rule 2a-7 of the
Act. MMFs offer a combination of limited principal volatility,
liquidity, and payment of short-term market returns, which make them a
popular cash management vehicle for both retail and institutional
investors. These funds also serve as an important source of short-term
financing for businesses and financial institutions, as well as
federal, state, and local governments.
Overall, MMFs tend to invest in short-term, high-quality debt
instruments that typically are held to maturity and
[[Page 8941]]
fluctuate very little in value under normal market conditions. However,
from fund to fund, MMFs vary significantly. They hold different types
of investments, serve investors of different types (i.e., institutional
and retail), and pursue different investment objectives. For example,
tax-exempt MMFs hold short-term state and local government and
municipal securities, while government MMFs almost exclusively hold
obligations of the U.S. government, including obligations of the U.S.
Treasury and federal agencies and instrumentalities, as well as
repurchase agreements collateralized fully by government securities.
Traditionally, prime MMFs invest mostly in private debt instruments,
including CP and NCDs. With regard to investor characteristics, there
are three types of MMFs: (1) Retail MMFs, which are limited to retail
investors; (2) publicly-offered institutional MMFs, which are held
primarily by institutional investors and offered broadly to the public;
and (3) non-publicly-offered institutional MMFs.\12\ Variations in
portfolio holdings also correspond with investor-specific factors such
as taxing jurisdictions and, to some extent, risk/return preferences.
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\12\ For example, funds not offered to the public include
``central'' funds that asset managers use for internal cash
management.
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Another significant difference among different types of MMFs is how
they price the purchase and redemption of their shares. All government
MMFs, as well as retail prime and retail tax-exempt MMFs, are permitted
to price their shares at a stable net asset value (``NAV'') per share
(typically $1.00) without regard to small variations in the value of
the assets in their portfolios. These MMFs must periodically compare
their stable NAV per share to the market-based value per share of their
portfolios (or ``market-based price''). If the deviation between these
two values exceeds one-half of one percent (50 basis points), the
fund's board must consider what action, if any, to take, including
whether to adjust the fund's share price. If the repricing is below the
fund's $1.00 share price, the event is commonly called ``breaking the
buck.'' In light of the importance investors place on a stable $1.00
share price, such an action can lead to a loss of confidence in the
fund and, if it is expected to extend beyond one fund, could lead to a
loss of confidence in all similar funds. As discussed below, following
the SEC's 2014 reforms, institutional prime and institutional tax-
exempt MMFs are required to price their shares using a floating NAV,
which reflects the market value of the fund's investments and any
changes in that value, thus reducing the risk of an adverse signaling
effect from ``breaking the buck.''
As investors commonly use MMFs for principal preservation and as a
cash management tool, many MMF investors may have a low tolerance for
losses and liquidity limitations. However, MMFs offer shareholder
redemptions on at least a daily basis (and in some cases at a stable
NAV), even though a potentially significant portion of portfolio assets
may not be converted into cash in that timeframe without a reduction in
value. When the MMF does have to sell portfolio assets at a discount,
the fund's remaining shareholders generally bear those losses. These
factors can lead to greater redemptions if investors believe they will
be better off by redeeming earlier than other investors--a so-called
``first mover'' advantage--when there is a perception that the fund may
suffer a loss in value or liquidity. Historically, amid periods of
stress for MMFs, institutional investors, who may have large holdings
and the resources to monitor risks carefully, have redeemed shares more
rapidly and extensively than retail investors.
B. 2010 and 2014 Reforms
The SEC has implemented a number of reforms over the past decade
aimed at making MMFs more resilient to credit and liquidity stresses
and addressing structural vulnerabilities in MMFs that were evident in
the 2008 financial crisis, particularly the substantial reforms the SEC
adopted in 2010 and 2014.\13\ The 2010 reforms focused on, among other
things, enhancing transparency and reducing credit, liquidity, and
interest rate risks of fund portfolios to make MMFs more resilient and,
in the case of stable NAV funds, less likely to break the buck. For
example, the amendments introduced new liquidity requirements: At the
time an MMF acquires an asset, it must hold at least 10 percent of its
total assets in daily liquid assets (``DLA'') and at least 30 percent
of its total assets in weekly liquid assets (``WLA'').\14\ These
requirements are designed to work in combination and ensure that a MMF
has the legal right to receive enough cash within one or five business
days to satisfy redemption requests. To address credit risks, the
amendments added a new 120-day limit on funds' portfolio weighted
average life to limit exposure to credit spreads, as well as a
reduction in the limit on funds' portfolio weighted average maturity
from 90 days to 60 days to limit interest rate risk.\15\ The 2010
reforms increased transparency by requiring MMFs to publicly disclose
portfolio holdings each month. In addition, the amendments addressed
other important issues such as stress testing, orderly fund
liquidation, and repurchase agreements.
---------------------------------------------------------------------------
\13\ See Money Market Fund Reform, Investment Company Act
Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)]
(``SEC 2010 Reforms''), available at https://www.sec.gov/rules/final/2010/ic-29132.pdf; SEC 2014 Reforms.
\14\ All MMFs are subject to these DLA and WLA standards, except
tax-exempt MMFs are not subject to DLA standards due to the nature
of the markets for tax-exempt securities and the limited supply of
securities with daily demand features. If a MMF's portfolio does not
meet the minimum DLA or WLA standards, it is not in violation of
rule 2a-7. However, it may not acquire any assets other than DLA or
WLA until it meets these minimum standards.
Daily liquid assets are: Cash; direct obligations of the U.S.
government; certain securities that will mature (or be payable
through a demand feature) within one business day; or amounts
unconditionally due within one business day from pending portfolio
security sales. See rule 2a-7(a)(8).
Weekly liquid assets are: Cash; direct obligations of the U.S.
government; agency discount notes with remaining maturities of 60
days or less; certain securities that will mature (or be payable
through a demand feature) within five business days; or amounts
unconditionally due within five business days from pending security
sales. See rule 2a-7(a)(28).
\15\ See SEC staff report, ``Response to Questions Posed by
Commissioners Aguilar, Paredes, and Gallagher,'' (November 2012) at
pp. 18-30, available at https://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf.
---------------------------------------------------------------------------
The SEC's subsequent 2014 reforms focused on the structural
vulnerabilities that make MMFs susceptible to runs and provided tools
intended to slow runs should they occur.\16\ These reforms included a
floating NAV requirement for all prime and tax-exempt MMFs sold to
institutional investors as a means of mitigating first mover advantages
for investors who redeem from these funds when the value of their
assets decline. Under the floating NAV requirement, these MMFs must
sell and redeem their shares at prices based on the current market-
based value of the assets in their underlying portfolios rounded to the
fourth decimal place (e.g., $1.0000). Prior to the 2014 reforms, rule
2a-7
[[Page 8942]]
permitted these funds to maintain a stable NAV per share like all other
MMFs.
---------------------------------------------------------------------------
\16\ Prior to the 2014 reforms, the Financial Stability
Oversight Council (``FSOC'') proposed recommendations regarding MMF
reforms to address structural vulnerabilities of MMFs that the SEC's
2010 reforms did not address. These proposed recommendations, which
FSOC made pursuant to Section 120 of the Dodd-Frank Act, included
alternatives on a floating NAV, a risk-based NAV buffer of 3 percent
to provide explicit loss-absorption capacity, and a minimum balance
at risk. See Financial Stability Oversight Council, ``Proposed
Recommendations Regarding Money Market Mutual Fund Reform,''
(November 2012) (``FSOC Proposed Recommendations''), available at
https://www.treasury.gov/initiatives/fsoc/Documents/Proposed%20Recommendations%20Regarding%20Money%20Market%20Mutual%20Fund%20Reform%20-%20November%2013,%202012.pdf.
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In addition, to provide tools to slow an investor run should it
occur, the 2014 reforms provided new fee and gate tools for all prime
and tax-exempt MMFs, including retail funds.\17\ Under the fee and gate
provisions, boards of these MMFs are permitted to impose liquidity
(redemption) fees of up to 2 percent or to temporarily suspend
redemptions if the fund's WLA falls below the 30 percent minimum
required. In addition, funds must impose a 1 percent liquidity fee if
WLA falls below 10 percent of total assets, unless the fund's board
determines that imposing the fee is not in the best interests of the
fund. Liquidity fees provide investors continued access to cash
redemptions but may reduce the incentive to redeem. Gates, on the other
hand, stop redemptions altogether for up to ten business days but may
cause investors to seek a first mover advantage and redeem in advance
of the imposition of gates.
---------------------------------------------------------------------------
\17\ Government MMFs are permitted (but not required) to adopt
fee and gate provisions.
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Further, the 2014 amendments enhanced transparency for MMF
investors and provided information about important MMF events more
uniformly and efficiently. For instance, the amendments required MMFs
to promptly report certain significant events in filings with the SEC,
including the imposition or removal of fees or gates, portfolio
security defaults, the use of sponsor support, and a fall in a retail
or government MMF's market-based price per share below $0.9975. The
2014 reforms also generally required website disclosure of these
events, as well as daily website disclosure of a fund's DLA, WLA,
market-based NAV, and net flows. In addition, the reforms addressed MMF
diversification and valuation practices.
C. State of the Money Market Fund Industry Following the 2008 Financial
Crisis
Since 2008, the composition of the MMF sector has changed
substantially, and the industry continued to evolve through 2020. Chart
1 provides information about changes in net assets by type of MMF,
while Chart 2 provides more detail about subcategories of prime and
tax-exempt MMFs (i.e., retail and institutional funds). As of September
30, 2020, total industry net assets were $4.9 trillion, down slightly
from an all-time high of $5.2 trillion in May 2020 (see Chart 1).
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN10FE21.001
[[Page 8943]]
[GRAPHIC] [TIFF OMITTED] TN10FE21.002
BILLING CODE 8011-01-C
The assets of government MMFs (the blue line in Chart 1), which
were under $1 trillion in August 2008, have grown considerably since
then. Much of the growth occurred in 2016, when government MMF assets
increased more than $1 trillion as investors shifted money from prime
and tax-exempt MMFs, which were required, starting in October 2016, to
implement the more significant aspects of the 2014 reforms.\19\ In
March 2020, government MMF assets increased by $840 billion to $3.6
trillion, and their assets reached nearly $4.0 trillion at the end of
April. As of September 2020, government MMFs accounted for 77 percent
of industry net assets.
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\18\ The 2014 amendments introduced a regulatory definition of a
retail MMF (and implemented it in 2016). Because data on
institutional and retail MMFs prior to October 2016 may not be
entirely comparable with current statistics, Chart 2 does not
include data on retail and institutional MMFs prior to October 2016.
The drop in prime retail MMF assets in September 2020 is the
result of a large prime retail MMF converting to a government MMF.
\19\ The compliance date for the floating NAV requirement for
institutional prime and institutional tax-exempt MMFs and for the
fee and gate provisions for all prime and tax-exempt funds was
October 14, 2016.
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The net assets of prime MMFs (the red line in Chart 1) contracted
substantially in the year leading up to the October 2016 deadline for
implementing the 2014 MMF reforms and were $550 billion in December
2016. By February 2020, these funds' assets had recovered to $1.1
trillion, but their assets fell $125 billion on net in March. As of
September 2020, prime MMFs accounted for around 20 percent of industry
net assets.
Net assets in tax-exempt MMFs (the dashed green line in Chart 1)
have also declined since 2008, when these funds had net assets
exceeding $500 billion. Tax-exempt funds' assets fell $120 billion in
the year before October 2016 and were about $135 billion at the end of
2016. By February 2020, tax-exempt fund assets were about $140 billion,
and they declined $9 billion in March 2020. The vast majority of tax-
exempt MMF net assets are in retail funds (see Chart 2). Tax-exempt
MMFs represent under three percent of total industry net assets as of
September 2020.
III. Events in March 2020
Amid escalating concerns about the economic impact of the COVID-19
pandemic in March 2020, market participants sought to rapidly shift
their holdings toward cash and short-term government securities. This
rapid shift in asset allocation preferences placed stress on various
components of short-term funding markets, including prime and tax-
exempt MMFs, the repo markets, the CP market, and short-term municipal
securities markets (including the market for variable-rate demand notes
(``VRDNs'')). As discussed in more detail below, pressures on prime and
tax-exempt MMFs again revealed structural vulnerabilities in MMFs that
led to increased redemptions and, in turn, began to contribute to and
increase the general stress in short-term funding markets.
A. Stresses in Short-Term Funding Markets
Private short-term debt markets. In markets for private short-term
debt instruments, such as CP and NCDs, conditions began to deteriorate
rapidly in the second week of March. Spreads for instruments held by
MMFs began widening sharply (see Chart 3). Specifically, spreads to
overnight indexed swaps (``OIS'') for AA-rated nonfinancial CP reached
new historical highs, while spreads for AA-rated financial CP and A2/
P2-rated nonfinancial CP widened to the highest levels seen since the
2008 financial crisis. Along with widening spreads, new issuance of CP
and NCDs declined markedly and shifted to short tenors. For instance,
the share of CP issuance with overnight maturity climbed steadily to
nearly 90 percent on March 23.
Pricing and liquidity concerns at MMFs were driven by, and began to
contribute to, these market stresses. Widening spreads in short-term
funding markets put downward pressure on the prices of assets in prime
MMFs' portfolios, and redemptions from MMFs likely contributed to
stress in these markets, as prime funds reduced their CP holdings
disproportionately compared to other holders. At the end of February,
prime MMFs offered to the public owned about 19 percent of outstanding
CP.\20\ From March 10 to
[[Page 8944]]
March 24, these funds cut their CP holdings by $35 billion. This
reduction accounted for 74 percent of the $48 billion overall decline
in outstanding CP over those two weeks.\21\ In addition, MMFs with WLAs
close to 30 percent were likely reluctant to purchase assets with
maturities of more than 7 days that would not qualify as WLA to avoid
going below the regulatory requirements.\22\ Beyond MMFs, there were
also other factors contributing to stress in CP markets, including
outflows from other investment vehicles that invest in these markets
(see below).
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\20\ Total CP outstanding at the end of February 2020 was $1.1
trillion (source: Federal Reserve). Holdings of publicly-offered
prime funds are based on data from iMoneyNet. Total prime MMF
holdings of CP, including internal funds that are not offered to the
public, were 29 percent of outstanding CP at the end of February
2020 (source: SEC Form N-MFP).
\21\ About $6 billion of the reduction in MMF holdings of CP
during this time was pledged as collateral to the MMLF.
\22\ Funds with WLAs below the 30 percent minimum threshold are
prohibited from purchasing assets that are not WLAs, including CP
and NCDs with maturities exceeding 7 days. On March 17 and 18, one
prime MMF offered to institutional investors reported WLAs below 30
percent.
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Some market participants have suggested that another contributing
factor to stress in CP markets was that dealers in CP markets (as well
as issuing dealers and banks) were experiencing their own liquidity
pressures and limits on their willingness to intermediate in money
markets.\23\ Historically, however, because the vast majority of CP
typically is held to maturity, dealers have not had a substantial role
in making secondary markets in CP. This is also the case for other
private short-term debt instruments that prime MMFs hold. Thus, there
was no reason to expect dealers to take a materially increased
intermediation role in these assets in March. There are also a large
number of individual issues (i.e., CUSIPs) in the private short-term
debt markets, which adds complexity to intermediation.\24\ In contrast
to the private short-term debt markets, Treasury and agency securities
markets have fewer CUSIPs, large daily trading volumes, and more liquid
secondary markets, with primary dealers and others playing a large
daily intermediation role in these markets.
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\23\ For example, large customer sales increased dealers'
inventories of Treasuries and mortgage-backed securities. Facing
balance sheet constraints and internal risk limits amid the elevated
volatility, dealers cut back on intermediation more generally.
\24\ According to DTCC's Money Market Kinetics report as of
March 31, 2020 (available at https://www.dtcc.com/money-markets),
the 12-month average of daily settlements for fixed and floating
rate CP was approximately $80 billion, although only a small share
of this volume appears to have been secondary market transactions,
and further analysis of secondary market activity is needed. As
previously noted, there was approximately $1.1 trillion of total CP
outstanding at the end of February 2020.
[GRAPHIC] [TIFF OMITTED] TN10FE21.003
Short-term municipal debt markets. Conditions in short-term
municipal debt markets also worsened rapidly in mid-March. Similar to
the relationship between the CP market and prime MMFs discussed above,
stresses in short-term municipal markets contributed to pricing
pressures and outflows for tax-exempt MMFs which, in turn, contributed
to increased stress in municipal markets. Beginning on March 12, tax-
exempt MMFs experienced unusually large redemptions, with outflows
accelerating over the next week. In response, tax-exempt funds reduced
their holdings of VRDNs by about 16 percent ($15 billion) in the two
weeks from March 9 to March 23, with primary dealer VRDN inventories
nearly tripling in the week ending March 18. VRDNs have a demand or
tender feature that allows tax-exempt MMFs to require the tender agent
to repurchase the security at par plus accrued interest. When a tax-
exempt MMF tenders a VRDN, a remarketing agent typically remarkets the
VRDN to other investors at a higher yield (and thus a lower price).
The redemption stresses on tax-exempt MMFs likely contributed to
worsening conditions in short-term municipal debt markets. The SIFMA 7-
day municipal swap index yield, a benchmark weekly rate in these
markets, shot up 392 basis points on
[[Page 8945]]
March 18, as remarketing agents offered VRDNs at higher yields in
response to tax-exempt MMFs putting back their notes to tender agents.
The spike in the SIFMA index yield caused a drop in market-based NAVs
of tax-exempt MMFs (which mostly have stable, rounded NAVs).
B. Stresses on Prime and Tax-Exempt Money Market Funds and Other Money-
Market Investment Vehicles
As part of the general deterioration in short-term funding market
conditions, prime and tax-exempt MMFs experienced heavy redemptions
beginning in the second week of March 2020. Outflows increased quickly,
peaking on March 17 for prime funds (the day the Federal Reserve
announced the CPFF) and on March 23 for tax-exempt funds (one business
day after the Federal Reserve's MMLF was expanded to include tax-exempt
securities).\25\
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\25\ The following discussion provides data on the size of the
largest outflows from different types of MMFs during a given two-
week (10 business day) period in March. These two-week periods do
not necessarily coincide. For example, the two-week period for
institutional prime funds begins two days before that for retail
prime funds, in part because institutional prime funds experienced
heavy redemptions earlier than retail prime funds. Using data for
one-week periods provides qualitatively similar results. For
comparison purposes, we also provide data on outflows for a standard
two-week period from March 9 to March 20 for all types of MMFs,
based on SEC Form N-MFP weekly data.
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Institutional prime fund outflows. Among institutional prime MMFs
offered to the public, outflows as a percentage of fund size exceeded
those in the September 2008 crisis. However, the dollar amount of
outflows from these funds was much smaller in March 2020, in part
because their assets on the eve of the pandemic were less than one-
quarter of their size on the eve of the 2008 crisis. Over the two-week
period from March 11 to 24, net redemptions from publicly-offered
institutional prime funds totaled 30 percent (about $100 billion) of
the funds' assets, and these funds' outflows exceeded 5 percent of
their assets on three consecutive days beginning on March 17. For
comparison, in September 2008, the highest outflows from these funds
over a two-week period were about 26 percent (about $350 billion) of
assets.\26\
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\26\ Data on daily MMF flows are from iMoneyNet. SEC Form N-MFP
provides an official source of weekly flows data (for weeks ending
on Fridays). For the two weeks from March 9 to 20, outflows from
institutional prime funds that are offered to the public (as proxied
by their presence in commercial databases) totaled $90 billion (27
percent of assets). Form N-MFP weekly flows data are not available
for the September 2008 crisis.
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A sizable portion of the institutional prime fund sector's assets
are in funds that are not offered to the public.\27\ These non-public
funds had smaller outflows than their publicly-offered counterparts,
indicating that, on average, the former do not demonstrate the same
vulnerabilities as funds that are offered publicly to a broad range of
unaffiliated institutional investors. This difference may be
attributable to investor characteristics as much as or more than the
nonpublic nature of the offering. Outflows from non-public
institutional prime funds totaled 6 percent ($17 billion) of assets
from March 9 to March 20.\28\
---------------------------------------------------------------------------
\27\ See footnote 12 and accompanying text for an explanation of
publicly-offered funds versus non-public funds.
\28\ Source: SEC Form N-MFP.
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Retail prime fund outflows. Although outflows from retail prime
MMFs as a share of assets in March exceeded retail prime MMF outflows
during the 2008 crisis, the March outflows from retail prime MMFs were
smaller than outflows from institutional prime MMFs. The redemptions
from retail prime MMFs in March began a couple of days after those for
institutional funds. Net redemptions totaled 9 percent (just over $40
billion) of assets over the two weeks from March 13 to 26.\29\ In
September 2008, the heaviest retail outflows over a two-week period
totaled 5 percent of assets. Retail prime funds had about 60 percent
more assets in 2008 than in February 2020, so outflows were similar in
dollar terms in both crises.\30\ Some retail prime MMFs experienced
declining market-based prices in March, but none of these funds
reported a market-based price below $0.9975. Moreover, retail prime MMF
flows in March 2020 appear to have been unrelated to market-based
prices, as funds with lower market-based prices did not experience
larger outflows than other retail prime MMFs.
---------------------------------------------------------------------------
\29\ Source: iMoneyNet daily data. Similarly, data from SEC Form
N-MFP show retail prime fund outflows of 7 percent of assets ($33
billion) over the two week period from March 9 to 20.
\30\ See footnote 18 (explaining that data on institutional and
retail MMFs prior to 2016 may not be entirely comparable with
current statistics).
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Tax-exempt fund outflows and declining market-based prices.
Outflows from tax-exempt MMFs, which are largely retail funds, were 8
percent ($11 billion) of assets during the two weeks from March 12 to
25.\31\ In 2008, when tax-exempt MMF assets were more than four times
larger than in February 2020, such funds had outflows of 7 percent
(almost $40 billion) of assets in one two-week period. In March, some
retail tax-exempt MMFs also had declining market-based prices. Although
none of these funds broke the buck, one fund reported a market-based
price below $0.9975. As with retail prime MMFs, there does not appear
to have been a relationship between a decline in a particular retail
tax-exempt MMF's market-based price and the size of its outflows.
---------------------------------------------------------------------------
\31\ Source: iMoneyNet daily data. Similarly, data from SEC form
N-MFP show tax-exempt fund outflows of 8 percent of assets ($11
billion) over the two weeks from March 9 to 20.
---------------------------------------------------------------------------
Declining WLAs and relation to fees and gates. As prime funds
experienced heavy redemptions, their WLAs declined, and some funds'
WLAs (which must be disclosed publicly each day) approached or fell
below the 30 percent minimum threshold that SEC rules require. Investor
redemptions, which may have been further exacerbated by declining WLAs,
can put additional pressure on fund liquidity during times of stress.
As previously noted, when a fund's WLA falls below 30 percent, the fund
can impose fees or gates on redemptions. Market participants reported
concerns that the imposition of a fee or gate by one fund, as well as
the perception that a fee or gate would be imposed by one fund, could
spark widespread redemptions from other funds, leading to further
stresses in the underlying markets. Although one institutional prime
fund (with assets that declined from $3.8 billion at the end of
February to $1.5 billion at the end of March) had WLAs below the 30
percent minimum, it did not impose a fee or gate in March.
Preliminary research indicates that prime fund outflows accelerated
as WLAs declined, suggesting that the potential imposition of a fee or
gate when a fund's WLA drops below 30 percent encouraged institutional
investors to redeem before that threshold was crossed.\32\
Additionally, some market participants and observers have suggested
that investors' potential motivation to redeem as a MMF moves toward
the 30 percent threshold is primarily driven by concerns about gates,
rather than liquidity fees, because MMF investors have a low tolerance
for being unable to access cash on demand.
---------------------------------------------------------------------------
\32\ See Lei Li, Yi Li, Marco Macchiavelli, and Xing (Alex)
Zhou, ``Runs and Interventions in the Time of COVID-19: Evidence
from Money Funds,'' working paper (2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3607593.
---------------------------------------------------------------------------
Sponsor support. As strains on prime and tax-exempt MMFs worsened,
two fund sponsors provided support for their funds. They did so by
purchasing securities from three prime institutional MMFs and making a
capital contribution to one tax-exempt fund.
Other investment vehicles that invest in securities and other
instruments
[[Page 8946]]
similar to MMFs. Other investment vehicles that invest in instruments
held by MMFs also experienced outflows and stress in March. Short-term
investment funds (``STIFs'') operated by banks, which have assets of
about $300 billion, had outflows in March and experienced related
stress.\33\ Ultra-short corporate bond mutual funds, which had assets
of $200 billion in February 2020, had outflows of $33 billion (16
percent of assets) in March.\34\ In addition, in the two weeks from
March 12 to 25, outflows from European dollar-denominated MMFs
investing in assets similar to U.S. prime MMFs (so-called offshore
MMFs, which are largely domiciled in Ireland and Luxembourg), totaled
25 percent (about $95 billion) of assets.\35\
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\33\ The Office of the Comptroller of the Currency (``OCC''),
which oversees national banks operating STIFs, issued an interim
final rule and an administrative order allowing STIFs to extend
their dollar-weighted average portfolio maturity and dollar-weighted
average portfolio life maturity to alleviate pressure on STIF
management's ability to comply with these maturity limits in light
of stressed market conditions. See Short-Term Investment Funds, 85
FR 16888 (Mar. 25, 2020), available at https://www.occ.gov/news-issuances/federal-register/2020/85fr16888.pdf.
\34\ Source: Morningstar data.
\35\ Source: iMoneyNet data.
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Prime and tax-exempt MMFs' role in short-term funding markets'
stress. Short-term funding markets are interconnected with other market
segments, and stress in one market can lead to stress in others. Prime
and tax-exempt MMFs were not the sole contributors to the pressures in
short-term funding markets.\36\ However, it appears that MMF actions
were particularly significant relative to market size. For example, as
noted above, prime funds reduced their CP holdings disproportionately
compared to other holders.\37\
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\36\ For example, leveraged non-bank entities, such as hedge
funds using Treasury collateral and real estate investment trusts
using agency mortgage-backed security collateral, may have also
contributed to pressure in short-term funding markets. See, e.g.,
FSOC Annual Report 2020 at p. 5, available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf.
\37\ See paragraph accompanying footnote 20.
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C. Taxpayer-Supported Central Bank Intervention
On March 18, 2020, the Federal Reserve, with the approval of the
Secretary of the Treasury, authorized the MMLF, which began to operate
on March 23.\38\ The MMLF provides non-recourse loans to U.S.
depository institutions and bank holding companies to finance their
purchases of specified eligible assets from MMFs under certain
conditions. The non-recourse nature of the loan protects the borrower
from any losses on the asset pledged to secure the MMLF loan. The
Federal Reserve, along with the OCC and Federal Deposit Insurance
Corporation (``FDIC''), also took steps to neutralize the effects of
purchasing assets through the MMLF on risk-based and leveraged capital
ratios and liquidity coverage ratio requirements of financial
institutions to facilitate participation in the facility.\39\ The MMLF
program, in combination with other programs, was intended to stabilize
the U.S. financial system by allowing MMFs to raise cash to meet
redemptions and to foster liquidity in the markets for the assets held
by MMFs, including the markets for CP, NCDs, and short-term municipal
securities.\40\ The Department of the Treasury provided $10 billion of
credit protection to the Federal Reserve in connection with the MMLF
from the Treasury's Exchange Stabilization Fund.\41\ MMLF utilization
ramped up quickly to a peak of just over $50 billion in early April, or
about 5 percent of net assets in prime and tax-exempt MMFs at the time.
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\38\ Information about the MMLF is available on the Federal
Reserve's website at https://www.federalreserve.gov/monetarypolicy/mmlf.htm. The Federal Reserve Bank of Boston operates the MMLF.
\39\ See Regulatory Capital Rule: Money Market Mutual Fund
Liquidity Facility, 85 FR 16232 (March 23, 2020), available at
https://www.federalregister.gov/documents/2020/03/23/2020-06156/regulatory-capital-rule-money-market-mutual-fund-liquidity-facility;
Liquidity Coverage Ratio Rule: Treatment of Certain Emergency
Facilities, 85 FR 26835 (May 6, 2020), available at https://www.federalregister.gov/documents/2020/05/06/2020-09716/liquidity-coverage-ratio-rule-treatment-of-certain-emergency-facilities.
\40\ The MMLF would not have worked in isolation, and other
programs and monetary policy responses would not have worked as well
without the MMLF. See SEC Staff Interconnectedness Report; Marco
Cipriani et al., ``Municipal Debt Markets and the COVID-19
Pandemic,'' (June 29, 2020), available at https://libertystreeteconomics.newyorkfed.org/2020/06/municipal-debt-markets-and-the-covid-19-pandemic.html.
\41\ The CARES Act also temporarily removed restrictions on
Treasury's authority to use the Exchange Stabilization Fund to
guarantee money market funds. See section 4015 of the CARES Act.
This authority has not been used.
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Outflows from prime MMFs abated fairly quickly after the Federal
Reserve's announcement of programs and other actions to support short-
term funding markets and the flow of credit to households and
businesses more generally, including its initial announcement of the
MMLF on March 18.\42\ Overall market conditions also began to improve.
For example, in the CP market, the share of CP issuance with overnight
maturity began to fall on March 24 and spreads to OIS for most types of
term CP started narrowing a few days later. After the expansion of the
MMLF to include municipal securities on March 20 (and VRDNs on March
23), tax-exempt MMF outflows eased and conditions in short-term
municipal debt markets improved. Beyond the MMLF, several other Federal
Reserve actions and announcements in March likely contributed to these
improved conditions. For example, the Federal Open Market Committee
lowered the target range for the federal funds rates twice in March by
a total of 150 basis points. A large increase in open market purchases
of Treasury securities and agency mortgage-backed securities was
announced on March 15, and establishments of the PDCF and the CPFF were
announced on March 17.
---------------------------------------------------------------------------
\42\ See, e.g., ``Federal Reserve Issues FOMC Statement'' (March
15, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm; ``Federal Reserve Actions to
Support the Flow of Credit to Households and Businesses'' (March 15,
2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315b.htm; ``Federal Reserve Board
Announces Establishment of a Commercial Paper Funding Facility
(CPFF) to Support the Flow of Credit to Households and Businesses''
(March 17, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317a.htm; ``Federal Reserve
Board Announces Establishment of a Primary Dealer Credit Facility
(PDCF) to Support the Credit Needs of Households and Businesses''
(March 17, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200317b.htm; ``Federal Reserve
Board Broadens Program of Support for the Flow of Credit to
Households and Businesses by Establishing a Money Market Mutual Fund
Liquidity Facility (MMLF)'' (March 18, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/monetary20200318a.htm.
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While stress affected a variety of money market instruments and
investment vehicles, the broad policy responses from the Federal
Reserve, including the availability of secondary market liquidity for
MMFs through the MMLF, appeared to have had the intended broad calming
effect on short-term funding markets. For instance, although European
dollar-denominated MMFs are not eligible to participate in the MMLF,
outflows from these funds abated shortly after the MMLF began
operations. The resulting stability in short-term funding markets,
along with the fiscal stimulus provided by the CARES Act and the
expectation of continued accommodative monetary policy, facilitated
stability in the capital markets more generally.
IV. Potential Policy Measures To Increase the Resilience of Prime and
Tax-Exempt Money Market Funds
While many of the post-2008 MMF reforms added stability to MMFs,
the events of March 2020 show that more work is needed to reduce the
risk that
[[Page 8947]]
structural vulnerabilities in prime and tax-exempt MMFs will lead to or
exacerbate stresses in short-term funding markets. The following
discussion sets forth potential policy measures that could address the
risks prime and tax-exempt MMFs pose to short-term funding markets.
This report is meant to facilitate discussion. The PWG is not endorsing
any given measure at this time.
These potential policy measures differ in terms of the scope and
breadth of regulatory changes they would require. For example, many of
the potential reforms would apply only to prime and tax-exempt MMFs,
while reforms such as swing pricing could apply to mutual funds more
generally. Moreover, some potential reforms would involve targeted
amendments to SEC rules, which relevant MMFs could likely implement
fairly quickly, while others would involve longer-term structural
changes or may require coordinated action by multiple agencies. The
different measures are not necessarily mutually exclusive, nor are they
equally effective at mitigating the vulnerabilities of prime and tax-
exempt MMFs. Policy makers could combine certain measures within a
single set of reforms. Some policy measures listed below have been
raised for consideration previously, including in the PWG's October
2010 report on MMF reform options and the FSOC's 2012 proposed
recommendations on MMF reform, and warrant renewed consideration in
light of recent MMF stresses.
This report focuses on reform measures for MMFs only. It is
important to recognize MMFs' role in the market events in March 2020
and to examine measures that would address concerns and structural
vulnerabilities specific to MMFs. Although they are beyond the scope of
this report, and as discussed generally above, there were other
stresses in short-term funding markets in March 2020 that may have
contributed to the pressure on MMFs.
As discussed in more detail below, the potential policy measures
for prime and tax-exempt MMFs explored in this report are:
Removal of Tie between MMF Liquidity and Fee and Gate
Thresholds;
Reform of Conditions for Imposing Redemption Gates;
Minimum Balance at Risk (``MBR'');
Money Market Fund Liquidity Management Changes;
Countercyclical Weekly Liquid Asset Requirements;
Floating NAVs for All Prime and Tax-Exempt Money Market
Funds;
Swing Pricing Requirement;
Capital Buffer Requirements;
Require Liquidity Exchange Bank (``LEB'') Membership; and
New Requirements Governing Sponsor Support.
Overarching goals for MMF reform. As a threshold matter, it should
be recognized that the various policy reforms, individually and in
combination, should be evaluated in terms of their ability to
effectively advance the overarching goals of reform. That is:
First, would they effectively address the MMF structural
vulnerabilities that contributed to stress in short-term funding
markets?
Second, would they improve the resilience and functioning
of short-term funding markets?
Third, would they reduce the likelihood that official
sector interventions and taxpayer support will be needed to halt future
MMF runs or address stresses in short-term funding markets more
generally?
Assessment of the MMF reform options. An assessment of the
effectiveness of reform options in achieving these goals should take
into account: (a) How each option would address MMF structural
vulnerabilities and contribute to the overarching goals; (b) the effect
of each option on short-term funding markets and the MMF sector more
broadly, including through its effects on the resilience, functioning,
and stability of short-term funding markets, as well as whether the
reform option would trigger the growth of existing investment
strategies and products, or the development of new strategies and
products, that could either exacerbate or mitigate market
vulnerabilities; and (c) potential drawbacks, limitations, or
challenges specific to each reform option. The reform options
considered in this report seek to achieve the goals in different ways.
For example, some are intended to address the liquidity-related
stresses that were evident in March 2020, while others also touch on
potential credit-related concerns. This menu of options reflects the
possibility that future financial stress events may affect the
liquidity of short-term investments, their credit quality, or both.
(a) How the reform options would seek to achieve the goals.
(1) Internalize liquidity costs of investors' redemptions,
particularly in stress periods. Some options would impose a cost on
redeeming investors that rises as liquidity stress increases to reflect
the costs of redemptions for the fund. These options, particularly
swing pricing and the MBR, could reduce or eliminate first-mover
advantages for redeeming investors and protect investors who do not
redeem.
(2) Decouple regulatory thresholds from consequences such as gates,
fees, or a sudden drop in NAV. Some options, such as those that revise
fee and gate thresholds or introduce the floating NAV for retail prime
and tax-exempt MMFs, could eliminate or diminish the importance of
thresholds (such as 30 percent WLA or an NAV of $0.995) that may spur
investor redemptions. By diminishing the importance of thresholds,
these options could also give MMFs greater flexibility, for example, to
tap their own liquid assets to meet redemptions.
(3) Improve MMFs' ability to use available liquidity in times of
stress. In March 2020, some prime and tax-exempt MMFs may have avoided
using their liquid assets to meet redemptions. Options such as
countercyclical WLA requirements or revisions to fee and gate
thresholds could make MMFs more comfortable in deploying their liquid
assets in times of stress.
(4) Commit private resources ex ante to enable MMFs to withstand
liquidity stress or a credit crisis. When prime and tax-exempt MMFs
have encountered serious strains, official sector interventions have
followed quickly. Options such as capital buffers, explicit sponsor
support, and the LEB could provide committed private resources to
supply liquidity or absorb losses and thus reduce the likelihood that
official sector support would be needed to calm markets.
(5) Further improve liquidity and portfolio risk management.
Changes to liquidity management requirements could include raising
required liquid-asset buffers. Other options could motivate more
conservative risk management by explicitly making fund sponsors or
others responsible for absorbing any heightened liquidity needs or
losses in their MMFs.
(6) Clarify that MMF investors, rather than taxpayers, bear market
risks. Government support has repeatedly provided emergency liquidity
to prime and tax-exempt funds and also has obscured the risks of
liquidity and credit shocks for MMFs. Some options, such as the
floating NAV for retail prime and tax-exempt MMFs, swing pricing, and
the MBR could make risks to investors more apparent.
(b) Effects on short-term funding markets. The reform options are
intended to reduce the structural vulnerabilities of MMFs, which could
make them a more stable source of short-term funding for financial
institutions, businesses, and state and local governments. This would
improve
[[Page 8948]]
the stability and resilience of short-term funding markets.
At the same time, some of the reform options would likely diminish
the size of prime and tax-exempt MMFs, which would also affect the
functioning of short-term funding markets. A shrinkage of MMFs could
reduce the supply of short-term funding for financial institutions,
businesses, and state and local governments. Making prime and tax-
exempt MMFs less desirable as cash-management vehicles also could cause
investors to move to less regulated and less transparent mutualized
cash-management vehicles that are also susceptible to runs that cause
stress in short-term funding markets.
A reduction in the size of prime and tax-exempt MMFs may not
necessarily be inappropriate if, for example, the growth of these funds
has reflected in part the effects of implicit taxpayer subsidies and
other externalities (that is, broader economic costs of runs that are
not borne by investors or the funds). In addition, if these MMFs remain
run prone, a reduction in the size of the industry could mitigate the
effects of future runs from these funds on short-term funding markets.
The aftermath of the 2014 MMF reforms provides a precedent for the
consequences of a substantial reduction in the size of prime and tax-
exempt funds, although a future experience could differ. In the year
before the October 2016 implementation deadline for those reforms,
aggregate prime MMF assets shrank by $1.2 trillion (69 percent) and
tax-exempt MMF assets declined about $120 billion (47 percent).
Nonetheless, to the extent that spreads for instruments held by these
MMFs were affected, they generally widened only temporarily, and
investor migration to other mutualized cash-management vehicles was
largely limited to shifts to government MMFs. (Over the next three
years, prime MMFs regained about half of the 2015-2016 decline.)
These considerations are important, because some of the reform
options could reduce the size of the prime and tax-exempt fund sectors
by:
Reducing attractiveness of prime and tax-exempt MMFs for
investors. The costs associated with some options, such as capital
buffers and LEB membership, may reduce the funds' yields. The MBR would
limit the liquidity of their shares in some circumstances. The floating
NAV requirement and swing pricing would make NAVs more volatile and MMF
shares less cash-like. And investors may view some policies, such as
swing pricing and the MBR, as unfamiliar, restrictive, and complicated.
Increasing costs associated with MMF sponsorship. Some
options, such as the introduction of capital buffers, required LEB
membership, and explicit sponsor support, could raise operating costs
for sponsors. Other options, such as swing pricing and MBR, may also
have sizable implementation costs. Increased costs and operational
complexity could lead to increased concentration and a reduction in the
overall size of the MMF industry.
(c) Potential drawbacks, limitations, and challenges specific to
each option. Evaluation of the reform options also should take into
account potential drawbacks, limitations, and challenges of each
option, such as implementation challenges or limits on an option's
ability to achieve the desired goals. The report discusses these
considerations for each option below.
Several specific policy options are described below, along with a
high-level analysis of the potential benefits and drawbacks of each
option.
A. Removal of Tie Between MMF Liquidity and Fee and Gate Thresholds
Liquidity fees and redemption gates are intended to give MMF boards
tools to stem heavy redemptions by imposing a fee to reduce
shareholders' incentives to redeem or by stopping redemptions
altogether for a period of time. Currently, MMF boards have discretion
to impose fees or gates when WLAs fall below 30 percent of total assets
and generally must impose a fee of 1 percent if WLAs fall below 10
percent, unless the board determines that such a fee would not be in
the best interest of the fund or that a lower or higher (up to 2
percent) liquidity fee is in the best interests of the fund.
Definitive thresholds for permissible imposition of liquidity fees
and redemption gates may have the unintended effect of triggering
preemptive investor redemptions as funds approach the relevant
thresholds. Some preliminary research suggests that redemptions
accelerated in March 2020 from funds with declining WLAs.\43\ Removing
the tie between the 30 percent and 10 percent WLA thresholds and the
imposition of fees and gates is one possible reform. Fund boards could
be permitted to impose fees or gates when doing so is in the best
interest of the fund, without reference to any specific level of
liquidity.
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\43\ See footnote 32, above.
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Potential benefits:
Removing the tie between the WLA thresholds and funds'
ability to impose gates and fees would reduce the salience of these
thresholds and could diminish the incentive for preemptive runs.
This may improve the usability of WLA buffers by making
MMFs more comfortable in deploying their liquid assets in times of
stress.
Potential drawbacks, limitations, and challenges:
While this option would remove a focal point that may
trigger runs, it would do little otherwise to mitigate run incentives.
If MMFs maintain fewer liquid assets (by holding WLA
levels closer to 30 percent) as a result of this change, the funds may
be less equipped to manage significant redemptions without engaging in
fire sales.
Permitting funds to impose fees or gates without reference
to a specific threshold may cause broader contagion if investors fear
the imposition of fees or gates in other funds that otherwise would
have been seen as safe.
B. Reform of Conditions for Imposing Redemption Gates
Reforming rules regarding redemption gates to reduce the likelihood
that gates may be imposed could diminish investors' incentives to
engage in preemptive runs. For example, funds could be required to
obtain permission from the SEC or notify the SEC prior to imposing
gates. Alternatively, fund boards could be required to consider
liquidity fees before gates, making it less likely that gates would be
imposed. Another option could be to lower the WLA threshold at which
gates could be imposed to, for example, 10 percent.
Gate rules also could be reformed to make gates ``soft'' or
``partial.'' With soft gates, for example, if redemptions on a
particular day exceed a certain amount, a fund could reduce each
investor's redemption pro rata to bring total redemptions below that
amount, with remaining redemption amounts deferred to the next business
day (and continuing daily deferrals until all redemption requests are
satisfied). This affords investors at least some liquidity, in contrast
to the complete curtailment of liquidity when a fund suspends all
redemptions.
Potential benefits:
Reforming the rules around gates might reduce concerns
that gates will be imposed immediately upon a breach of the 30 percent
WLA requirement and reduce the salience of that threshold, particularly
if investors are more concerned about gates than fees.
Gates could still be imposed, but only in very dire
conditions when runs on funds are likely anyway.
[[Page 8949]]
This may improve the usability of WLA buffers by making
MMFs more comfortable in deploying their liquid assets in times of
stress.
A ``soft'' or ``partial'' gate could reduce disruptions
caused by the imposition of a gate by allowing shareholders to redeem a
portion of shares as normal, with a portion held for a limited time to
help the fund slow the rate of redemptions during stress periods
without engaging in fire sales.
Potential drawbacks, limitations, and challenges:
If thresholds remain, they could still be focal points for
runs on MMFs.
While this option could reduce the salience of a threshold
that may trigger runs, it would do little otherwise to mitigate run
incentives.
Reducing the likelihood that a gate may be imposed could
reduce the potential utility of gates as a tool to slow investor
redemptions.
Providing the SEC a role in granting permission for
imposition of gates may result in less timely action than the current
framework involving the MMF's board, particularly if multiple MMFs seek
SEC permission in a short period of time, which could allow runs to
continue or accelerate. Absent a threshold, it could be challenging to
develop objective criteria in advance for quickly approving or denying
such requests in a consistent and appropriate manner amid a fast-moving
crisis.
If MMFs maintain fewer liquid assets (by holding WLA
levels closer to 30 percent) as a result of this change, the funds may
be less equipped to manage significant redemptions without engaging in
fire sales.
Like other gates, a ``soft'' (or ``partial'') gate may
spur preemptive runs, but a soft gate may be less effective at slowing
runs than a full gate, as investors can continue to redeem even after a
soft gate has been imposed.
``Soft'' or ``partial'' gates could introduce accounting
and administrative complexities.
C. Minimum Balance at Risk
An MBR is a portion of each shareholder's recent balances in a MMF
that would be available for redemption only with a time delay to ensure
that redeeming investors still remain partially invested in the fund
over a certain time period. As such, even if the investor redeems all
of her available shares, she would still share in any losses incurred
by the fund during that timeframe. A ``strong form'' of MBR would also
put a portion of redeeming investors' MBRs first in line to absorb any
losses, which creates a disincentive to redeem. The size of the MBR
would be a specified fraction of the shareholder's maximum recent
balance (less an exempted amount). An MBR mechanism could be used in a
floating NAV fund to allocate losses only under certain rare
circumstances, such as when the fund suffers a large drop in NAV or is
closed.
Potential benefits:
A properly calibrated ``strong'' MBR could reduce the
vulnerability of MMFs to runs.
A strong MBR can internalize the liquidity costs of
investors' redemptions and thus reduce or eliminate the first-mover
advantage for redeeming investors. It would do so by subordinating a
portion of their shares to put them at greater risk if the fund suffers
a loss. This can weigh against incentives to redeem in a stress event,
so it can be particularly helpful as liquidity costs rise.\44\
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\44\ See, for example, FSOC Proposed Recommendations; Patrick E.
McCabe, Marco Cipriani, Michael Holscher, and Antoine Martin, ``The
Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks
Posed by Money Market Funds,'' Brookings Papers on Economic Activity
(Spring 2013), available at https://www.brookings.edu/wp-content/uploads/2016/07/2013a_mccabe.pdf.
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The disincentive to redeem created by an MBR strengthens
mechanically as stresses increase and put subordinated shares at
greater risk. Hence, the MBR does not create a threshold effect that
might spur redemptions.
Under a strong form of MBR, the subordinated shares of
redeeming investors provide extra loss absorption to protect the
investments of non-redeeming investors.
An MBR could provide more transparency to shareholders
regarding their risk, as shareholders' account information could
include their balances and the size of their MBRs.
Potential drawbacks, limitations, and challenges:
The MBR could present implementation and administration
challenges. For example, MMFs, intermediaries, and service providers
would need to update systems to: (1) Compute the MBR on an ongoing
basis for each shareholder account and update the allocation of
unrestricted, holdback, or subordinated holdback shares for each
account to reflect any additional subscriptions or redemptions and the
passage of time; and (2) prevent a shareholder from redeeming holdback
or subordinated holdback shares in transaction processing systems.\45\
In addition, a ``strong form'' of MBR may create the need to convert
existing MMF shares or issue new subordinated shares to comply with
typical state law limitations on allocating losses to a subset of
shares in a single share class.
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\45\ Many MMF investors hold their shares through intermediaries
(such as broker-dealers, banks, trust companies, and retirement plan
administrators) that establish omnibus accounts with the fund. An
intermediary's omnibus account aggregates shares held on behalf of
its underlying clients or beneficiaries, and the fund does not have
access to information about these underlying clients or
beneficiaries. As a result, intermediaries would be involved in
implementing MBR reforms.
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An MBR mechanism may have different and unequal effects on
investors in stable NAV and floating NAV MMFs. During the holdback
period, investors in a stable NAV MMF would only experience losses if
the fund breaks the buck, but investors in a floating NAV MMF are
always exposed to changes in the fund's NAV and would continue to be
exposed to such risk for any shares held back.
The MBR is an unfamiliar concept in the fund industry that
may result in investor discomfort or confusion, particularly when it is
first introduced.
Calibrating the appropriate size for an MBR could be a
challenge; an MBR that is too small may not create sufficient
disincentives to redeem in stress events, but one that is too large
would unnecessarily reduce the liquidity of the fund's shares.
D. Money Market Fund Liquidity Management Changes
MMFs currently are subject to daily and weekly liquid asset
requirements and must disclose the amount of daily and weekly liquid
assets each day on the fund's website. Changes to liquidity management
requirements could include a new category of liquidity requirements.
For example, instead of focusing solely on daily and weekly liquid
assets, creating an additional category for assets with slightly longer
maturities (e.g., biweekly liquid assets) could strengthen funds' near-
term portfolio liquidity when short-term funding markets become
stressed.
As another alternative, an additional threshold, such as a WLA
threshold of 40 percent, could be set to augment current liquidity
buffers. If a fund's WLAs fell below this threshold, penalties such as
requiring the escrow of fund management fees until the level of WLA is
restored could be imposed on fund managers, rather than investors. This
effectively would require funds to maintain a larger amount of WLAs
than currently required.
Potential benefits:
An additional tier of liquidity may make MMFs more
resilient to significant redemptions by ensuring they maintain assets
that will soon become WLAs. Additional liquidity requirements also
[[Page 8950]]
could limit ``barbell'' strategies (where a fund offsets its short-term
assets with riskier longer-term assets that enhance returns but
increase the riskiness of the fund's portfolio).
Rules to penalize fund managers first for having
inadequate portfolio liquidity have the potential to diminish the
salience of WLA thresholds to investors by ensuring that initial
consequences for crossing the thresholds are not imposed directly on
investors.
Potential drawbacks, limitations, and challenges:
Requiring funds to purchase additional near-term liquid
assets or maintain larger WLAs to avoid penalties might encourage funds
to take greater risks in the less liquid parts of their portfolios,
particularly in a low interest rate environment, absent other measures
to constrain this behavior.
Imposing the escrow of fees or other penalties on fund
managers if WLAs do not meet a new higher minimum requirement could
further diminish the usability of WLA buffers by making MMFs less
comfortable in deploying their liquid assets in times of stress.
Further increases in liquid asset requirements may provide
funds only a little extra time during a run, as institutional prime
fund outflows exceeded 5 percent of assets per day at the height of the
run in March 2020.
Additional liquid asset requirements for MMFs could
heighten roll-over risks for issuers of short-term debt that may see
more demand for issuance in shorter tenors. In addition, to the extent
that new investors would replace MMFs in the tenors outside the near-
term liquidity requirements, transparency regarding the nature of these
investors may be lower.
It is not clear whether the required escrow of fees or
other penalties could be imposed on fund managers in a way that would
not also affect MMF investors (e.g., fund managers may respond by
reducing the amount of fees they waive).
Additional considerations:
Funds that purchase additional near-term liquid assets or
maintain larger WLAs to avoid penalties may generate lower yield
compared to similar investment products, which may reduce investor
demand for such funds. As noted above, a reduction in the size of the
prime and tax-exempt MMF sectors could affect the resilience and
functioning of short-term funding markets in a variety of ways.
E. Countercyclical Weekly Liquid Asset Requirements
During the market stress in March 2020, prime and tax-exempt MMFs
that were close to the 30 percent WLA threshold may have avoided using
their liquid assets to meet redemptions. MMFs' incentives to maintain
WLAs well above the 30 percent minimum, even in the face of significant
outflows, may include the desires to avoid: (1) Prohibitions on
purchasing assets that are not WLAs; (2) raising investor concerns
about the potential imposition of fees or gates; and (3) potential
scrutiny resulting from public disclosure of low WLA amounts. A
countercyclical WLA requirement could reduce some or all of these
concerns. Under this approach, minimum WLA requirements could
automatically decline in certain circumstances, such as when net
redemptions are large or when the SEC provides temporary relief from
WLA requirements. Any thresholds linked to a fund's minimum WLA
requirements (e.g., fee or gate thresholds) would also move with the
minimum.
Potential benefits:
A countercyclical WLA requirement could reduce the
salience of the 30 percent WLA threshold and may lessen redemption
pressures when a fund is near that threshold.
This may improve the usability of WLA buffers by making
MMFs more comfortable in deploying their liquid assets in times of
stress.
Potential drawbacks, limitations, and challenges:
Funds that reduce WLAs in stress events would be less
equipped to manage additional redemptions without engaging in fire
sales.
Even if the WLA threshold is reduced, threshold effects
may still motivate investors to redeem. In addition, investors may
still prefer to redeem from funds that are approaching or breaching the
standard 30 percent threshold, and reduced WLA minimums may in fact
call attention to potential stress and prompt greater investor
outflows.
The benefits of this change for funds' use of liquid
assets may be modest, as current rules do not preclude funds from using
WLAs to meet redemptions or prohibit funds from allowing their WLAs to
fall below 30 percent.
Appropriately calibrating a countercyclical WLA
requirement, including determining whether it would be an automatic
mechanism or one that the SEC has to adjust in a crisis, could be
challenging.
F. Floating NAVs for All Prime and Tax-Exempt Money Market Funds
Retail prime MMFs and retail tax-exempt MMFs currently can use a
rounded NAV and value portfolio assets at their amortized cost, which
permits the funds to sell and redeem shares at a stable share price
(e.g., $1.00) without regard to small variations in the value of the
securities in their portfolios. A floating NAV requirement would ensure
that these MMFs instead sell and redeem their shares at a price that
reflects the market value of a fund's portfolio and any changes in that
value. This would be consistent with floating NAV requirements that
currently apply to institutional prime and institutional tax-exempt
MMFs. Although this option would only affect retail MMFs, those funds
had large outflows in March 2020, and outflows likely would have
continued or worsened without official sector intervention.\46\
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\46\ Retail prime MMFs and tax-exempt MMFs were under stress
during March 2020, with one tax-exempt MMF receiving sponsor
support, although stress among retail funds was less severe than
that for institutional prime MMFs. See Section III.B, above
(explaining that outflows from retail prime funds totaled 9 percent
(or just over $40 billion) of assets during the two weeks from March
13 to 26, and outflows from tax-exempt MMFs--which are largely
retail funds--were 8 percent ($11 billion) of assets during the two
weeks from March 12 to 25).
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Potential benefits:
The floating NAV eliminates the salience of a MMF's NAV
dropping more than 0.5 percent ($0.995). Unlike stable NAV funds, MMFs
with floating NAVs cannot ``break the buck.''
Stable NAVs can create an incentive to redeem when MMF
portfolios assets lose value because redeeming investors can receive
more for their shares than they are worth, while losses are
concentrated among non-redeeming investors. In contrast, a floating NAV
mitigates that incentive to redeem as losses are spread across all
shareholders on a pro rata basis whether they redeem or not. Thus, a
floating NAV requirement may decrease retail prime and tax-exempt MMFs'
vulnerabilities to runs by mitigating the first mover advantage for
redeeming investors.
Floating NAVs make portfolio risks more transparent by
making fluctuations in share values readily observable, which could
better align investors' expectations with the risks of portfolio
holdings.
Potential drawbacks, limitations, and challenges:
A floating NAV requirement would not affect institutional
MMFs, which have historically been the most vulnerable to runs but
already have floating NAVs.
[[Page 8951]]
Institutional prime MMFs with floating NAVs still
experienced runs in March; floating NAVs do not prevent runs.
Additional considerations:
Floating NAVs could result in a reduction in the size of
retail prime and retail tax-exempt MMF sectors by making retail MMF
shares less cash-like, which could reduce investor demand. As noted
above, a reduction in the size of the prime and tax-exempt MMF sectors
could affect the resilience and functioning of short-term funding
markets in a variety of ways.
G. Swing Pricing Requirement
Under current rules, MMF investors redeeming their shares in a
prime or tax-exempt fund typically do not incur the costs associated
with this redemption activity. Instead, these costs are largely borne
by other investors in the fund, and this contributes to a first-mover
advantage for those who redeem quickly in a crisis. Swing pricing
effectively allows a fund to impose the costs stemming from redemptions
directly on redeeming investors by adjusting the fund's NAV downward
when net redemptions exceed a threshold.\47\ That is, when the NAV
``swings'' down, redeeming investors receive less for their shares. A
swing pricing requirement could help ensure that redeeming shareholders
bear liquidity costs throughout market cycles (i.e., not only in times
of market stress). In the United States, an optional swing pricing
framework is permissible for certain mutual funds, but not for MMFs.
Although swing pricing is largely untested for MMFs, it has been
helpful for other types of non-U.S. mutual funds.\48\
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\47\ If a fund has net inflows above the swing threshold, swing
pricing would instead adjust the fund's NAV upward.
\48\ See, for example, Jin, Dunhong, Marcin Kacperczyk, Bige
Kahraman, an Felix Suntheim, ``Swing Pricing and Fragility in Open-
end Mutual Funds,'' IMF Working Paper WP/19/227 (2019); Association
of the Luxembourg Fund Industry, Swing Pricing Updae 2015 (Dec.
2015) (``ALFI Survey 2015'') at 21, available at https://www.alfi.lu/sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015-FINAL.pdf.
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Potential benefits:
A properly calibrated swing pricing mechanism could reduce
the vulnerability of MMFs to runs.
Swing pricing can internalize the liquidity costs of
investors' redemptions and thus reduce or eliminate the first-mover
advantage for redeeming investors. By making redemptions costly, swing
pricing can weigh against incentives to redeem in a stress event, so it
can be particularly helpful as liquidity costs rise. Swing pricing also
benefits investors who do not redeem by reducing dilution to the value
of a fund's shares and insulating these investors from the effects of
others' redemption activity.
Swing pricing can improve long-run fund performance by
reducing dilution.
If swing pricing is available (and used occasionally) in
``normal'' times, its use can help investors understand that they bear
liquidity risks in a MMF. Moreover, regular deployment of swing pricing
would make its use in stress events less unsettling for investors.
Potential drawbacks, limitations, and challenges:
Eligible U.S. mutual funds have yet to implement swing
pricing, largely because implementation would require substantial
reconfiguration of current distribution and order-processing practices.
MMFs could face similar challenges.
Unlike other mutual funds, some MMFs strike their NAVs
more than once per day and allow intraday purchases and redemptions for
any orders received prior to a given NAV strike. The potential
management of swing pricing considerations multiple times per day could
be particularly challenging in times of market stress.
It may be challenging to design and calibrate a swing
pricing mechanism that can effectively internalize liquidity costs for
redeeming investors, especially during stress events.
H. Capital Buffer Requirements
Capital (or ``NAV'') buffers, which could be structured in a
variety of ways, can provide dedicated resources within or alongside a
fund to absorb losses and can serve to absorb fluctuations in the value
of a fund's portfolio, reducing the cost to taxpayers in case of a
run.\49\ For a floating NAV fund, capital buffers could be reserved to
absorb the fund's losses only under certain rare circumstances, such as
when it suffers a large drop in NAV or is closed.
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\49\ See, for example, Craig M. Lewis, ``Money Market Fund
Capital Buffers,'' (April 6, 2015), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2687687; Samuel G.
Hanson, David S. Scharfstein, and Adi Sunderam, ``An Evaluation of
Money Market Fund Reform Proposals,'' (May 2014), available at
https://www.imf.org/external/np/seminars/eng/2013/mmi/pdf/Scharfstein-Hanson-Sunderam.pdf.
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Potential benefits:
A capital buffer adds ex ante loss-absorption capacity to
a MMF that would mitigate MMF shareholders' risk of losses and their
incentives to redeem in a stress event.
A buffer would mitigate the MMF industry's reliance on
discretionary, ex post sponsor support by assuring that MMFs already
have resources in place to absorb losses.
Owners of capital will have incentives to mitigate risk-
taking by the fund. For example, if capital is provided by the fund's
sponsor, the sponsor will have an explicit incentive to manage
portfolio risks to preserve the capital.
Potential drawbacks, limitations, and challenges:
A capital buffer financed from unaffiliated investors
could be complex to administer.
Sizable capital buffers are costly to finance, and
building adequate capital buffers from MMF income could take
substantial time, particularly in a low interest rate environment, and
could disadvantage current MMF investors for the benefit of future MMF
investors.
Calibrating the appropriate size for a capital buffer
could be a challenge; MMFs would continue to be vulnerable if the
buffer is too small, but one that is too large would be unnecessarily
costly.
A capital requirement could increase MMF industry
concentration because provision of initial capital would be a
substantial burden for some asset managers and could cause them to exit
the industry. In addition, such a requirement may favor bank-sponsored
funds.
Additional considerations:
The costs of financing a capital buffer would be borne by
MMF sponsors and investors, and these costs could result in a reduction
in the size of the prime and tax-exempt MMF sectors. As noted above, a
reduction in the size of these MMFs could affect the resilience and
functioning of short-term funding markets in a variety of ways.
I. Require Liquidity Exchange Bank Membership
To provide a liquidity backstop during periods of market stress,
prime and tax-exempt MMFs could be required to be members of a private
liquidity exchange bank. The LEB would be a chartered bank. Under one
LEB proposal, MMF members and their sponsors would capitalize the LEB
through initial contributions and ongoing commitment fees. During times
of market stress, the LEB would purchase eligible assets from MMFs that
need cash, up to a maximum amount per fund. The LEB would not be
intended to provide credit support.
Potential benefits:
The existence of a liquidity backstop provided by an LEB
could diminish investors' incentives to run.
An LEB would commit private resources, including bank
capital, ex ante to provide liquidity to MMFs. This
[[Page 8952]]
framework could partially internalize the costs of liquidity protection
for the MMF industry and reduce distortions that can arise from an
expectation of official sector support in times of stress.
Chartered banks generally have access to Federal Reserve
liquidity through the discount window, although the duration and extent
of access is not guaranteed. To the extent that the LEB has access to
the discount window, that access may further mitigate liquidity
pressures on MMFs and reduce the likelihood of fire sales.
Pooling liquidity resources for MMFs may offer efficiency
gains. An LEB would provide liquidity to MMFs that need it, rather than
requiring each MMF to hold liquidity separately.
Potential drawbacks, limitations, and challenges:
Access to the LEB backstop during times of market stress,
without further consideration of risk management measures, could have
moral hazard effects that motivate some funds to take greater risks in
the less-liquid parts of their portfolios.
The LEB, which would not provide traditional banking
services, is not intended to operate as a commercial bank, and
commercial banks are not organized to buy assets from entities facing
financial difficulties. As such, it is unclear whether such an entity
would be able to obtain a banking charter.
Access to the discount window by the LEB is not
guaranteed, particularly in the size and term that may be needed to
provide material liquidity support to MMFs under stress.
To the extent that liquidity provided by the Federal
Reserve exceeds what is provided to a typical commercial bank, the LEB
would not be significantly different from other types of historical
official sector support.
As a bank, the LEB would be subject to supervision and
regulation, including restrictions on transactions with affiliate
funds.\50\ In addition, investors in the LEB may themselves become bank
holding companies. If an investor became a bank holding company, it
would be subject to consolidated supervision and regulation, and would
be required to serve as a source of strength to the LEB.\51\
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\50\ 12 U.S.C. 371c; 12 CFR 223.
\51\ 12 U.S.C. 1841 et seq.
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The LEB would need significant capital to both be in a
position to provide meaningful liquidity for MMFs in stress events and
be seen as a credible liquidity backstop. Building adequate capacity
from MMF income could take several years, particularly in a low
interest rate environment. Moreover, the need to comply with applicable
leverage-based capital requirements on a continuous basis--even during
periods of peak usage under stress--could render the LEB's lending
capacity insufficiently robust in extremis.
News that an LEB is running out of capacity could
accelerate runs.
Requiring fund sponsors to provide initial capital for an
LEB would likely favor large and bank-affiliated sponsors and could
cause some others to exit the industry, thus increasing industry
concentration.
Administering an LEB may raise complex governance and
fairness concerns, particularly in times of stress.
Additional considerations:
Requiring membership in an LEB likely would impose a cost
on sponsors and reduce yields for investors, both of which could result
in a reduction in the size of the prime and tax-exempt MMF sectors. As
noted above, a reduction in the size of these MMFs could affect the
resilience and functioning of short-term funding markets in a variety
of ways.
J. New Requirements Governing Sponsor Support
In times of market stress, sponsor support has been a tool for
stabilizing MMF share prices and providing liquidity. Support of funds
was relatively common during the 2008 financial crisis as a number of
MMF sponsors purchased large amounts of portfolio securities from their
MMFs or provided capital support to their MMFs.\52\ However, the
discretionary nature of sponsor support contributes to uncertainty
about who will bear risks in periods of stress, including when there is
a run on a MMF. Moreover, the inability of one sponsor to provide
support for a distressed fund accelerated the run on MMFs in September
2008. Currently, sponsors may provide support to MMFs under certain
conditions established by rule 17a-9 under the Act, and must make
public disclosure of any ``financial support'' to increase transparency
about sponsor involvement.\53\ However, bank sponsors are subject to
limits on transactions with affiliates under section 23A of the Federal
Reserve Act. In March, the Federal Reserve, in conjunction with the
FDIC and OCC, provided temporary relief from these restrictions.\54\
The SEC staff also issued a temporary no-action letter in March to
permit the purchase of certain MMF securities by an affiliate where
reliance on rule 17a-9 could conflict with sections 23A and 23B of the
Federal Reserve Act.\55\
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\52\ See SEC 2014 Reforms, at paragraph accompanying footnote
53; 2010 PWG Report. A sponsor may also provide support when the
fund is not under stress. As one example, a sponsor may provide
support in a form of capital contribution to maintain a fund's
stable NAV when liquidating a fund that experienced small losses as
assets matured.
\53\ See Investment Company Act rule 17a-9 [17 CFR 270.17a-9];
SEC Form N-CR, Part C; and SEC Form N-MFP, Item C.18.
\54\ See Letters dated March 17, 2020, available at https://www.federalreserve.gov/supervisionreg/legalinterpretations/fedreserseactint20200317.pdf.
\55\ See Letter to Susan Olson, Investment Company Institute
(March 19, 2020), available at https://www.sec.gov/investment/investment-company-institute-031920-17a.
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A regulatory framework governing sponsor support could clarify who
bears MMF risks by establishing when a sponsor would be required to
provide support.\56\
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\56\ This reform could also include changes to obviate the need
for future SEC staff no-action letters relating to the interaction
of rule 17a-9 and certain banking law provisions, which may provide
more certainty with respect to sponsor support.
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Potential benefits:
Explicit sponsor support, similar to a capital buffer,
would commit private resources ex ante to absorb losses, mitigate risks
to MMF shareholders, and reduce their incentives to redeem in a stress
event.
Similar to a capital buffer financed by MMF sponsors,
explicit sponsor support could strengthen sponsors' incentives to
reduce portfolio risks.
Potential drawbacks, limitations, and challenges:
Making sponsor support for MMFs explicit would favor bank-
sponsored funds and would likely increase MMF industry concentration.
Making support explicit would require new official sector
oversight to ensure that sponsors have resources to provide support.
Additional considerations:
Formalizing sponsor support would impose an expected cost
on sponsors and likely would cause them to charge higher fees to
investors, which could lead to a reduction in the size of the prime and
tax-exempt MMF sectors. At the same time, explicit support could boost
demand for these funds by making them less risky. As noted above,
changes in the size of these MMFs could affect the resilience and
functioning of short-term funding markets in a variety of ways.
[FR Doc. 2021-02704 Filed 2-9-21; 8:45 am]
BILLING CODE 8011-01-P
