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October 21, 2016

From the Vault: Funds, Flight, and Financial Stability

The money market industry is in the midst of significant change. With the implementation this month of new Securities and Exchange Commission rules designed to make money market funds (MMFs) more resilient to stress, institutional prime and tax-exempt funds must report more accurate prices reflecting the net asset value (NAV) of shares based on market prices for the funds’ asset holdings, rather than promising a fixed NAV of $1 per share. The rules also permit prime funds, which invest in a mixture of corporate debt, certificates of deposit, and repurchase agreements, to impose fees or set limits on investors who redeem shares when market conditions sharply deteriorate. (Funds investing in government securities, which are more stable, are not subject to the new rules.) These changes, driven by a run on MMFs at the height of the financial crisis, add to earlier risk-limiting rules on portfolio holdings.

In what is being described as a “big sort,” institutional MMF investors are rethinking their strategies for where to place large pools of cash; many are shifting investments from prime funds to funds that invest only in government securities, while others remain in place or undecided about their next move. Meanwhile, critics continue to debate whether the new rules go far enough, or perhaps too far. For readers interested in learning more, numerous posts in the Liberty Street Economics archive help illuminate the issues underlying the reforms.

In “Money Market Funds and Systemic Risk,” our bloggers examine the vulnerability of MMFs, and show why, in theory, a floating NAV could stanch runs. As they explain, the end of “NAV rounding” (MMFs traditionally rounded their shares to $1 per unit even if the market NAV was only within a half penny of $1) would temper investors’ rush to redeem shares before others do when a fund suffers a loss, since there would be no more opportunity for arbitrage between the stable share price and the true value of the MMF share.

Elsewhere on the blog, our authors looked at the extent to which sponsor support has been vital to maintaining MMFs’ price stability. Their analysis, using information collected by regulators, showed that while the catalyst for the September 2008 run on MMFs—the Reserve Primary Fund—was the only fund to officially “break the buck” during the crisis, at least twenty-eight other funds would have also done so had their sponsors not provided crucial support in the form of cash infusions and purchases of the funds’ securities at above-market prices. The bloggers called for reforms “that would provide a form of stability to the MMF industry not predicated on voluntary and uncertain support from sponsors.”

Our bloggers also explored MMFs’ significance as a potential source of systemic risk, particularly through MMFs’ increasing importance as a funding source for banks in recent decades. A check of the data at the end of 2012 revealed that MMFs held 43 percent of financial commercial paper, 29 percent of certificates of deposit, and 33 percent of repo agreements, prompting consideration of possible spillovers if MMFs reacted to run-like redemptions by fire-selling the bank assets in their portfolios.

Other blog analysis paid close attention to MMF investor movements during unsettling periods, such as the large outflows from prime funds that were exposed to the U.S. debt-ceiling and European debt crises in 2011, and weighed the pros and cons of fees and gates to reduce the run risk posed by investor redemptions.

Reading List

Money Markets and Systemic Risk

Marco Cipriani, Michael Holscher, Antoine Martin, and Patrick McCabe

The Fragility of an MMF-Intermediated Financial System
Marco Cipriani, Antoine Martin, and Bruno Maria Parigi

Twenty-Eight Money Market Funds That Could Have Broken the Buck: New Data on Losses during the 2008 Crisis

Marco Cipriani, Michael Holscher, Antoine Martin, and Patrick McCabe

Pick Your Poison: How Money Market Funds Reacted to Financial Stress in 2011
Neel Krishnan, Antoine Martin, and Asani Sarkar

Gates, Fees, and Preemptive Runs

Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno M. Parigi


The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Anna Snider is a cross-media editor in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this blog post:

Anna Snider, “From the Vault: Funds, Flight, and Financial Stability,” Federal Reserve Bank of New York Liberty Street Economics (blog), October 21, 2016,


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Thank you for sharing your views on the new rules. The impact of the new rules for MMF investors is still not clear. Lets hope we will get a clear picture in the coming months.

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