Money Market Fund Reform: Dealing with the Fundamental Problem

16 Pages Posted: 30 Jun 2022

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Jeffrey M. Lacker

Federal Reserve Bank of Richmond

John A. Weinberg

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: June, 2022

Abstract

After the events in March 2020, it became clear to policymakers that the 2014 reform of the money market funds (MMFs) industry had not successfully addressed all associated stability concerns related to surges in withdrawals. In December 2021, the SEC proposed a new set of rules governing how money market funds can operate. A fundamental problem behind the instability of (some) money market funds is the expectation that backstop liquidity support will be provided by the government in the event of financial distress, along with the government's inability to credibly commit to not provide such support. This expectation dampens funds' incentives to take steps ahead of time to mitigate the risk of sudden withdrawals. The newly proposed reforms aim to address this problem by constraining withdrawals or penalizing them with "swing pricing." We argue that if the commitment problem is the fundamental issue, it would be more useful to reduce expectations of ex post support by requiring MMFs to have contractual commitments in place, ex ante, for liquidity support from private parties.

Keywords: Money market funds, prime money market, Securities and Exchange Commission, regulation

Suggested Citation

Ennis, Huberto M. and Lacker, Jeffrey M. and Weinberg, John A., Money Market Fund Reform: Dealing with the Fundamental Problem (June, 2022). FRB Richmond Working Paper No. 22-8, Available at SSRN: https://ssrn.com/abstract=4150160 or http://dx.doi.org/10.21144/wp22-08

Huberto M. Ennis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Jeffrey M. Lacker

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8279 (Phone)
804-697-8461 (Fax)

HOME PAGE: http://www.richmondfed.org

John A. Weinberg

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States
804-697-8205 (Phone)
804-697-8255 (Fax)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
50
Abstract Views
187
PlumX Metrics