The Money Market Investor Funding Facility

Abstract

The authors review the creation and economic rationale for the Money Market Investors Funding Facility (MMIFF), a Federal Reserve facility designed to provide liquidity to money market mutual funds and securities lenders. Put in place in October 2008 under Section 13(3) of the Federal Reserve Act that allows the Federal Reserve to lend to nonbanks, the MMIFF was one of a number of policy actions taken to stem the excessive withdrawals by money fund shareholders in the wake of losses experienced by many prime funds after the Lehman Brothers bankruptcy. One challenge in designing an appropriate method for money funds to access an alternative source of liquidity is that money funds may not borrow. Instead, they hold tradable debt instruments, with prime funds holding large amounts of commercial paper, as assets and issue shares, rather than deposits, as liabilities. In October 2008 trading in commercial paper became highly illiquid, causing the funds' strategy of selling commercial paper to meet shareholder withdrawal demands to be very costly. The MMIFF is designed to allow money funds to sell commercial paper to the facility even in a market that is otherwise highly illiquid or frozen. Its design is a novel approach to provide an official liquidity backstop for financial institutions that hold tradable securities and are not allowed to take on leverage. Its design features may be applied to the provision of liquidity to tradable securities more generally.

Keywords: Federal Reserves, Money Markets, Liquidity

JEL Classification: E44, E58