Changing Rule 2a-7 and the Risk Profiles of Money Market Mutual Funds

15 Pages Posted: 1 Jul 2016

See all articles by Ozzy (Ozgur) Akay

Ozzy (Ozgur) Akay

Office of Financial Research, US Department of the Treasury

Mark D. Griffiths

Miami University of Ohio - Department of Finance

Drew B. Winters

Texas Tech University

Date Written: 2015

Abstract

Rule 2a-7 defines the quality, maturity and diversity of investments allowed in money market fund (MMF) portfolios. Following the financial crisis, the Securities and Exchange Commission (SEC) modified this rule to improve the liquidity and the credit quality (valuation) of MMFs. We analyze the portfolio compositions of 295 taxable MMFs to determine if liquidity and credit quality (valuation) were problems during the crisis and whether the changes to the earlier rule address the issues. We find that the problems in the MMF industry during the crisis stem principally from valuation issues and argue that the modifications to Rule 2a-7 are only a partial solution towards making MMFs more resilient to market disruptions. We propose a two-tier system based on asset classes, where Tier One would comprise traditional informationally-insensitive and transparent money market securities and Tier Two would allow less transparent, more risky qualifying securities.

Suggested Citation

Akay, Ozzy (Ozgur) and Griffiths, Mark D. and Winters, Drew B., Changing Rule 2a-7 and the Risk Profiles of Money Market Mutual Funds (2015). Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 25, No. 1, 2015, Available at SSRN: https://ssrn.com/abstract=2802551

Ozzy (Ozgur) Akay

Office of Financial Research, US Department of the Treasury ( email )

717 14th Street, NW
Washington, DC 20005
United States
202-927-8274 (Phone)

Mark D. Griffiths

Miami University of Ohio - Department of Finance ( email )

Oxford, OH 45056
United States

Drew B. Winters (Contact Author)

Texas Tech University ( email )

Finance Department
Rawls College of Business
Lubbock, TX 79409
United States
806-742-3350 (Phone)
806-742-3197 (Fax)

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