ICI published a new "Viewpoint," entitled, "On Closer Look, a Very Different Picture of Funds' Role in the Commercial Paper Market." Author Shelly Antoniewicz tells us, "New analysis by ICI shows that prime money market funds did not pull back significantly from the commercial paper market during the height of the market turmoil and 'dash for cash' triggered by the COVID-19 health crisis in March 2020. That's not what the President's Working Group on Financial Markets report on money market funds (PWG Report) suggests. That report notes that two categories of prime money market funds -- public institutional funds and retail funds -- reduced their holdings of commercial paper by $35 billion from March 10 to March 24, and 'this reduction accounted for 74 percent of the $48 billion overall decline in outstanding commercial paper over those two weeks.' The implication: prime money market funds helped fuel the meltdown in the commercial paper market." (Note: Thanks again to those who attended last week's ESG & Social Money Fund Update! Click here to see the recording or visit our Money Fund Webinars 2021 page to access the Powerpoint.)

She explains, "The PWG Report leaves out three critical facts, and taking those into account produces a very different picture of prime money market fund activity in the commercial paper market -- especially when combined with new ICI research on the daily purchases and sales by those funds. What does the PWG Report fail to say? First, the time period the PWG analyzed straddles the March 18 announcement of the Federal Reserve's Money Market Mutual Fund Liquidity Facility (MMLF) -- a facility designed to buy commercial paper from prime money market funds. Two-thirds of the reduction in prime funds' commercial paper holdings cited by the PWG -- $23 billion of the $35 billion -- occurred after the Fed's announcement and was driven by funds' sales of commercial paper that were ultimately pledged to the facility. Those sales did not destabilize the commercial paper market -- indeed, the Fed explicitly stated that sales to the MMLF helped relieve stresses."

The ICI post continues, "Second, prime money market funds' sales of commercial paper during the market turmoil were a small share of the $28.8 billion decline in outstanding nonfinancial and financial commercial paper in the week ended March 18. Public institutional and retail prime money market funds together reduced their holdings of such commercial paper during that week by only $5.6 billion -- accounting for only 19 percent of the total reduction. The rest -- 81 percent of the decline -- was driven by other participants in the commercial paper market."

It says, "Third, sales of commercial paper to the MMLF after March 18 were driven largely by prime money market funds' efforts to keep their weekly liquid assets well above the 30 percent threshold that could trigger fees or gates on the funds. In other words, funds sold commercial paper to avoid a regulatory tripwire that is a legacy of the prior round of money market fund reform in 2014."

The Viewpoint adds, "Taken together, these three critical facts undermine claims that prime money market funds caused the commercial paper market to freeze in March 2020. They also demonstrate that regulators must examine the activities and behavior of all market participants before proposing reforms for prime money market funds. Only by doing so will policymakers make progress toward their goal of making the financial system more resilient in the face of a liquidity shock of the nature experienced in March 2020."

It summarizes, "In this blog post, I'll discuss the first two sets of facts above -- the experience of prime money market funds during the market turmoil prior to the Fed's March 18 MMLF announcement. In a related post, I'll present new research on how prime money market funds used the MMLF to keep their weekly liquid assets well above the 30 percent threshold -- a regulatory constraint that effectively precluded funds from using much of their existing liquidity to meet redemptions."

In other news, the New York Times writes, "Money Market Funds Melted in Pandemic Panic. Now They're Under Scrutiny." The article explains, "The Federal Reserve swooped in to save money market mutual funds for the second time in 12 years in March 2020, exposing regulatory shortfalls that persisted even after the 2008 financial crisis. Now, the savings vehicles could be headed for a more serious overhaul."

The piece continues, "The Securities and Exchange Commission in February requested comment on a government report that singled out money market funds as a financial vulnerability -- an important first step toward revamping the investment vehicles, which households and corporations alike use to eke out higher returns on their cashlike savings. Treasury Secretary Janet L. Yellen has repeatedly suggested that the funds need to be fixed, and authorities in the United States and around the world have agreed that they were an important part of what went wrong when markets melted down a year ago."

It tells us, "The reason: The funds, which contain a wide variety of holdings like short-term corporate debt and municipal debt, are deeply interlinked with the broader financial system. Consumers expect to get their cash back rapidly in times of trouble. In March last year, the funds helped push the financial system closer to a collapse as they dumped their holdings in an effort to return cash to nervous investors."

The Times also says, "But there are questions about whether the political will to overhaul the fragile investments will be up to the complicated task. Regulators were aware that efforts to fix vulnerabilities in money funds had fallen short after the 2008 financial crisis, but industry lobbying prevented more aggressive action. And this time, the push will not be riding on a wave of popular anger toward Wall Street. Much of the public may be unaware that the financial system tiptoed on the brink of disaster in 2020, because swift Fed actions averted protracted pain."

They add, "Division lines are already forming, based on comments provided to the S.E.C. The industry used its submissions to dispute the depth of problems and warn against hasty action. At least one firm argued that the money market funds in question didn't actually experience runs in March 2020. Those in favor of changes argued that something must be done to prevent an inevitable and costly repeat."

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