The Federal Reserve Bank of Boston published, "Money Market Mutual Funds: Runs, Emergency Liquidity Facilities, and Potential Reforms." The new paper, authored by Kenechukwu Anadu and Siobhan Sanders, states, "Twice in the past 12 years, prime and tax-exempt money market mutual funds (MMMFs), collectively non-government MMMFs, have experienced large investor redemptions and runs. In both cases, the runs contributed to significant strains in short-term funding markets, an important source of funding for businesses and municipalities. These strains only abated after the Board of Governors of the Federal Reserve System and the United States Department of the Treasury took emergency actions, including the establishment of lending facilities for non-government MMMFs."

Its summary continues, "Policymakers are now examining potential reform options to enhance non-government funds' resilience and reduce run risk. An option worth examining is a requirement that all non-government MMMFs convert to government MMMFs, which remained resilient -- and even experienced large inflows -- during periods in which non-government funds experienced runs."

The paper explains, "The remainder of this note is organized as follows. Sections 2 and 3, respectively, describe past runs on non-government MMMFs and the impact of these runs on the short-term funding markets. Section 4 discusses official sector actions that were taken to stem the runs. Past and potential reforms are described in Section 5. The penultimate section highlights some cash management vehicles that may have vulnerabilities like those of non-government funds. A conclusion follows in Section 7."

The Introduction says, "During the 2008 global financial crisis, prime MMMFs experienced large investor redemptions and runs. Amid the onset of the COVID-19 pandemic in the U.S. in March of 2020, prime MMMFs experienced runs like those observed nearly 12 years earlier. Net outflows from prime MMMFs were approximately 19 percent and 17 percent in the worst two weeks of the MMMF runs in 2008 and 2020, respectively. In contrast, over the same reporting periods in 2008 and 2020, government MMMFs experienced large net inflows in the wake of investor flight to safety." (Note: The Boston Fed paper doesn't include a large portion of the Prime Inst MMF market that the SEC and Crane Data track, so our totals show a much milder outflow from Prime.)

A section on "Official sector interventions," tells us, "With approval from the U.S. Treasury, the Board of Governors of the Federal Reserve System took numerous emergency actions in 2008 and 2020, including those aimed at halting runs on MMMFs and restoring the functioning of the broader short-term funding markets. Specifically, under authorization from the Board of Governors, the Federal Reserve Bank of Boston established the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) in 2008 and the Money Market Mutual Funds Liquidity Facility (MMLF) in 2020."

On past and future reforms, the Boston Fed team writes, "During the 2014 reform deliberations, some academics and policy makers noted that fees and gates could serve as potential run accelerants.... `There is some evidence that concerns about fees and gates exacerbated runs. For example, Figure 3 suggests that institutional prime funds with WLA levels below 40 percent of net assets tended to experience more rapid net outflows in March 2020. Li et al. (2020) examined this empirically and found that institutional prime funds' outflows were highly sensitive to WLA during the COVID-19 crisis -- funds with lower WLA had larger outflows -- and the sensitivity of WLA was greater than in previous crises. To be sure, these observations do not suggest that runs would not have occurred absent the linkage between fees and gates and WLA levels, as funds with higher holdings of WLA also experienced large outflows."

They continue, "Policy makers are now examining potential reform options for MMMFs. One option worth examining is to require institutional and retail prime and tax-exempt MMMFs to convert to government funds. The potential benefits of this option are three-fold. First, the requirement is relatively simple to implement, and market adjustment to this change could be facilitated by an appropriately lengthy transition period. Second, government MMMFs have proved resilient during prior periods of severe stress. Therefore, this option reduces the vulnerabilities arising from the MMMF sector. Finally, the likelihood of future official sector support for MMMFs is substantially reduced under this option."

The paper adds, "One obvious drawback is the reduced demand for short-term corporate and municipal debt held by non-government MMMFs. However, evidence from prior instances in which MMMF holdings changed significantly suggest that the effects of a further reduced prime and tax-exempt industry on the broader funding markets would be transitory."

Anadu and Sanders also say, "Besides U.S. MMMFs, other cash management vehicles that invest substantially in short[1]term debt instruments also experienced varying degrees of stress last March (Financial Stability Report (2021)). These vehicles may be suitable substitutes for some investors in non-government MMMFs. Accordingly, the risk-mitigation benefits of any potential reforms to MMMFs depend, in large part, on the degree to which activities migrate to other structures with similar vulnerabilities."

The paper states, "We highlight two potential MMMF substitutes: short-term investment funds (STIFs) and ultrashort-bond mutual funds, which hold approximately $322 and $246 billion in assets, respectively, and have both grown in recent years.... Available data shows STIF assets increased from December 2019 to March 2020, alas, granular data on STIFs are not available. Therefore, the aggregated data likely masks shifts from prime-like into government-like STIFs during the stress period, as was seen in MMMFs. Ultrashort-bond Mutual Funds (MFs), SEC-registered funds that invest substantially in short-term debt instruments, also experienced large outflows in March 2020."

A footnote explains, "STIFs are collective investment funds (CIFs) that typically seek to maintain a stable NAV. The primary Federal regulators of CIF sponsors are the Office of the Comptroller of the Currency (OCC), Federal Reserve, or the Federal Deposit Insurance Corporation, depending on the type of sponsor. CIFs administered by state-chartered, limited purpose trust companies are overseen by the relevant chartering agencies. CIFs administered by OCC-regulated entities are governed by Rule 9.18, which was amended in 2012 to require, among other things, that STIFs maintain a WAM and WAL of 60 and 120 days, respectively, and report detailed portfolio data to the OCC. The degree to which non-OCC regulated CIF sponsors follow Rule 9.18 varies by state."

Finally, the paper tells us, "To reduce the likelihood that risk from prime and tax-exempt funds migrate into other structures with similar vulnerabilities, policy makers should consider specific enhancements to transparency and regulation for those structures as they are considering MMMF reforms. Possible measures could include enhanced transparency and disclosure for STIFs and mandatory swing pricing for ultrashort-bond funds."

The piece concludes, "MMMFs play an important role in short-term funding markets. The 2008 runs on prime and tax-exempt funds (or non-government funds) revealed the vulnerabilities in MMMF structures. Post-crisis reforms promulgated by the SEC mitigated some of these risks; however, the subsequent runs in 2020 suggests that vulnerabilities remain. Academics, policy makers, and industry participants are now exploring various reform options for MMMFs. An option worth examining is to require all non-government MMMFs to convert to government funds. Notably, the largest prime fund sponsor did so on its own last year. Policy makers should also pay attention to other cash management vehicles that may have similar vulnerabilities to non-government funds, and, as needed, consider potential reforms to ensure that the risks from non-government funds does not migrate to other vehicles such that the net effects of any new reforms is diminished."

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