September 26, 2019
Money Market Mutual Funds: A Financial Stability Case Study
A money market mutual fund (MMF) is a mutual fund that
transmission of risks from one event to broadly affect the
under Securities and Exchange Commission (SEC) Rule 2a-
confidence and functioning of the financial system as a
7 can invest only in high-quality, short-term debt securities,
whole.
such as U.S. Treasury bills or commercial paper (a type of
corporate debt). MMFs are commonly considered as safe
MMFs pose financial stability concerns because they
alternatives to bank deposits, although they are not
demonstrated during the 2008 market events that they were
federally insured like bank deposits. However, this
susceptible to sudden large redemptions (runs), causing
perceived-to-be-safe financial instrument triggered major
dislocation in short-term funding markets. Share
market disruptions in 2008 that accelerated the 2007-2009
redemption is the MMF feature that is often discussed
financial crisis. This case study explains the incident, the
under the context of runs.
post-crisis reforms, and the ongoing policy debate.
Redemptions at Per Share Net Asset Value
MMFs and the 2007-2009 Financial Crisis
Share redemption allows MMF investors to exit their
On September 15, 2008, Lehman Brothers Holdings Inc., an
investment positions by selling their shares back to the fund
investment bank, filed for bankruptcy. The next day, one
on demand. Investors redeem MMF shares at per share net
prominent MMF—the Reserve Primary Fund—saw its per
asset value (NAV), meaning the value of a fund’s assets
share price fall from $1.00 to $0.97 after writing off its
minus liabilities. Prior to the 2007-2009 crisis, MMFs
Lehman debt. This event triggered an array of market
generally maintained a stable NAV at $1.00 per share,
reactions, including investors’ redemptions of more than
paying dividends as their value rises, thus closely
$250 billion throughout the MMF industry within a few
mimicking the features of a bank deposit. If its stable NAV
days of the bankruptcy. The consequences of these actions
drops below $1.00, which rarely occurs, although it
were potentially so dire to U.S. financial stability that the
occurred in 2008, it is said that the MMF “broke the buck.”
government ultimately intervened:
MMFs are susceptible to runs because investors have an
 The Treasury Department provided explicit temporary
incentive to redeem shares before others do when there is a
deposit insurance to all MMF investors. Over its life, the
perception that the fund could suffer a loss. Thus when the
program guaranteed more than $3 trillion in deposits
Reserve Primary Fund broke the buck, MMF investors
and earned $1.2 billion in insurance coverage fees, but
elsewhere also rushed to exit their positions, spreading fear
no guaranteed funds failed. Treasury announced this
that MMFs, and even the broader financial system, were
program without seeking specific congressional
vulnerable, regardless of whether actual losses occurred.
authorization, justifying the program on the grounds that
guaranteeing MMFs would protect the value of the
Post-Crisis Reforms
dollar. After the fact, Congress addressed the guarantee
MMFs are regulated primarily under the Investment
in the Emergency Economic Stabilization Act (P.L. 110-
Company Act of 1940 (P.L. 76-768) and Rule 2a-7
343), reimbursing the exchange stability fund (ESF) that
pursuant to the act. To mitigate MMFs’ systemic risk, the
backed the guarantee, but also forbidding the future use
SEC reformed Rule 2a-7 in a multi-year process:
of the ESF to provide such a guarantee.
February 2010—SEC adopted certain Rule 2a-7
 The Federal Reserve System also established multiple
amendments to strengthen MMF liquidity.
emergency liquidity facilities under its statutory
March 2011—SEC proposed rules to eliminate certain
authority invoked by “unusual and exigent
circumstances”
references to credit ratings in MMF reforms. The rules were
in September and October of 2008 to
re-proposed in July 2014 and adopted in September 2015.
provide a backstop to MMFs and commercial paper as
part of a broader crisis response. These programs
June 2013—SEC proposed rules to convert institutional
expired without loss between late 2009 and early 2010.
prime and institutional municipal MMFs to floating NAV.
March 2014—SEC issued multiple MMF economic studies
(See CRS Report R43413, Costs of Government
to solicit public comments.
Interventions in Response to the Financial Crisis: A
Retrospective
, by Baird Webel and Marc Labonte.)
July 2014—SEC finalized the 2014 MMF reform.
Financial Stability Considerations
October 2016—SEC MMF reform became effective.
Threats to financial stability, or systemic risk, can be
The main types of MMFs are (1) municipal, also referred to
viewed in different ways (e.g., spillover, contagion, and
as tax-exempt, which invest in national or state municipal
negative feedback loops). They largely relate to the
securities that are free of national or state income tax; (2)
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Money Market Mutual Funds: A Financial Stability Case Study
government, which invest in securities backed by the
Figure 1. Net Assets of Money Market Funds
creditworthiness of the U.S. government; and (3) prime,
($Tril ions, Data as of July 31, 2019)
which include investments in corporate debt, certificates of
deposit, and repurchase agreements. The main types of
MMFs are then further divided into those held by individual
investors (retail) or those held by organizations
(institutional). The 2014 MMF regulation affects different
MMF types in different ways:
 Institutional prime and institutional municipal MMFs
are required to float their NAV from stable value to
reflect the actual market value of the fund more closely.
All government and retail MMFs may continue to use

stable NAV.
Source: CRS based on SEC MMF Statistics.
 MMFs’ boards now may impose redemption fees (up to
2%) and redemption gates (up to 10 business days) for
Between July 2015 and July 2019, government MMFs,
all nongovernment MMFs. These barriers to withdrawal
which were not affected by the NAV reform, increased
are expected to discourage runs.
from $0.5 trillion to $1.7 trillion. Municipal retail and
institutional MMFs combined fell to $141 billion (a 45%
In addition, the SEC reform required new macro-prudential
decline) and prime retail and institutional MMFs combined
stress tests similar to those more commonly used in
fell from $1.7 trillion to $1.0 trillion (a 40% decline). But
banking. Stress testing as a systemic risk mitigation tool
there are also signs of gradual volume recovery. Short-term
generally refers to a forward-looking quantitative
funding markets are complex and sensitive to interest rate
evaluation of the impact of stressful economic and financial
movements. Other factors could also influence this trend
market conditions. As part of the SEC’s 2014 MMF reform,
irrespective of the MMF reforms.
MMFs are required to stress test their ability to maintain
weekly liquid assets of at least 10% and to minimize
Policy Debates
principal volatility in response to several SEC-defined
Policy discussions continued after the 2014 reform,
hypothetical stress scenarios including (1) increases in the
especially about whether the MMFs’ NAV should be
level of short-term interest rates, (2) the downgrade or
floating or stable. For example, the Consumer Financial
default of particular portfolio security positions, and (3) the
Choice and Capital Markets Protection Act of 2019 (S. 733)
widening of spreads in various sectors.
would require the SEC to reverse the floating NAV back to
a stable NAV for the affected MMFs.
This SEC stress testing is separate from the stress testing
required for certain asset management firms as part of the
Many proponents of floating NAV believe the floating
2010 Dodd-Frank Wall Street Reform and Consumer
NAV could (1) reduce the investors’ incentive to runs in
Protection Act (P.L. 111-203, Dodd-Frank). The Dodd-
distressed markets because of the difference between the
Frank stress tests are to include baseline and severely
stable value and the actual market value; (2) allow investors
adverse scenarios, and testing results must be reported to
to better understand a fund’s price movements and market
the SEC and the Federal Reserve Board. The SEC has not
fluctuations; and (3) remove the implicit guarantee of zero
yet implemented the Dodd-Frank stress testing
investor losses through the stable value that could lead to
requirements for asset managers.
unrealistic expectations of safety. Opponents believe that
floating NAV does not solve the issue of investors’
Since the 2014 reform, certain MMFs that converted to
incentive to run. For example, one academic research article
floating NAV—institutional municipal and institutional
concludes that European MMFs that offer similar structures
prime MMFs—appear to have seen overall net assets
to floating NAV did not experience significant reduction in
decline. However, because MMFs began to identify
run propensity during market distress compared with stable
themselves as institutional or retail only in October 2016,
NAV. In addition, providing floating NAV requires
the data are not definitive (see Figure 1).
calculation time and business model changes that could
raise costs and slow market operations. The opponents also
point to the volume decline of the affected MMFs since the
reform as an example of a shrinking MMF market that may
raise working capital costs for certain business operations
and municipalities. Others argue that because the MMF
reform has been fully implemented since 2016, it makes
sense to thoroughly study the effectiveness and impact of
the reform before considering changes.
Regarding stress testing, a 2017 Treasury report rejected the
use of prudential stress testing on investment companies,
contending that the MMF reform stress testing requirements
already “satisfy the spirit of” the Dodd-Frank’s stress
testing requirements. In the 116th Congress, the Alleviating
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Money Market Mutual Funds: A Financial Stability Case Study
Stress Test Burden to Help Investors Act (H.R. 3987)
could originate from widespread market fears instead of the
would exempt nonbanks from certain Dodd-Frank stress
size of the actual losses alone, thus making the exact place
test requirements. There are also others who support stress
and condition of the next financial crisis unpredictable.
tests as important for mitigating systemic risk.
Eva Su, Analyst in Financial Economics
As illustrated by this case study, unexpected market events
and seemingly safe financial instruments could, at times,
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trigger widespread financial instability. Such instability


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