Money Market Mutual Funds: Policy Concerns and Reform Options

Money Market Mutual Funds: Policy Concerns and Reform Options

Money Market Mutual Funds: Policy Concerns November 17, 2022
and Reform Options
Eva Su
A money market mutual fund (MMF) is a mutual fund that, under Securities and Exchange
Analyst in Financial
Commission (SEC) Rule 2a-7, can invest only in high-quality short-term securities. MMFs are
Economics
considered safe investment options and common alternatives to bank deposits, although they are

not federally insured like bank deposits. But this perceived-to-be-safe financial instrument
triggered market disruptions in 2008 that accelerated the 2007-2009 financial crisis. At the time,

the Treasury Department and the Federal Reserve developed multiple intervention tools to
provide a backstop for the industry. Following the 2007-2009 crisis, the MMF industry underwent major regulatory reforms.
During the 2020 coronavirus-induced market distress, however, some of the same MMF-related financial stability concerns
recurred. The federal government once again took action to mitigate the related risks. These conditions have led to
discussions about the effectiveness of previous MMF reforms and how policymakers could proceed with potential future
reforms.
The MMF industry’s assets increased while the number of funds declined in recent years. Government, prime (or corporate),
and tax-exempt (or municipal) are the three main types of MMFs. These funds have different asset compositions and
regulations. The MMF industry’s net assets stood at $5.1 trillion as of July 2022. The industry’s net assets increased,
especially after the COVID-19 pandemic, led by increases in government MMFs and partially offset by decreases in prime
and tax-exempt MMFs. Government MMFs held the most net assets ($4.1 trillion or 80% of the overall MMF industry
assets), substantially more than prime MMFs ($917 billion or 18%) and tax-exempt MMFs ($104 billion or 2%). Over the
past decade, the number of MMFs decreased by nearly half from 600 in October 2012 to 306 in July 2022. Multiple reasons,
including reduced fee income and increased operating costs, might have contributed to the decline in the number of MMFs.
MMFs provide sources of financing for federal and local governments and private corporations, including financial
intermediaries that facilitate funding for households. They also serve as investment and cash management tools for retail and
institutional investors. The MMF industry offers short-term funding for businesses and government entities to help them pay
for things such as operational expenses, schools, bridges, and other financial obligations. MMFs are significant holders of
U.S. government securities, commercial paper (a type of short-term corporate debt), municipal debt, and certificates of
deposits. For example, MMFs are especially important for the commercial paper market, an integral part of the short-term
funding markets that facilitate financing for businesses and households. MMFs held around 20% of all U.S. commercial
paper outstanding as of April 2022. Because of the strong connection between MMFs and the short-term funding markets, the
health of MMF operations could affect related businesses, government entities, households, and investors through the costs
and availability of funds.
At the center of the MMF-related financial stability concern is the instrument’s susceptibility to run-like behavior. Run risk
refers to the scenario where many investors withdraw their investments nearly simultaneously, triggering negative feedback
loops and contagion effects for the broader financial system. MMFs are susceptible to runs because their shareholders have
an incentive to redeem their shares before others do when there is a perception that the fund might experience a loss (i.e., the
first-mover advantage). The SEC published an MMF reform proposed rule in December 2021 that includes multiple options.
Other financial authorities have also come up with additional proposals that are not part of the SEC’s proposed amendments
to MMF regulation. These proposals include:
 Rolling back some earlier reform provisions regarding liquidity fees and redemption gates.
 Addressing the first-mover advantages through swing pricing and minimum balance at risk.
 Increasing transparency through additional disclosure requirements and floating NAV.
 Addressing MMF liquidity needs through increased liquidity requirements.
 Reducing MMF portfolio risks through sponsor support, capital buffers, and limits on eligible assets.
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Contents
Introduction ..................................................................................................................................... 1
MMFs’ Role in Financial Markets and the Economy ............................................................... 1
Operational Mechanics: Redemptions at Per Share Net Asset Value (NAV) ............................ 3
Different Types of MMFs .......................................................................................................... 3
Market Size and Trends ............................................................................................................. 3
Run Risk and Financial Stability Concerns ..................................................................................... 5
Attributes of MMF “Runs” ....................................................................................................... 6
Perception (or Misperception) of Absolute Safety and the Existence of Risk .................... 6
First-Mover Advantage and Dilution to Remaining Investors ............................................ 6
MMFs’ Liquidity Needs and the Spillover Effects ............................................................. 7
Market Disruptions and MMF Structural Vulnerabilities ................................................................ 7
2007-2009 Great Recession ...................................................................................................... 7
2020 Pandemic-Induced “Dash for Cash” ................................................................................ 8
Prime MMF Outflow and Short-Term Funding Market Distress ........................................ 8
NAV and the “Breaking the Buck” Conditions ................................................................. 10
Current Regulatory Framework ...................................................................................................... 11
Eligible Assets and Maturity Limits ......................................................................................... 11
Portfolio Valuation: Floating or Stable NAV .......................................................................... 12
Liquidity Requirements ........................................................................................................... 12
Liquidity Fees and Redemption Gates .................................................................................... 12
Disclosure Requirements ........................................................................................................ 13
Stress Testing........................................................................................................................... 13
Reform Options ............................................................................................................................. 14
Proposals by the SEC .............................................................................................................. 15
Remove Threshold Effects of Liquidity Fees and Redemption Gates .............................. 15
Floating NAV .................................................................................................................... 16
Swing Pricing .................................................................................................................... 17
Increased Liquidity Requirements .................................................................................... 18
Additional Disclosure Requirements ................................................................................ 19
Proposals Not Part of the SEC’s Recommendations ............................................................... 19
Formalization of Sponsor Support .................................................................................... 19
Limits on Eligible Assets .................................................................................................. 20
Minimum Balance at Risk ................................................................................................ 21
Capital Buffer .................................................................................................................... 21

Figures
Figure 1. MMF Holdings Composition (As of Second Quarter 2022) ............................................ 1
Figure 2. MMF CP Holdings and MMF Holdings as a Percentage of CP Outstanding .................. 2
Figure 3. MMF Net Assets by Type ................................................................................................ 4
Figure 4. Number of MMFs by Type .............................................................................................. 5
Figure 5. Prime MMF Outflow and Short-Term Funding Market Distress During “Dash
for Cash” ...................................................................................................................................... 9
Figure 6. Prime and Tax-Exempt MMF Net Asset Value During “Dash for Cash” ...................... 10
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Tables
Table 1. Examples of Different Requirements for Different Types of MMFs ................................ 11
Table 2. Examples of MMF Reform Proposals ............................................................................. 14

Contacts
Author Information ........................................................................................................................ 22

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Introduction
A money market mutual fund (MMF) is a mutual fund that, under Securities and Exchange
Commission (SEC) Rule 2a-7,1 can invest only in high-quality short-term investments (called
money market instruments). MMFs are often treated as cash-equivalent or money-like, and they
are commonly considered alternatives to bank deposits.
MMFs first appeared in the 1970s when inflation was at a historical high, and some money
market instruments were paying higher rates of return than bank deposits, which were capped by
regulatory restrictions.2 The first MMF, called the Reserve Fund, started accepting investments in
1971.3 The fund invested in money market instruments—such as U.S. Treasuries and commercial
paper—with a relatively high degree of safety and paid investors market-based rates of return at
levels generally above the interest payments from bank deposits.
The invention of MMFs addressed unmet investor needs with respect to bank deposits, and the
industry has come a long way since its inception. At around $5 trillion in size (Figure 3), the
MMF industry plays a significant role in the short-term funding markets and now has also
repeatedly drawn financial stability concerns in recent years. This report provides background
about MMFs and discusses their regulatory frameworks, policy concerns, and reform options.
MMFs’ Role in Financial Markets and the Economy
MMFs facilitate financing for federal and local governments as well as private corporations and
households. They also serve as investment and cash management tools for retail and institutional
investors.
Figure 1. MMF Holdings Composition (As of Second Quarter 2022)

Source: CRS using data from Federal Reserve Z.1 Financial Accounts of the United States.

1 17 C.F.R. §270.2a-7.
2 The earlier versions of the Federal Reserve’s Regulation Q in effect at the time restricted interest payments on deposit
accounts.
3 Investment Company Institute, Report of the Money Market Working Group, March 17, 2009, https://www.ici.org/
doc-server/pdf%3Appr_09_mmwg.pdf.
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Notes: GSE = government-sponsored enterprise. The vast majority of the security repurchase agreements
(repos) are U.S. government security repos, but there are also other security repos.
MMFs channel short-term funding to businesses and government entities to help them cover
activities such as paying for inventory, payroll, schools, bridges, and meeting other financial
obligations. MMFs are significant holders of U.S. government securities, commercial paper (CP),
municipal debt, and certificates of deposits. For example, MMFs are especially important for the
CP market, an integral part of the financial system that facilitates short-term funding for
businesses and households (Figure 1). CPs are generally short-term debt issued with minimum
denominations of $100,000 and terms less than 270 days.4 As of April, 2022, MMFs held $231
billion in CP, representing around 20% of all U.S. CP outstanding. In earlier years, MMFs held an
even higher percentage of CP, reaching close to half of all CP outstanding (Figure 2). See the
“Prime MMF Outflow and Short-Term Funding Market Distress” section of this report for more
discussions on the interconnectedness of MMF and other parts of the short-term funding market.
Figure 2. MMF CP Holdings and MMF Holdings as a Percentage of CP Outstanding

Source: CRS using data from Federal Reserve Board and Securities and Exchange Commission form N-MFP
filings.
Notes: CP = commercial paper. The bars represent the amount of MMF CP holdings in $billions. The line
represents MMF CP holdings as a percentage of all U.S. CP outstanding. MMF CP holdings and U.S. CP
outstanding are not seasonally adjusted.
Because of the strong connection between MMFs and the short-term funding markets, MMFs are
important institutional investors and financial intermediaries in those markets. If investors
withdraw their funding from MMFs, the businesses, government entities, and households that rely
on the industry could face increases in costs and reductions in the availability of funding.

4 For more background on the CP market, see Tobias Adrian, Karin Kimbrough, and Dina Marchioni, “The Federal
Reserve’s Commercial Paper Funding Facility,” FRBNY Economic Policy Review, May 2011,
https://www.newyorkfed.org/medialibrary/media/research/epr/11v17n1/1105adri.pdf.
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Operational Mechanics: Redemptions at Per Share Net Asset Value
(NAV)
As pooled investment vehicles that collect money from investors and make investment decisions
on their behalf, MMFs have operational features such as valuation and redemption processes.
Share redemption allows MMF investors to exit their investment positions by selling their shares
back to the funds on demand. Investors redeem MMF shares at per share NAV, meaning the value
of a fund’s assets minus liabilities. MMFs generally maintain a NAV of $1 per share (investors
make returns through the fund paying dividends as their value increases), thus mimicking bank
deposits—with the perception that investors are exposed to minimal risk of losses. Bank deposits
achieve this with an explicit government guarantee via Federal Deposit Insurance Corporation
insurance, while MMFs do so through investment in low-risk, short-term instruments and implicit
guarantee from the funds’ sponsors that they would manage to maintain the $1 per share NAV or
cover losses in case the MMFs could not.5
Prior to 2014 regulatory reforms, all MMFs offered a stable $1 NAV, which means that MMFs
were permitted (within the range of $0.995 to $1.005) to round the NAV to exactly $1, arguably
reinforcing perceptions that MMF investors were not exposed to losses.6 Market regulations at the
time allowed an MMF to value its investments at amortized cost rather than market value. This
type of measurement gave the fund a constant $1 value and thus further reinforced to investors
that MMFs could serve as an alternative to checking and savings accounts. If the funds’ stable
NAV drops below $1, which rarely occurs, it is said that the MMF “broke the buck.”
Different Types of MMFs
There are three main types of MMFs:
1. Government MMFs, which invest in securities backed by the creditworthiness
of the U.S. government. Government MMFs generally hold U.S. Treasury and
federal agency debt instruments and repurchase agreements collateralized by
government securities.
2. Tax-exempt MMFs, also referred to as municipal MMFs, which invest in
municipal securities that are normally exempt from federal personal income
taxes.
3. Prime MMFs, which generally invest in short-term obligations issued by
corporations, governments, and banks, including asset-backed or unsecured CP
and repurchase agreements.
The main types of MMFs are then further divided into those held by individual investors (retail)
and those held by organizations (institutional).
Market Size and Trends
The MMF industry’s assets increased while the number of funds declined in recent years.
According to SEC form N-MFP filings, the MMF industry net assets stood at $5.1 trillion as of
July 2022 (Figure 3). Government MMFs held the most net assets ($4.1 trillion or 80% of the

5 See “Formalization of Sponsor Support” section of this report for more details on MMF sponsors.
6 See “Portfolio Valuation: Floating or Stable NAV” section of this report for more details.
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overall MMF industry assets), substantially more than prime MMFs ($917 billion or 18%) and
tax-exempt MMFs ($104 billion or 2%).
Figure 3. MMF Net Assets by Type

Source: CRS using data from SEC form N-MFP filings.
Notes: Because the SEC implemented a data reconfiguration starting in October 2016 that affected how the
MMF net assets by type are recorded, the chart starts from 2017. Government MMFs includes government and
Treasury MMFs.
The MMF industry’s net assets increased, especially after the COVID-19 pandemic (Figure 3),
led by increases in government MMFs and partially offset by decreases in prime and tax-exempt
MMFs. The flight-to-safety behavior of investors, who were selling the higher-risk assets and
purchasing safer investments such as Treasury securities and government MMFs during market
distress, potentially contributed to the ramp-up of government MMFs and the decline in prime
and tax-exempt MMFs in early 2020. For more details on the reasons for this change, see the
“2020 Pandemic-Induced ‘Dash for Cash’” section of this report.
Over the past decade, the number of MMFs decreased by nearly half from 600 in October 2012 to
306 in July 2022 (Figure 4). During this period, while the number of prime and tax-exempt
MMFs significantly declined, the number of government MMFs increased. Prime and tax-exempt
MMFs declined by 74% and 68% to reach 63 and 60 (from 243 and 189), respectively, while
government MMFs increased 9% to reach 183 as of July 2022.
Multiple reasons, including reduced fee income and increased operating costs, might have
contributed to the decline in the number of MMFs. The period of decline coincided with the time
when MMF regulatory reforms affected the costs of compliance, reporting, and other
requirements. For example, a major MMF reform in 2014, which most significantly affected
prime MMFs, was fully implemented in 2016. Following the reform, the number of government
MMFs increased, while prime MMFs decreased (Figure 4).
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Figure 4. Number of MMFs by Type

Source: CRS using data from SEC form N-MFP filings.
Notes: Number of MMFs reporting to the SEC. Excluding feeder funds.
In addition, MMFs had faced operating pressure from a prolonged low-interest-rate environment
in recent years.7 The Federal Reserve (Fed) established the lower bound of the target range for the
federal funds rate at 0% twice during the past 15 years. As a cash-like instrument, limited by
regulatory requirements, an MMF cannot generate a high rate of return by taking more risks (and
is thus unable to earn substantial returns for investors via a risk premium). When interest rates are
close to zero, MMFs often waive fees to keep overall fund returns positive. MMF fees reportedly
declined by around 75% over the past 25 years.8 The average MMF fees reached a mere 12 basis
points in 2021.9 According to one data provider, around 91% of U.S. MMFs were waiving some
portion of their fees (as of February 2022), making this one of the most challenging environments
for MMFs to cover their operating costs.10 However, so long as interest rates are not close to the
near-zero territory, MMFs could have the opportunity to charge full fees again, providing some
relief to operating pressure.
Run Risk and Financial Stability Concerns
Run risk refers to the fact that financial institutions or funds that have some mismatch between
their assets and their repayment or redemption obligations may fail to meet their obligations to
their clients when faced with the possibility of a large number of investors withdrawing their
investments simultaneously. Runs on such entities can, under certain circumstances, trigger
negative feedback loops and contagion effects for the broader financial system. MMFs are

7 For a chart on the history of the federal funds rate, see Federal Reserve Bank of St. Louis, Federal Funds Effective
Rate, https://fred.stlouisfed.org/series/FEDFUNDS.
8 Brooke Masters, “‘The Return of Cash’: Money Market Fund Sector Perks Up on Rising Rates,” Financial Times,
July 19, 2022, https://www.ft.com/content/7195fd47-b843-4025-9a5b-100b44f79b06.
9 One basis point is 1/100 of a percent, or 0.01%.
10 Financial Times reporting of iMoneyNet data. See Masters, “‘The Return of Cash.’”
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susceptible to runs because the shareholders expect to always be able to redeem their funds at a
price of $1 per share, while the value of a fund’s assets could fall below the value of outstanding
shares. Thus, shareholders have an incentive to redeem their shares before others do when there is
a perception that the fund might experience a loss—the first investors to get their money out are
more likely to receive the full value, while by the time the later ones request their money, the
fund’s assets may have already been depleted. During market distress, a run on MMFs could
involve heavy redemptions and attempts of many investors to try to get their money back at the
same time. If a fund indeed suffers a loss (i.e., breaking the buck), investors who redeem their
shares early in the run may get more money for their shares than do other investors who redeem
their shares later.
Attributes of MMF “Runs”
This section describes some common attributes that are associated with MMF runs. It also
provides examples of policy proposals to address MMF run risk. More detailed policy proposal
discussions are in the “Reform Options” section.
Perception (or Misperception) of Absolute Safety and the Existence of Risk
As mentioned earlier, MMFs are relatively safe cash-like investment options, but risks do exist.
For example, if a fund holds a large amount of CP issued by an institution that suddenly defaults
on its debt, then the value of the fund’s assets could unexpectedly drop. Meanwhile, investors
generally view MMFs as comparable to bank deposits, expecting that the fund value will stay
steady at $1 per share. However, this expectation of safety does not mean that the fund will not
encounter losses. Unlike bank deposits that are largely backed by an explicit guarantee from the
federal government in the form of deposit insurance, MMF investors can rely only on a fund’s
sponsors and management to maintain the value of the MMFs or cover any losses. Thus, if the
ability of an MMF to maintain its stable share value comes into question, it could generate
incentives for investors to quickly redeem shares before losses result in the share value falling.
For examples of policy proposals to address MMF risk and risk transparency, see the “Floating
NAV,” “Capital Buffer,” “Sponsor Support,” and “Limits on Eligible Assets” sections of this
report.
First-Mover Advantage and Dilution to Remaining Investors
In a crisis scenario, when faced with potential losses, each investor has an incentive to redeem his
or her shares in full before the rest of the investors do. Whoever redeems shares last, after others
have redeemed in full, may bear the loss of the whole portfolio. Research shows that institutional
and retail MMF investors tend to redeem shares at different speeds. While institutional investors
may have the resources and technology to detect and respond to losses quicker, retail investors
may be slower to detect and respond to potential losses.11
For examples of policy proposals to address first-mover advantage, see the “Swing Pricing” and
“Minimum Balance at Risk” sections of this report.

11 Institutional investors consistently redeem faster than do retail investors during crisis situations. See Antoine
Bouveret, Antoine Martin, and Patrick McCabe, Money Market Fund Vulnerabilities: A Global Perspective, March 8,
2022, https://www.federalreserve.gov/econres/feds/files/2022012pap.pdf.
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MMFs’ Liquidity Needs and the Spillover Effects
MMFs have to prepare liquid assets (e.g., “cash in hand”) in anticipation of redemption needs.
This operation would normally be seamless, but for unexpected large redemptions, the funds
could face challenges. For example, while MMFs are obligated to honor daily redemption for
investors, it is possible that a fund may be unable to raise enough cash to meet all redemption
requests at once. This may be because when the fund wants to liquidate the portfolio assets to
meet redemption requests, the assets may not be sold at desired market price because the market
is under distress or liquidity is tight. The liquidity needs in such situations can trigger fire sales
and contagion effects through negative feedback loops, meaning that large quantities of portfolio
asset sales would place further downward pressure on portfolio assets’ pricing and, in turn, further
stress the funds that are in need of the proceeds from asset sales to redeem investor shares. In
such situations, MMFs would adversely affect entities relying on funding from short-term
markets, potentially causing them to be unable to obtain working capital or roll over their
maturing debt, increasing default risk and creating market fear and market halts that potentially
dry up the money to businesses, municipalities, and households.
For an example of a policy proposal to address liquidity needs, see the “Increase Liquidity
Requirements” section of the report.
Market Disruptions and MMF Structural
Vulnerabilities
Policymakers and regulators have repeatedly pushed for MMF reforms following two major
market disruptions that demonstrated the MMF industry’s structural vulnerabilities. Because the
symptoms MMFs displayed during these stressed scenarios could help market observers diagnose
the challenges and comprehend potential reform options, this section of the report aims to
describe MMF market behavior during the financial crises, focusing on MMF market symptoms
and related direct federal government interventions.
2007-2009 Great Recession
On September 15, 2008, Lehman Brothers Holdings, an investment bank, filed for bankruptcy.
The next day, one prominent MMF—the Reserve Primary Fund—saw its per share price fall from
$1.00 to $0.97 after writing off its Lehman debt. MMFs faced “run-like” behavior, because
investors have an incentive to redeem shares before others do when there is a perception that the
fund could suffer a loss.12 Thus when the Reserve Primary Fund broke the buck, MMF investors
elsewhere also rushed to exit their positions. This spillover effect illustrated that MMFs, and even
the broader financial system, were vulnerable regardless of whether large actual losses occurred.
The Reserve Primary Fund event triggered an array of market reactions, including investors’
redemptions of more than $250 billion throughout the MMF industry within a few days of the
Lehman bankruptcy filing.
The consequences of these actions were potentially so dire to U.S. financial stability that the
government ultimately intervened. The Treasury Department provided explicit temporary

12 Run is a term that was first made famous by banks when depositors simultaneously withdraw deposits, causing
solvency risk concerns at banks. See the “Attributes of MMF “Runs” section of this report for more discussions on run-
like behaviors.
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guarantees to all MMF investors. Treasury announced this program without seeking specific
congressional authorization. After the fact, Congress addressed the guarantee in the Emergency
Economic Stabilization Act (P.L. 110-343), reimbursing the Exchange Stability Fund that backed
the guarantee but also forbidding the future use of the fund to provide such a guarantee.13 Over
the life of the Treasury guarantee, no guaranteed funds failed.14
The Federal Reserve also established multiple emergency liquidity facilities under its statutory
authority invoked by “unusual and exigent circumstances” in September and October 2008 to
provide a backstop through funding to MMFs and CP as part of a broader crisis response.15 These
programs expired without loss between late 2009 and early 2010.16
2020 Pandemic-Induced “Dash for Cash”
In March 2020, the economic and financial uncertainties surrounding the COVID-19 pandemic
induced a “dash for cash” that involved extensive market selloffs of assets across a wide
spectrum, including stocks, bonds, and investment funds.17 Faced with the pandemic-induced
uncertainty, market participants allocated more assets toward cash and short-term instruments that
receive federal government backing. As a result, government MMFs experienced substantial
inflows (Figure 3), while prime and tax-exempt MMFs suffered sudden outflows (Figure 5).
Rapid volume shifts like this also occurred in other short-term markets linked to MMFs,
including the CP market and the short-term municipal securities market. Some observers believe
that the structural vulnerabilities at MMFs might have led to the increased redemptions and
potentially escalated the stress at the overall short-term funding markets.18 The Fed took action
again in March 2020 to address the MMF market disruption, including establishing emergency
lending for MMF and CP markets.19
Prime MMF Outflow and Short-Term Funding Market Distress
The distress in prime MMF and CP markets was severe during March 2020, when dash-for-cash
conditions were the most pronounced. Figure 5 illustrates the extent of the conditions. The spread
on CP against overnight index swaps—a measure of the higher return CP investors are requiring
to compensate for perceived risk—widened to historical highs. This increased risk and volatility
in CP, in turn, contributed to prime MMFs’ reduction in CP holdings, thus placing additional
downward pressure on CP pricing, potentially escalating the overall market stress. However,
MMFs were only one of many factors that affected the CP market conditions at the time (see

13 For more on related Treasury Department actions, see CRS Report R43413, Costs of Government Interventions in
Response to the Financial Crisis: A Retrospective, by Baird Webel and Marc Labonte.
14 For more information on Federal Reserve liquidity facilities, see CRS Report R44185, Federal Reserve: Emergency
Lending, by Marc Labonte.
15 Michael Fleming, “Federal Reserve Liquidity Provision During the Financial Crisis of 2007-2009,” Federal Reserve
Bank of New York Staff Reports, July, 2012, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/
sr563.pdf.
16 For more on Fed emergency lending programs, see CRS Report R44185, Federal Reserve: Emergency Lending, by
Marc Labonte.
17 For more details, see CRS Report R46424, Capital Markets Volatility and COVID-19: Background and Policy
Responses, by Eva Su.
18 Bouveret, Martin, and McCabe, Money Market Fund Vulnerabilities.
19 For more details, see CRS Insight IN11340, COVID-19: Selected Capital Markets Segments Supported by Federal
Government Liquidity Interventions, by Eva Su; and CRS Insight IN11327, Federal Reserve: Emergency Lending in
Response to COVID-19, by Marc Labonte.
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Figure 2 for MMF CP holding as a percentage of total CP outstanding). Other intermediaries,
such as CP dealers, might have also affected the short-term funding market conditions.
Figure 5. Prime MMF Outflow and Short-Term Funding Market Distress During
“Dash for Cash”
Prime MMF Net Flows and One-Month Commercial Paper Spreads for Nonfinancial Firms

Source: President’s Working Group on Financial Markets.
Notes: MMLF = Federal Reserve money market mutual fund liquidity facility. CP = commercial paper. OIS =
overnight index swap.
Regarding prime MMF asset holdings, at the peak of the selloff, prime MMFs experienced
abnormal outflow of around $25 billion per day in mid-March (Figure 5). But the conditions
eased toward the end of the month following the Fed’s announcement and implementation of the
Money Market Mutual Funds Liquidity Facility (MMLF). On March 18, 2020, the Fed, with the
approval of the Treasury Department, announced the MMLF to backstop the MMF market for the
second time in history (the other being in 2008 in response to the financial crisis discussed
above). The program was expanded and operationalized on March 23 to include domestic prime
and tax-exempt MMFs as eligible funds.20
The federal government actions to assist the MMF industry in 2020 were similar to those of
September 2008 in design and purpose.21 Both programs made non-recourse loans to eligible
banks to purchase certain assets from eligible MMFs (prime and tax-exempt MMFs), but the
eligible collateral assets were broader for MMLF when compared to the 2008 actions.22 The

20 Federal Reserve, Money Market Mutual Fund Liquidity Facility, https://www.federalreserve.gov/monetarypolicy/
mmlf.htm.
21 For more information, see Federal Reserve, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility, https://www.federalreserve.gov/monetarypolicy/abcpmmmf.htm.
22 Non-recourse loans are generally loans secured by collateral only, not including further compensation from the
borrowers. For more details, see Ken Clark, “Recourse vs. Non-Recourse Loan: What’s the Difference?” Investopedia,
August 24, 2022, https://www.investopedia.com/ask/answers/08/nonrecourse-loan-vs-recourse-loan.asp.
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federal government actions seemed to have worked in stabilizing the short-term funding market
conditions during the 2020 dash for cash (Figure 5).
NAV and the “Breaking the Buck” Conditions
In addition to the fund outflow measures that indicate MMF market stress, observers could detect
MMF market conditions through changes in NAV. Figure 6 illustrates that at one point in March
2020, prime and tax-exempt MMFs’ per share NAV, in aggregate, experienced sharp declines and
then a recovery. The per share NAV dropped to below $0.999 and recovered after the
implementation of the Fed’s MMLF. Without the federal government backstop, the NAV
performance at prime and tax-exempt MMFs would have been uncertain.
Notably, the term breaking the buck does not have an official, standardized definition. Some
industry observers may consider situations depicted in Figure 6—a share price decline to
$0.9985—as breaking the buck. Meanwhile, SEC Rule 2a-7 specifies the level of price deviation
to be “1/2 of 1 percent” (i.e., falling below $0.995) before the fund’s board would be mandated to
address the deviation.23 MMFs’ NAV deviation during March 2020 did not reach the $0.995
threshold that triggers mandatory Rule 2a-7 MMF board actions.
Figure 6. Prime and Tax-Exempt MMF Net Asset Value During “Dash for Cash”

Source: Federal Reserve Bank of New York.
Notes: The vertical line indicates the implementation date of the Fed’s MMF liquidity facility.
Some of the MMF market concepts and terminology highlighted in this section, such as fund
outflow and NAV, will continue to provide context for the “Reform Options” section of the report.
These technical measures revealed market symptoms and thus are built into some of the policy
proposals covered in the “Reform Options” section.

23 17 C.F.R. §270.2a-7. The board actions could normally include suspending redemptions and repricing the fund.
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Current Regulatory Framework
MMFs are one type of open-end mutual fund, meaning they are funds that can issue unlimited
number of shares and are brought or sold on demand.24 Rule 2a-7, which governs MMFs,
specifies a variety of MMF requirements, including eligible portfolio assets, valuation methods,
liquidity requirements, fee and gate provisions, disclosure requirements, and others. Different
types of MMFs may face different regulation (Table 1). This section explains several key MMF
regulatory requirements in detail.25
Table 1. Examples of Different Requirements for Different Types of MMFs
Prime
Tax-Exempt
Requirements
Government
Retail
Institutional
Retail
Institutional
Fees and Gates
Optional
Required
Required
Required
Required
Net Asset Value
Stable
Stable
Floating
Stable
Floating
Liquid Asset
Daily and
Weekly
Weekly
Measures
Daily and weekly
weekly
Daily and weekly
Source: CRS.
Notes: The table presents selected examples of MMF regulatory requirements. For more details on the
requirements, see text portion of the current report section.
Eligible Assets and Maturity Limits
MMF regulation uses restrictions on eligible assets and maturity limits to control risks at MMF
portfolio assets and ensure that the funds maintain short-term and high quality assets. MMF assets
normally have a remaining maturity of 397 days or less. Government MMFs are required to
invest in cash, government securities, or repurchase agreements that are collateralized solely by
government securities or cash. Prime and tax-exempt MMFs can invest in the types of securities
eligible for government MMFs but can also invest in other assets. When investing in other assets,
prime and tax-exempt MMFs’ boards must determine that the portfolio assets present minimal
credit risks to the funds. As part of the risk assessment, the board has to consider factors such as
the issuers’ financial condition, source of liquidity, and ability to react to market events, among
other factors. Prime and tax-exempt MMFs’ boards must also conduct ongoing review of each
security in the portfolio to make sure that the securities continue to present minimal credit risks,
and they must retain written records of such reviews for three years.
Specific to maturity limits, at the portfolio level, MMFs are generally required to have a dollar-
weighted average maturity of 60 days or less and weighted average life maturity of 120 days or
less.

24 Open-end funds stand in contrast to closed-end funds, which issue a fixed number of shares and are traded on
national stock exchanges or in the over-the-counter market.
25 For more information, see SEC, “Money Market Fund Reform; Amendments to Form PF Final Rule,” 79 Federal
Register 47735, August 14, 2014; SEC, “Money Market Fund Reforms Proposed Rule,” 87 Federal Register 7248,
February 8, 2022; and 17 C.F.R. §270.2a-7.
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Portfolio Valuation: Floating or Stable NAV
Institutional prime and institutional tax-exempt MMFs are required to float their NAVs to reflect
the actual market value of the fund more closely. All government and retail MMFs may use a
stable NAV.
The floating NAV method requires institutional prime and tax-exempt MMFs to price their shares
based on the market value of the underlying portfolio assets at NAV rounded to the fourth
decimal point. For example, a floating NAV fund might be priced at $1.0003 or $0.9995 instead
of a stable $1 value.
In contrast, the stable NAV method allows the government and retail prime and tax-exempt
MMFs to round the share price to exactly $1 per share as long as the portfolio assets do not fall
below $0.995 or rise above $1.005.26 The stable NAV MMFs have to calculate (using the
amortized cost method) if the fund has broken the buck.27 Stable value MMFs that see their per
share value of portfolio assets drop below $0.995 could face board actions and be subject to the
floating NAV regime. Examples of board actions could include liquidity fees and redemption
gates.28
Liquidity Requirements
Liquidity requirements aim to ensure that an MMF has sufficient cash in hand to meet redemption
needs. Rule 2a-7 requires MMFs to hold sufficient liquidity securities to meet “reasonably
foreseeable” redemptions and develop procedures to identify investors whose redemption
requests may pose risks to the funds.
All MMFs have to maintain a minimum of 30% weekly liquid assets (WLA) and cannot exceed a
maximum of 5% illiquid assets. WLA could include cash, Treasury securities, federal agency
discount notes with remaining maturity of 60 days or less, and other short-term instruments
payable or receivable within five business days. Illiquid securities include any security that
cannot be sold within seven days at the perceived fair market value.
Government and prime MMFs also have to maintain daily liquid assets (DLA), while tax-exempt
MMFs do not need to meet DLA requirements. At least 10% of non-tax-exempt MMFs’ total
assets must be in DLA that could include cash, Treasury securities, or securities maturing within
one business day.
Liquidity Fees and Redemption Gates
Nongovernment MMFs’ boards may impose liquidation fees and redemption gates if certain
conditions are met. Specifically, an MMF may impose a liquidity fee of up to 2%, or temporarily
suspend redemptions for up to 10 business days in a 90-day period, if the MMF’s WLA fall below
30% of its total assets and the fund’s board determines that imposing the fees and gates are in the
fund’s best interests. If the WLA fall to below 10% of total assets, the fund could also impose a

26 As measured by mark-to-market per share value of the fund’s portfolio assets.
27 Amortized cost method of valuation means the method of calculating an investment company’s NAV whereby
portfolio securities are valued at the fund’s acquisition cost as adjusted for amortization of premium or accretion of
discount rather than at its value based on current market factors. 17 C.F.R. §270.2a-7.
28 See “Liquidity Fees and Redemption Gates” section of this report for more detail.
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default liquidity fee of 1% unless the fund’s board determines that a fee would not be in the best
interests of the fund.29
These barriers to withdrawal were designed to discourage runs, as they could restrict or increase
the costs of redemptions, although whether they met this design intention is a point of debate. For
more on this policy debate, see the “Remove Threshold Effects of Liquidity Fees and Redemption
Gates” section of this report.
Disclosure Requirements
The MMF disclosure requirements make the funds’ composition and potential risks known to
investors and regulators. MMFs have to clearly warn investors in their outreach materials and
prospectuses of the fact that the funds have the potential of losing money, using language such as
“although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot
guarantee it will do so.”30
In addition, all MMFs have to provide disclosures through Form N-MFP, Form N-CR, Statement
of Additional Information (SIA), and daily website disclosure. Form N-MFP includes monthly
information on NAV per share, liquidity levels, and shareholder flows.31 Form N-CR includes
immediate disclosure of special events such as a material decline in fund value and sponsor
supports or the board’s actions in imposing fees and gates.32 SIA disclosure for government
MMFs would include the reporting of any occasion within the past 10 years that the MMFs
received sponsor support. For nongovernment MMFs, the SIA report must also include the
occasions when the funds’ WLA were less than 10% and the occasions when the funds imposed
liquidity fees and redemption gates. MMF daily website disclosures include the funds’ DLA,
WLA, and net shareholder flows and the fund’s “shadow price,” a price that reflects market
conditions.33
Stress Testing
Stress testing generally refers to a forward-looking quantitative evaluation of the projected impact
of stressful economic and financial market conditions. MMFs are required to test their abilities to
maintain WLA of at least 10% and to minimize principal volatility in response to several SEC-
defined hypothetical stress scenarios, including (1) increases in the level of short-term interest
rates, (2) the downgrade or default of particular portfolio security positions, and (3) the widening
of spreads in various sectors. MMFs must also periodically test and report to their boards the test
results, assumptions, and related assessments of the funds’ ability to withstand the events.34

29 SEC, “Money Market Fund Reform; Amendments to Form PF Final Rule,” 79 Federal Register 47735, August 14,
2014.
30 SEC, “Money Market Fund Reform; Amendments to Form PF Final Rule.”
31 SEC Form N-MFP, https://www.sec.gov/files/formn-mfp.pdf.
32 SEC Form N-CR, https://www.sec.gov/files/formn-cr.PDF.
33 For an example of daily website disclosure, see Fidelity prime MMF disclosure of “Fidelity Investments Money
Market—Money Market Portfolio—Class I,” https://fundresearch.fidelity.com/mutual-funds/summary/316175207.
34 See SEC final rule, “Money Market Fund Reform; Amendments to Form PF,” July 23, 2014, p. 553,
https://www.sec.gov/rules/final/2014/33-9616.pdf; and “SEC Adopts Money Market Fund Reform Rules,” press
release, July 23, 2014, https://www.sec.gov/news/press-release/2014-143. For examples of applying the scenarios, see
Jeremy Berkowitz, “Money Market Mutual Funds: Stress Testing and New Regulatory Requirements,” National
Economics Research Associates, July 14, 2015, https://corpgov.law.harvard.edu/2015/07/14/money-market-mutual-
funds-stress-testing-new-regulatory-requirements.
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Reform Options
As previously mentioned, the existing MMF regulatory framework has incorporated multiple
iterations of reforms. The most recent large-scale reform happened in 2014, with the major
changes implemented by 2016. However, the reformed regulatory framework did not prevent
MMFs’ run-like behaviors during the dash for cash in March 2020. That has led policymakers to
question what more could be done to address MMF-related risks, including the run-risk-related
financial stability concerns. It has also led to a re-examination of certain newer regulatory
features adopted since 2014 that appear not to have led to the intended outcome. Observers
suggest that some previous reform initiatives, although designed to discourage runs, achieved the
contrary. This section discusses current reform options, including new ideas and proposals to roll
back certain previously implemented provisions. Table 2 provides examples of MMF reform
proposals. Some of the proposals are currently part of the SEC’s MMF proposed rule published in
December 2021 while others are not. The reform options would:
 Roll back some earlier reform provisions regarding liquidity fees and redemption
gates.
 Address the first-mover advantages through swing pricing and minimum balance
at risk.
 Increase transparency through additional disclosure requirements and floating
NAV.
 Address MMF liquidity needs through increased liquidity requirements.
 Reduce MMF portfolio risks through sponsor support, a capital buffer, and limits
on eligible assets.
Table 2. Examples of MMF Reform Proposals
Proposed by SEC
Not Proposed by SEC

Remove liquidity fees and redemption gates
x

Swing pricing
x

Additional liquidity requirements
x

Additional disclosure reporting requirements
x

Floating NAV*
x

Sponsor support

x
Limits on eligible assets

x
Minimum balance at risk

x
Capital buffer

x
Source: CRS.
Notes: The SEC expanded floating NAV under certain unique market conditions. Its proposal does not
recommend rolling back the existing practice or creating significant expansions of the floating NAV.
Opponents of increased MMF regulation worry about the implementation costs of some of the
reforms as well as potential operational delays. They also point to the volume decline of the
affected MMFs in response to earlier reforms and how a shrinking MMF market may raise
working capital costs for certain business operations and municipalities (Figure 4). More
opponent discussions specific to individual proposals are included in the related segments below.
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Proposals by the SEC
The SEC proposed amendments to MMF rules on December 15, 2021.35 The proposed
amendments would increase liquidity requirements, require additional disclosures, roll back some
of the earlier reform provisions, and reduce MMF investors’ incentives to run. Here is a list of
proposals that the SEC suggested for adoption in the agency’s MMF reform proposed rule.
Remove Threshold Effects of Liquidity Fees and Redemption Gates
The threshold effect, also called the cliff effect, refers to investors’ pre-emptive actions to avoid
consequences of funds crossing certain thresholds. As discussed in earlier sections of the report,
MMFs’ boards may impose liquidation fees and redemption gates for nongovernment MMFs if a
fund’s WLA falls below 30% of its total assets and the fund’s board of directors determines that
imposing a fee or gate is in the fund’s best interests. In cases where a prime MMF begins to
approach the threshold, investors may increase their redemptions to avoid doing so after a fee or
gate is imposed. Some policy proposals suggest decoupling of the regulatory thresholds from the
consequences of such fees and gates.
The fees and gates were first implemented to reduce incentives to run. Some market participants
believe that these types of restrictions could allow funds’ investors to share the potential losses
more evenly at the time of sudden crisis, thus reducing the first-mover advantages in a run.36 In
addition, giving the fund boards control over the temporary fees and redemption gates could
provide a cooling-off period for fund investors during a time of distress and allow the investors to
go through a more orderly process if the worst-case scenario of a fund liquidation does occur.
Some compare the functionalities and goals of MMF fees and gates with the “circuit breaker,” the
SEC’s existing policy tool to manage market volatility by placing temporary market halts to
provide breathing room for the market conditions to calm down.37 In addition, the SEC and others
cited examples they viewed as successful by certain non-MMF cash management pools to stem
redemptions during times of stress before the SEC implemented the related MMF rules.38
During the dash for cash in 2020, no MMF imposed a fee or gate, but the possibility of such
imposition may have created a threshold effect for investors, as discussed above. From the
MMFs’ perspective, unexpected increases in redemptions from the threshold effects could further
decrease the level of WLA. The liquidity assets that form the WLA were used to pay out
redemptions during distress, thus creating a market run tied to the threshold instead of the
breaking-the-buck scenarios.
Some research from the SEC, the Fed, and the industry points to the existence of the threshold
effect. The research shows that the fees and gates that link to the WLA threshold froze substantial

35 SEC, “SEC Proposes Amendments to Money Market Fund Rules,” press release, December 15, 2021,
https://www.sec.gov/news/press-release/2021-258.
36 See, for example, Institutional Money Market Funds Association, IMMFA Recommendations for Redemption Gates
and Liquidity Fees, January 2014, https://www.immfa.org/assets/files/publications/
Paper%20IMMFA%20Position%20Papers%20on%20MMF%20Reform%20-
%20Liquidity%20Fees%20and%20Gate%20FINAL%20-%20January%202014.pdf; and Investment Company
Institute, Temporary Gates, Liquidity Fees, and Enhanced Disclosure Offer Promising Tools to Make Prime Money
Market Funds More Resilient, January 2013, https://www.ici.org/doc-server/pdf%3A13_mmf_liquidity_fee_gates.pdf.
37 For more on the circuit breaker and the related policy context, see CRS Report R46424, Capital Markets Volatility
and COVID-19: Background and Policy Responses, by Eva Su.
38 SEC, “Money Market Fund Reform; Amendments to Form PF Final Rule,” 79 Federal Register 47735, August 14,
2014, p. 42.
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amounts of MMF liquidity, reducing the capacity for redemptions and potentially increasing the
risk of runs. A Federal Reserve Bank of New York staff paper in 2014 highlights the fees and
gates’ potential unintended effects on preemptive runs.39 Another Federal Reserve Board staff
paper (last revised in June 2021) concludes that while the fees and gates were designed to
improve financial stability, they exacerbated the run on prime MMFs during the dash for cash.40
Some industry studies also indicate that institutional prime MMFs with a WLA approaching the
30% threshold had larger outflows than other prime MMFs did, despite these funds’ capabilities
to meet substantial redemptions.41 They concur that the threshold effect made MMFs more
susceptible to financial market stress in 2020 and could continue to do so during future crises.42
As a point of reference, previous European MMF reforms created two kinds of prime MMFs, one
with fees and gates and the other without. Research shows that prime MMFs with gates and fees
suffered heavier outflows during the dash for cash.43
The SEC’s Proposal
In the December 2021 MMF reform proposed rule, the SEC recommends the removal from Rule
2a-7 of the provisions that would allow or require MMF boards to impose liquidity fees or
redemption gates.
Floating NAV
The 2014 MMF reform established floating NAV requirements for institutional prime and tax-
exempt MMFs.44 Policy discussions focus on whether the MMFs’ NAV should be floating or
stable. Many proponents of floating NAV believe it could (1) reduce the investors’ incentive to
runs in distressed markets because it may reduce the differences between the stable value and the
actual market value, (2) allow investors to better understand a fund’s price movements and
market fluctuations, and (3) remove the implicit guarantee of zero investor losses through the
stable value that could lead to unrealistic expectations of investor safety. Opponents believe that
floating NAV does not solve the issue of investors’ incentive to run. For example, one academic
research article concluded that European MMFs that offered similar structures to floating NAV
did not experience significant reduction in run propensity during market distress compared with
stable NAV.45 In addition, providing floating NAV requires calculation time and business model

39 Marco Cipriani et al., “Fees, Gates, and Preemptive Runs,” Federal Reserve Bank of New York Staff Reports, April
2014, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr670.pdf.
40 Lei Li et al., Liquidity Restrictions, Runs, and Central Bank Interventions: Evidence from Money Market Funds, May
24, 2021, https://ssrn.com/abstract=3607593.
41 Investment Company Institute, Comment Letter for Money Market Fund Reforms, April 11, 2022, p. 10,
https://www.sec.gov/comments/s7-22-21/s72221-20123254-279522.pdf.
42 Investment Company Institute, Comment Letter for Money Market Fund Reforms.
43 Marco Cipriani and Gabriele La Spada, “Preemptive Runs and the Offshore U.S. Dollar Money Market Funds
Industry,” Federal Reserve Bank of New York, November 22, 2021, https://libertystreeteconomics.newyorkfed.org/
2021/11/preemptive-runs-and-the-offshore-u-s-dollar-money-market-funds-industry.
44 SEC, “Money Market Fund Reform; Amendments to Form PF Final Rule,” 79 Federal Register 47735, August 14,
2014.
45 Jeffrey Gordon and Christopher Gandia, Money Market Funds Run Risk: Will Floating Net Asset Value Fix the
Problem?, July 25, 2014, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2134995. For additional arguments, see
Jeffrey Gordon, Letter to the SEC, February 26, 2021, https://www.sec.gov/comments/s7-01-21/s70121-8426020-
229603.pdf.
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changes that could raise costs and slow market operations. Another challenge is that converting
existing floating NAV back to stable NAV may also incur costs.
The SEC’s Proposal
In the 2021 MMF reform proposal, the SEC does not recommend rolling back the part of the
2014 reform that mandates floating NAV for institutional prime and institutional tax-exempt
MMFs. Rather, the SEC recommends that stable NAV MMFs be converted to floating share price
when a negative interest rate environment occurs,46 during which time MMFs may face
difficulties generating sufficient operating income to support stable share price. See the last
paragraph of the “Market Size and Trends” section of this report for background on low interest
rate environments and MMF fees.
Swing Pricing
Swing pricing is a pricing method aimed at reducing incentives to run. As mentioned earlier, the
existing regulatory framework and MMF practice may allow first-mover advantage during a
crisis, when certain costs would be borne by the remaining fund investors, not the investors who
redeemed in full before others did. Swing pricing allows funds to adjust their NAV so that the
transaction price would pass on the costs from MMF redemptions more evenly to all investors,
including those who rush to redeem their shares before others do. With this approach of cost
sharing and a reduction in the first-mover advantage, investors would face much reduced
financial incentives to run.
The SEC finalized a rule in 2016 that permits certain mutual funds, except for MMFs, to use
swing pricing in some circumstances.47 Although the method has not met widespread adoption in
the United States, it has been a common liquidity management tool for European asset managers
for 20 years.48 One academic study on existing swing pricing practice at certain U.K. funds shows
that the method eliminated the funds’ first-mover advantage and reduced outflows during market
stress.49 The experience from the dash for cash in 2020 also demonstrated the effectiveness of
swing pricing. The frequency and magnitude of swing pricing increased significantly during the
most turbulent weeks of the dash for cash at some mutual funds with swing pricing capability.50
Some observers view this increased use as an investor protection mechanism that protected
remaining investors of funds from bearing the increased transaction costs of selling assets to meet
outflows.
Some observers argue that European MMF practices cannot be easily duplicated for MMFs in the
United States, because the European funds’ operating environment is better configured for data

46 A negative interest rate environment exists when nominal interest rates drop to below zero, meaning depositors
would have to pay banks to keep their cash. For more details, see Vikram Haksar and Emauel Kopphow, “How Can
Interest Rates Be Negative?,” International Monetary Fund, March 2020, https://www.imf.org/en/Publications/fandd/
issues/2020/03/what-are-negative-interest-rates-basics.
47 SEC, “Investment Company Swing Pricing,” 81 Federal Register 82084, November 11, 2016.
48 Swing pricing was introduced in the early 2000s in Luxembourg, Ireland, and the U.K. in response to market timing
cases. For more details, see BlackRock, Lessons from COVID-19: Liquidity Risk Management Is Central to Open-
Ended Funds, November 2020, p. 19, https://www.blackrock.com/corporate/literature/whitepaper/viewpoint-lessons-
from-covid-19-liquidity-risk-management-central-open-ended-funds-november-2020.pdf.
49 Dunhong Jin et al., “Swing Pricing and Fragility in Open-End Mutual Funds,” Review of Financial Studies, March 8,
2021, https://doi.org/10.1093/rfs/hhab022.
50 BlackRock, Swing Pricing – Raising the Bar, September 2021, p. 16, https://www.blackrock.com/corporate/
literature/whitepaper/spotlight-swing-pricing-raising-the-bar-september-2021.pdf.
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and estimates that allow the funds to more accurately implement the swing pricing terms.51 The
implementation of swing pricing may impose costs and operational challenges at MMFs and their
intermediaries such as broker-dealers and banks. In anticipation of swing pricing, large
institutional investors may refrain from providing advance notice of redemptions or game the
system by staggering their transactions to avoid unfavorable swings of the NAV. In addition,
calculating liquidity costs of investor redemptions during market distress could be difficult. This
lack of precision in estimating the transaction costs could pose challenges for swing pricing
design and implementation.
The SEC’s Proposal
The December 2021 SEC proposal recommends swing pricing for institutional prime and
institutional tax-exempt MMFs. These MMFs would be required to adjust their current NAV per
share using a swing factor whenever the funds encounter net redemptions that meet a certain
threshold. In deciding the swing factor, the SEC suggests the funds take into consideration the
transaction costs of selling a portion of the fund’s portfolio and an estimate of market impact
costs. Some of the SEC’s MMF swing price design leveraged off the existing swing pricing rule
applicable to other non-MMF mutual funds.52
Increased Liquidity Requirements
MMF liquidity requirements create cash buffers for the funds to meet redemption requirements.
The more liquidity assets MMFs hold, the better equipped they are to meet unexpected
redemptions and avoid fire sales.53
Some proposals suggest expanding liquidity requirements. The SEC calculated various
probabilities of an MMF to breach the daily and weekly liquidity requirements, taking into
account irregular market conditions as seen in March 2020. The analysis estimates that at current
liquidity requirement of 10% DLA and 30% WLA, a fund would have a 32% chance of
exhausting its available liquidity and needing to sell less-liquid assets on at least one day during a
five-day period during such market conditions. However, if DLA and WLA levels were to be
increased to 25% and 50%, respectively, the chance of running out of liquid assets would be
reduced to 9% for the same period.54
On the other hand, the more liquid and cash-like portfolio assets MMFs include in their
portfolios, the lower the expected portfolio returns. As the MMFs are facing proportionately more
liquidity requirements, they would have to commit a reduced share of their portfolios to higher
risk and return assets. This reallocation of the types of portfolio assets could affect the level of
investment returns MMFs could generate for their investors.
The SEC’s Proposal
The SEC recommends the increase of the DLA and WLA requirements to 25% and 50% from the
current 10% and 30%, respectively.

51 Investment Company Institute, Evaluating Swing Pricing: Operational Considerations, November 2016,
https://www.ici.org/doc-server/pdf%3Appr_16_evaluating_swing_pricing.pdf.
52 17 C.F.R. §270.22c-1(a)(3)(i)(C).
53 Fire sales often happen during financial market turbulence. These actions involve sales of assets at far below market
value to meet cash needs.
54 SEC, “Money Market Fund Reforms Proposed Rule,” 87 Federal Register 7248, February 8, 2022; and 17 C.F.R.
§270.2a-7.
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Additional Disclosure Requirements
Some observers argue that more information regarding the MMFs could help regulators and
market participants monitor and understand market conditions and potentially better mitigate or
price risks. Specifically, mandatory disclosure may encompass new information related to MMF
activities, shareholders, and when the funds could be approaching higher risk positions. With
increased transparency, investors and regulators could act on the information for investment,
regulation, and systemic risk prevention purposes. However, the increased disclosure generally
raises compliance costs, including direct commitment of financial resources and potential
requirements to reconfigure the existing business infrastructure to capture the information.
The SEC’s Proposal
The SEC proposes amendments to the Form N-CR and Form N-MFP reporting requirements,
including adding Form N-CR reporting when an MMF falls below a specified liquidity threshold
and increasing the amount of information N-MFP would collect on MMFs’ shareholders and the
selling of non-maturing portfolio assets.
Proposals Not Part of the SEC’s Recommendations
This section discusses some additional proposals that are considered by other financial
authorities—such as the President’s Working Group on Financial Markets and the Financial
Stability Board—but are not part of the SEC’s recommended approach in its proposed rule (Table
2 column 3).55 The general description of these options and some pros and cons are below.
Formalization of Sponsor Support
Rule 17a-9 under the Investment Company Act of 1940 permits MMF sponsors to provide certain
support for MMFs, but the sponsors have to publicly disclose financial support to increase
transparency.56 Some observers propose a more formalized sponsor support practice governed by
enhanced regulatory frameworks. This section discusses the magnitude of sponsor support during
past crises and the benefits and concerns associated with formalizing MMF sponsor support.
MMF sponsors can be important sources of stabilization for fund investors during crises. The
sponsors could provide support to MMFs in many ways, including cash injection, asset
purchases, and fee waivers.57 One research paper states that MMF sponsors have voluntarily
stepped in more than 200 times since the 1980s to provide support and absorb MMF losses.58
MMF sponsors have assets and operations that are separated from the assets of the funds, which
is very different from banks that generally do not segregate assets. This is a fundamental
difference that causes some industry observers to argue that policymakers should encourage
private resources from MMF sponsors to provide financial stability for the MMF industry.59

55 President’s Working Group on Financial Markets, Overview of Recent Events and Potential Reform Options for
Money Market Funds, December 2020, https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-
2020.pdf; and Financial Stability Board, Policy Proposals to Enhance Money Market Fund Resilience Final Report,
October 11, 2021, https://www.fsb.org/wp-content/uploads/P111021-2.pdf.
56 17 C.F.R. §270.17a-9.
57 Jill Fisch, The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform, 2015,
https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=2324&context=faculty_scholarship.
58 Bouveret, Martin, and McCabe, Money Market Fund Vulnerabilities.
59 Fisch, The Broken Buck Stops Here.
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In addition, because a formalized commitment to risk mitigation could provide more “skin in the
game” for MMF sponsors, these sponsors are likely to be more motivated to reduce MMF risk
taking. Under a more formalized sponsorship regime, the actions sponsors could take to mitigate
MMF risks may include reducing a fund’s risky assets, screening for large investor concentration
and transaction patterns, and proactively seeking pre-emptive steps to minimize potential losses
during a run.
Some observers are concerned that during crisis situations, certain risks supposedly borne by
MMF investors were borne by MMF sponsors and taxpayers (who are ultimately supporting the
federal government programs that provided a backstop for the industry). As such, these
arrangements lead to concerns regarding fairness in risk sharing and moral hazard. Opponents to
sponsor support argue that MMF investors are the appropriate parties to assume market and credit
risks.
Uncertainty regarding the voluntary nature of the sponsor support could also pose a concern, and
this is a concern that formalization is trying to address. Because sponsor support is discretionary
and not fully transparent, some observers worry that the failure of sponsor support during a crisis
could accelerate the run for the industry. Thus, some proposals call for explicit support and
reporting requirements to increase transparency and mandate sponsor support.60 But the increased
costs of sponsor support would also likely be borne by investors and the industry through reduced
investment returns.
Similar to one of the concerns for capital buffer proposals (discussed below), formalizing sponsor
support could favor bank-sponsored funds and increase industry concentration. The increased
concentration could result from the market discipline that causes investors to seek out funds with
stronger sponsor support, thus leaving the funds with less support in a weaker competitive
position.
With regard to bank-sponsored MMFs, some observers argue that sponsoring bank holding
companies could extend “shadow insurance” to MMFs under distress.61 Shadow insurance refers
to the perceived extension of government safety nets available to the bank holding companies to
their affiliated MMFs through sponsorship. Because such sponsorship generally does not increase
costs to banks (e.g., not facing increased capital requirements or paying federal insurance fees),
some observers consider this a form of regulatory arbitrage.62 As such, in addition to market
competition concerns, the “shadow insurance” measures may reference the unintended
consequences of risk transferring, circling back to the earlier question of whether non-MMF
investors should bear MMF risks.
Limits on Eligible Assets
Some observers suggest placing further limits on eligible assets and, in turn, potentially reducing
the size of the MMF industry. This option would confine MMF operations to certain safer assets
(e.g., short-term government securities) and thus reduce the impact of redemptions.
Opponents argue that reforms limiting and substantially altering MMFs may lead to growth in
MMF alternatives, such as banks and other financial entities that provide cash management

60 Fisch, The Broken Buck Stops Here.
61 Stefan Jacewitz and Haluk Unal, “Shadow Insurance? Money Market Fund Investors and Bank Sponsorship,” FDIC
Working Paper Series, June 2020, https://www.fdic.gov/analysis/cfr/working-papers/2020/cfr-wp2020-03.pdf.
62 Jacewitz and Unal, “Shadow Insurance?”
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Money Market Mutual Funds: Policy Concerns and Reform Options

services similar to investment funds. The measures may draw charges of government interference
with the free market by appearing to pick winners and losers.
Minimum Balance at Risk
Minimum balance at risk (MBR) is a loss absorption mechanism that would also reduce first-
mover advantages.63 With the use of MBR, a small portion of each investor’s share would be
redeemed with a time delay. Any investor’s redemption portion exceeding the MBR shares would
be redeemed without delay. The MBR shares serve to absorb potential losses more evenly across
all fund investors and ensure that investors who redeem the funds earlier would still share the
losses with other investors. MBR could protect investors, including retail investors, who tend to
act slower than institutional investors do during crises to redeem their shares.
MBR presents operational challenges for the related funds and liquidity concerns for their
investors. The ongoing computation of MBR may require system reconfigurations that involve
funds, investors, and related intermediaries to keep track of unrestricted and restricted MBR
shares, among other complexities for recording and transaction processing. These operational
challenges may increase costs and delays that adversely affect market efficiency. In addition, the
portion of the MBR shares that are not immediately accessible could generate liquidity issues for
investors who lack alternative sources of cash.
Capital Buffer
A capital buffer is a common banking regulation tool that requires bank funding to be structured
to allow the banks’ own capital to absorb losses before other stakeholders (e.g., depositors and
credit investors) do so. Such a buffer for MMFs would increase the MMF industry’s resilience
against crises and reduce its reliance on federal government actions during runs. The capital
commitment could also incentivize capital owners to mitigate portfolio risks to preserve capital.
In practice, in order to maintain the capital buffer that protects the fund’s NAV, the buffer would
be held in an escrow account financed by fund managers or outside investors, who would be
compensated for doing so.
On the other hand, capital buffers could be costly to construct. One study concludes that because
capital providers would demand compensation for bearing the risks, the return to investors after
removing the compensation would reduce the returns to be comparable to risk-free securities,
essentially making investing in MMFs uneconomical.64 The reduced utility of investing in MMFs
may adversely affect the availability of short-term funding through MMFs. In addition, capital
buffers could increase MMF industry concentration, because it may favor bank-sponsored funds,
potentially causing smaller asset managers to exit the market.65

63 Patrick McCabe et al., “The Minimum Balance at Risk: A Proposal to Mitigate the Systemic Risks Posed by Money
Market Funds,” Federal Reserve Bank of New York Staff Reports, July 2012, https://www.newyorkfed.org/
medialibrary/media/research/staff_reports/sr564.pdf.
64 Craig Lewis, “Money Market Fund Capital Buffers,” Vanderbilt Owen Graduate School of Management Research
Paper No. 2388676, April 6, 2015, https://ssrn.com/abstract=2388676.
65 President’s Working Group on Financial Markets, Overview of Recent Events and Potential Reform Options for
Money Market Funds, December 2020, https://home.treasury.gov/system/files/136/PWG-MMF-report-final-Dec-
2020.pdf.
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Money Market Mutual Funds: Policy Concerns and Reform Options

Author Information

Eva Su

Analyst in Financial Economics

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