8938 Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 

5See Securities Exchange Act Release No. 89344, 

85 FR 44951 (July 24, 2020). The Commission 

designated September 6, 2020 as the date by which 

the Commission shall approve or disapprove, or 

institute proceedings to determine whether to 

approve or disapprove, the proposed rule change. 

6 15 U.S.C. 78s(b)(2)(B). 

7See Securities Exchange Act Release No. 89739, 

85 FR 55708 (September 9, 2020). 

8Amendment No. 1 is available at https://

www.sec.gov/comments/sr-nasdaq-2020-028/ 

srnasdaq2020028.htm. 

9See Securities Exchange Act Release No. 90549, 

85 FR 79048 (December 8, 2020). 

10 17 CFR 200.30–3(a)(12). 

1The PWG is chaired by the Secretary of the 

Treasury and includes the Chair of the Board of 

Governors of the Federal Reserve System, the Chair 

of the SEC, and the Chair of the Commodity Futures 

Trading Commission. For a detailed discussion of 

the structure and significance of short-term funding 

markets and the effects of the COVID–19 shock, as 

well as the effects of monetary and fiscal measures, 

see SEC staff report, ‘‘U.S. Credit Markets 

Interconnectedness and the Effects of COVID–19 

Economic Shock,’’ (October 2020) (‘‘SEC Staff 

Interconnectedness Report’’), available at https://

www.sec.gov/files/US-Credit-Markets_COVID-19_

Report.pdf. The SEC Staff Interconnectedness 

Report also discusses the effects of the March 2020 

market stress on money market funds, including 

heavy outflows from prime and tax-exempt money 

market funds and significant inflows for 

government money market funds. 

2The Report is also available at https://

home.treasury.gov/system/files/136/PWG-MMFreport-final-Dec-2020.pdf. 

3See Money Market Fund Reform, Investment 

Company Act Release No. 29132 (Feb. 23, 2010) [75 

FR 10060 (Mar. 4, 2010)] (amending rule 2a–7 

under the Investment Company Act of 1940 (the 

‘‘Act’’) to, among other things, enhance 

transparency and reduce credit, liquidity, and 

interest rate risks of money market fund portfolios); 

Money Market Fund Reform; Amendments to Form 

PF, Investment Company Act Release No. 31166 

(July 23, 2014) [79 FR 47736 (Aug. 14, 2014)] 

(amending rule 2a–7 under the Act to address risks 

stemming from investor runs, including a floating 

NAV requirement for all prime and tax-exempt 

money market funds sold to institutional investors 

and the provision of new gate and fee tools for all 

prime and tax-exempt money market funds, 

including retail funds). 

rule change.5 On September 2, 2020, the 

Commission instituted proceedings 

under Section 19(b)(2)(B) of the Act 6 to 

determine whether to approve or 

disapprove the proposed rule change.7

On November 6, 2020, the Exchange 

filed Amendment No. 1 to the proposed 

rule change, which replaced and 

superseded the proposed rule change as 

originally filed.8 On December 2, 2020, 

the Commission extended the period for 

consideration of the proposed rule 

change to February 3, 2021.9 On 

February 1, 2021, the Exchange 

withdrew the proposed rule change 

(SR–NASDAQ–2020–028). 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.10

J. Matthew DeLesDernier, 

Assistant Secretary. 

[FR Doc. 2021–02707 Filed 2–9–21; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. IC–34188; File No. S7–01–21] 

Request for Comment on Potential 

Money Market Fund Reform Measures 

in President’s Working Group Report 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Request for comment. 

SUMMARY: The Securities and Exchange 

Commission (the ‘‘SEC’’ or the 

‘‘Commission’’) is seeking comment on 

potential reform measures for money 

market funds, as highlighted in a recent 

report of the President’s Working Group 

on Financial Markets (‘‘PWG’’). Public 

comments on the potential policy 

measures will help inform consideration 

of reforms to improve the resilience of 

money market funds and broader shortterm funding markets. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (https://www.sec.gov/ 

rules/submitcomments.htm); or 

• Send an email to rule-comments@

sec.gov. Please include File No. S7–01– 

21 on the subject line. 

Paper Comments 

• Send paper comments to Secretary, 

Securities and Exchange Commission, 

100 F Street NE, Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–01–21. This file number 

should be included on the subject line 

if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method of submission. The 

Commission will post all comments on 

the Commission’s website (http://

www.sec.gov). Typically, comments are 

also available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Due to pandemic 

conditions, however, access to the 

Commission’s public reference room is 

not permitted at this time. All 

comments received will be posted 

without change. Persons submitting 

comments are cautioned that we do not 

redact or edit personal identifying 

information from comment submissions. 

You should submit only information 

that you wish to make publicly 

available. 

Studies, memoranda, or other 

substantive items may be added by the 

Commission or staff to the comment file 

during this request for comment. A 

notification of the inclusion in the 

comment file of any such materials will 

be made available on the Commission’s 

website. To ensure direct electronic 

receipt of such notifications, sign up 

through the ‘‘Stay Connected’’ option at 

www.sec.gov to receive notifications by 

email. 

DATES: Comments should be received on 

or before April 12, 2021. 

FOR FURTHER INFORMATION CONTACT: 

Adam Lovell or Elizabeth Miller, Senior 

Counsels; Angela Mokodean, Branch 

Chief; Thoreau Bartmann, Senior 

Special Counsel; Viktoria Baklanova, 

Senior Financial Analyst; or Brian 

Johnson, Assistant Director, at (202) 

551–6792, Division of Investment 

Management, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–8549. 

SUPPLEMENTARY INFORMATION: 

I. The President’s Working Group 

Report 

The PWG has studied the effects of 

the growing economic concerns related 

to the COVID–19 pandemic in March 

2020 on short-term funding markets 

and, in particular, on money market 

funds.1 The results of this study are 

included in the report issued on 

December 22, 2020 and attached to this 

release as an Appendix (the ‘‘Report’’).2

The Report provides an overview of 

prior money market fund reforms in 

2010 and 2014, as well as how different 

types of money market funds have 

evolved since the 2008 financial crisis.3

The Report then discusses events in 

certain short-term funding markets in 

March 2020, focusing on money market 

funds. In reviewing the events of March 

2020, the Report discusses significant 

outflows from prime and tax-exempt 

money market funds that occurred and 

how these funds experienced, and began 

to contribute to, general stress in shortterm funding markets before the Federal 

Reserve, with the approval of the 

Department of the Treasury, established 

facilities to support short-term funding 

markets, including money market funds. 

The Report observes that these events 

occurred despite prior reform efforts to 

make money market funds more 

resilient to credit and liquidity stresses 

and, as a result, less susceptible to 

redemption-driven runs. Accordingly, 

Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 8939 

4For example, certain policy measures discussed 

in the Report, such as requiring prime and taxexempt money market funds to be members of a 

private liquidity exchange bank, may require 

rulemaking by the Commission as well as regulatory 

action from the Federal Reserve or other banking 

regulators. 

5A Commission staff statement also requested 

comment on the Report. See Staff Statement on the 

President’s Working Group Report on Money 

Market Funds (Dec. 23, 2020), available at https:// 

www.sec.gov/news/public-statement/blass-pwgmmf-2020-12-23. With the issuance of this 

Commission request for comment, commenters are 

encouraged to submit comments to File No. S7–01– 

21 by following the instructions at the beginning of 

this release. 

the Report concludes that the events of 

March 2020 show that more work is 

needed to reduce the risk that structural 

vulnerabilities in prime and tax-exempt 

money market funds will lead to or 

exacerbate stresses in short-term 

funding markets. The Report discusses 

various reform measures that policy 

makers could consider to improve the 

resilience of prime and tax-exempt 

money market funds and broader shortterm funding markets. Many of the 

measures discussed in the Report could 

be implemented by the Commission 

under our existing statutory authority, 

while others may require coordinated 

action by multiple agencies or the 

creation of new private entities.4

Moreover, relevant money market funds 

could likely implement some of the 

potential reform measures fairly 

quickly, while other measures would 

involve longer-term structural changes. 

II. Request for Comment 

The Commission requests comments 

on the Report. Comments received will 

enable the Commission and other 

relevant financial regulators to consider 

more comprehensively the potential 

policy measures the Report identifies 

and help inform possible money market 

fund reforms.5 Following the comment 

period, we anticipate conducting 

discussions with various stakeholders, 

interested persons, and regulators to 

discuss the options in the Report and 

the comments we receive. 

We request comment on the potential 

policy measures described in the Report 

both individually and in combination. 

We also request comment on the 

effectiveness of previously-enacted 

money market fund reforms, and the 

effectiveness of implementing policy 

measures described in the Report in 

addition to, or in place of, previouslyenacted reforms. Commenters should 

address the effectiveness of the 

measures in: (1) Addressing money 

market funds’ structural vulnerabilities 

that can contribute to stress in shortterm funding markets; (2) improving the 

resilience and functioning of short-term 

funding markets; and (3) reducing the 

likelihood that official sector 

interventions will be needed to prevent 

or halt future money market fund runs, 

or to address stresses in short-term 

funding markets more generally. 

Commenters also may address the 

potential impact of the measures on 

money market fund investors, fund 

managers, issuers of short-term debt, 

and other stakeholders. In addition, we 

are interested in comments on other 

topics commenters believe are relevant 

to further money market fund reform, 

including other approaches for 

improving the resilience of money 

market funds and short-term funding 

markets generally. We encourage 

commenters to submit empirical data 

and other information in support of 

their comments. 

By the Commission. 

Dated: February 4, 2021. 

Vanessa A. Countryman, 

Secretary. 

Report of the President’s Working 

Group on Financial Markets 

Overview of Recent Events and 

Potential Reform Options for Money 

Market Funds 

December 2020 

Table of Contents 

Paragraph 

Nos. 

I. Overview ................................................................................................................................................................................................ 229 

II. Background ........................................................................................................................................................................................... 231 

A. Money Market Funds—Structure, Asset Types, and Investor Characteristics ......................................................................... 231 

B. 2010 and 2014 Reforms ................................................................................................................................................................ 232 

C. State of the Money Market Fund Industry Following the 2008 Financial Crisis ..................................................................... 234 

III. Events in March 2020 ......................................................................................................................................................................... 236 

A. Stresses in Short-Term Funding Markets ................................................................................................................................... 237 

B. Stresses on Prime and Tax-Exempt Money Market Funds and Other Money-Market Investment Vehicles .......................... 239 

C. Taxpayer-Supported Central Bank Intervention ......................................................................................................................... 242 

IV. Potential Policy Measures to Increase the Resilience of Prime and Tax-Exempt Money Market Funds ..................................... 243 

A. Removal of Tie between MMF Liquidity and Fee and Gate Thresholds .................................................................................. 247 

B. Reform of Conditions for Imposing Redemption Gates .............................................................................................................. 248 

C. Minimum Balance at Risk ............................................................................................................................................................ 249 

D. Money Market Fund Liquidity Management Changes ............................................................................................................... 250 

E. Countercyclical Weekly Liquid Asset Requirements .................................................................................................................. 251 

F. Floating NAVs for All Prime and Tax-Exempt Money Market Funds ...................................................................................... 252 

G. Swing Pricing Requirement ......................................................................................................................................................... 253 

H. Capital Buffer Requirements ........................................................................................................................................................ 254 

I. Require Liquidity Exchange Bank Membership ........................................................................................................................... 255 

J. New Requirements Governing Sponsor Support ......................................................................................................................... 256 

I. Overview 

In March 2020, short-term funding 

markets came under sharp stress amid 

growing economic concerns related to 

the COVID–19 pandemic and an overall 

flight to liquidity and quality among 

investors. Instruments underlying these 

markets include short-term U.S. 

Treasury securities, short-term agency 

securities, short-term municipal 

securities, commercial paper (‘‘CP’’), 

and negotiable certificates of deposit 

issued by domestic and foreign banks 

(‘‘NCDs’’). Money market funds 

(‘‘MMFs’’) are significant participants in 

these markets, facilitating investment by 

a broad range of individuals and 

institutions in the relevant short-term 

instruments. Because these short-term 

instruments tend to have relatively 

stable values and MMFs offer daily 

redemptions, investors in MMFs often 

expect to receive immediate liquidity 

with limited price volatility. However, 

in times of stress, these expectations 

may not match market conditions, 

causing investors to seek to liquidate 

8940 Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 

6For a more detailed discussion of the structure 

and significance of short-term funding markets and 

the effects of the COVID–19 shock, as well as the 

effects of monetary and fiscal measures, see SEC 

staff report, ‘‘U.S. Credit Markets 

Interconnectedness and the Effects of COVID–19 

Economic Shock,’’ (October 2020) (‘‘SEC Staff 

Interconnectedness Report’’), available at https://

www.sec.gov/files/US-Credit-Markets_COVID-19_

Report.pdf; Board of Governors of the Federal 

Reserve System, ‘‘Financial Stability Report,’’ 

(November 2020) at pp. 13–14, available at https:// 

www.federalreserve.gov/publications/files/ 

financial-stability-report-20201109.pdf. 

7The MMLF makes loans available to eligible 

financial institutions secured by high-quality assets 

the financial institution purchased from MMFs. The 

MMLF also received $10 billion in credit protection 

from the Treasury’s Exchange Stabilization Fund. 

Other relevant Federal Reserve facilities include, 

among others: (1) The Commercial Paper Funding 

Facility (‘‘CPFF’’), which provides a liquidity 

backstop to U.S. issuers of commercial paper; and 

(2) the Primary Dealer Credit Facility (‘‘PDCF’’), 

which provides funding to primary dealers in 

exchange for a broad range of collateral. 

8A number of other funds that suffered losses in 

2008 avoided breaking the buck because they 

received sponsor support. See Money Market Fund 

Reform; Amendments to Form PF, Investment 

Company Act Release No. 31166 (July 23, 2014) [79 

FR 47736 (Aug. 14, 2014)] (‘‘SEC 2014 Reforms’’) at 

Section II.B.4, available at https://www.sec.gov/ 

rules/final/2014/33-9616.pdf; See also Steffanie A. 

Brady, Kenechukwu E. Anadu, and Nathaniel R. 

Cooper, ‘‘The Stability of Prime Money Market 

Mutual Funds: Sponsor Support from 2007 to 

2011,’’ Federal Reserve Bank of Boston Supervisory 

Research and Analysis Working Papers (2012), 

available at https://www.bostonfed.org/ 

publications/risk-and-policy-analysis/2012/thestability-of-prime-money-market-mutual-fundssponsor-support-from-2007-to-2011.aspx. For a 

description of the term ‘‘break the buck,’’ see 

Section II.A, below. 

9For a more detailed discussion of the MMFrelated events in 2008, see Report of the President’s 

Working Group on Financial Markets, ‘‘Money 

Market Fund Reform Options,’’ (October 2010) 

(‘‘2010 PWG Report’’), available at https://

www.treasury.gov/press-center/press-releases/ 

Documents/10.21%20PWG%20Report

%20Final.pdf. 

10The PWG is chaired by the Secretary of the 

Treasury and includes the Chair of the Board of 

Governors of the Federal Reserve System, the Chair 

of the Securities and Exchange Commission, and 

the Chair of the Commodity Futures Trading 

Commission. 

11 Given jurisdictional differences, this report is 

not intended to cover events in other jurisdictions 

or to suggest a uniform international approach to 

policy changes. 

their positions in MMFs. These investor 

actions, which are motivated by both 

the expectation-market condition 

mismatch and the structural 

vulnerabilities of MMFs, can amplify 

market stress more generally.6

The economic and public policy 

considerations raised by this dynamic 

among investors, MMFs, and short-term 

funding markets are multi-faceted and 

significant. The orderly functioning of 

short-term funding markets is essential 

to the performance of broader financial 

markets and our economy more 

generally. It is the role of financial 

regulators to identify and address 

market activities that have the potential 

to impair that orderly functioning. 

Crafters of public policy and financial 

regulation also must recognize that the 

broad availability of short-term funding 

is critical to short-term funding markets 

and, for many decades, prime and taxexempt MMFs have been an important 

source of demand in these markets 

although their market share has 

decreased and assets shifted toward 

government MMFs in the past decade. 

In addition, the participation of retail 

investors in MMFs raises considerations 

of fairness and consumer confidence, 

particularly in times of unanticipated 

stress, that can affect regulatory and 

public policy responses. 

These dynamics and policy 

considerations were brought into stark 

relief in March 2020. While government 

MMFs saw significant inflows during 

this time, the prime and tax-exempt 

MMF sectors faced significant outflows 

and increasingly illiquid markets for the 

funds’ assets. As a result, prime and taxexempt MMFs experienced, and began 

to contribute to, general stress in shortterm funding markets in March 2020. 

For example, as pressures on prime and 

tax-exempt MMFs worsened, two MMF 

sponsors intervened to provide support 

to their funds. It did not appear that 

these funds had idiosyncratic holdings 

or were otherwise distinct from similar 

funds and, accordingly, it was 

reasonable to conclude that other MMFs 

could need similar support in the near 

term. These events occurred despite 

multiple reform efforts over the past 

decade to make MMFs more resilient to 

credit and liquidity stresses and, as a 

result, less susceptible to redemptiondriven runs. When the Federal Reserve 

quickly took action in mid-March by 

establishing, with Treasury approval, 

the Money Market Mutual Fund 

Liquidity Facility (‘‘MMLF’’) and other 

facilities to support short-term funding 

markets generally and MMFs 

specifically, prime and tax-exempt 

MMF outflows subsided and short-term 

funding market conditions improved.7

Prime and tax-exempt MMFs have 

been supported by official sector 

intervention twice over the past twelve 

years. In September 2008, there was a 

run on certain types of MMFs after the 

failure of Lehman Brothers caused a 

large prime MMF that held Lehman 

Brothers short-term instruments to 

sustain losses and ‘‘break the buck.’’ 8

During that time, prime MMFs 

experienced significant redemptions 

that contributed to dislocations in shortterm funding markets, while 

government MMFs experienced net 

inflows. Ultimately, the run on prime 

MMFs abated after announcements of a 

Treasury guarantee program for MMFs 

and a Federal Reserve facility designed 

to provide liquidity to MMFs.9

Subsequently, the Securities and 

Exchange Commission (‘‘SEC’’) adopted 

reforms (in 2010 and 2014) that were 

designed to address the structural 

vulnerabilities that became apparent in 

2008. 

Because prime and tax-exempt MMFs 

again have shown structural 

vulnerabilities that can create or 

transmit stress in short-term funding 

markets, it is incumbent upon financial 

regulators to examine the events of 

March 2020 closely, and in particular 

the role, operation, and regulatory 

framework for these MMFs, with a view 

toward potential improvements. In 

addition, absent regulatory reform or 

other action that alters market 

expectations, these prior official sector 

interventions may have the consequence 

of solidifying the perception among 

investors, fund sponsors, and other 

market participants that similar support 

will be provided in future periods of 

stress. 

With that history and context, this 

report by the President’s Working Group 

on Financial Markets (‘‘PWG’’) begins 

the important process of review and 

assessment.10 After providing 

background on MMFs and prior reforms, 

the report discusses events in certain 

short-term funding markets in March 

2020, focusing on MMFs. The report 

then discusses various measures that 

policy makers could consider to 

improve the resilience of MMFs and 

broader short-term funding markets.11

This report is meant to facilitate 

discussion. The PWG is not endorsing 

any given measure at this time. 

II. Background 

A. Money Market Funds—Structure, 

Asset Types, and Investor 

Characteristics 

MMFs are a type of mutual fund 

registered under the Investment 

Company Act of 1940 (the ‘‘Act’’) and 

regulated under rule 2a–7 of the Act. 

MMFs offer a combination of limited 

principal volatility, liquidity, and 

payment of short-term market returns, 

which make them a popular cash 

management vehicle for both retail and 

institutional investors. These funds also 

serve as an important source of shortterm financing for businesses and 

financial institutions, as well as federal, 

state, and local governments. 

Overall, MMFs tend to invest in shortterm, high-quality debt instruments that 

typically are held to maturity and 

Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 8941 

12For example, funds not offered to the public 

include ‘‘central’’ funds that asset managers use for 

internal cash management. 

13See Money Market Fund Reform, Investment 

Company Act Release No. 29132 (Feb. 23, 2010) [75 

FR 10060 (Mar. 4, 2010)] (‘‘SEC 2010 Reforms’’), 

available at https://www.sec.gov/rules/final/2010/ 

ic-29132.pdf; SEC 2014 Reforms. 14All MMFs are subject to these DLA and WLA 

standards, except tax-exempt MMFs are not subject 

to DLA standards due to the nature of the markets 

for tax-exempt securities and the limited supply of 

securities with daily demand features. If a MMF’s 

portfolio does not meet the minimum DLA or WLA 

standards, it is not in violation of rule 2a–7. 

However, it may not acquire any assets other than 

DLA or WLA until it meets these minimum 

standards. 

Daily liquid assets are: Cash; direct obligations of 

the U.S. government; certain securities that will 

mature (or be payable through a demand feature) 

within one business day; or amounts 

unconditionally due within one business day from 

pending portfolio security sales. See rule 2a–7(a)(8). 

Weekly liquid assets are: Cash; direct obligations 

of the U.S. government; agency discount notes with 

remaining maturities of 60 days or less; certain 

securities that will mature (or be payable through 

a demand feature) within five business days; or 

amounts unconditionally due within five business 

days from pending security sales. See rule 2a– 

7(a)(28). 

15See SEC staff report, ‘‘Response to Questions 

Posed by Commissioners Aguilar, Paredes, and 

Gallagher,’’ (November 2012) at pp. 18–30, 

available at http://www.sec.gov/news/studies/2012/ 

money-market-funds-memo-2012.pdf. 

16Prior to the 2014 reforms, the Financial 

Stability Oversight Council (‘‘FSOC’’) proposed 

recommendations regarding MMF reforms to 

address structural vulnerabilities of MMFs that the 

SEC’s 2010 reforms did not address. These 

proposed recommendations, which FSOC made 

pursuant to Section 120 of the Dodd-Frank Act, 

included alternatives on a floating NAV, a riskbased NAV buffer of 3 percent to provide explicit 

loss-absorption capacity, and a minimum balance at 

risk. See Financial Stability Oversight Council, 

‘‘Proposed Recommendations Regarding Money 

Market Mutual Fund Reform,’’ (November 2012) 

(‘‘FSOC Proposed Recommendations’’), available at 

https://www.treasury.gov/initiatives/fsoc/

Documents/Proposed%20Recommendations

%20Regarding%20Money%20Market%20Mutual

%20Fund%20Reform%20-%20November%2013,

%202012.pdf. 

fluctuate very little in value under 

normal market conditions. However, 

from fund to fund, MMFs vary 

significantly. They hold different types 

of investments, serve investors of 

different types (i.e., institutional and 

retail), and pursue different investment 

objectives. For example, tax-exempt 

MMFs hold short-term state and local 

government and municipal securities, 

while government MMFs almost 

exclusively hold obligations of the U.S. 

government, including obligations of the 

U.S. Treasury and federal agencies and 

instrumentalities, as well as repurchase 

agreements collateralized fully by 

government securities. Traditionally, 

prime MMFs invest mostly in private 

debt instruments, including CP and 

NCDs. With regard to investor 

characteristics, there are three types of 

MMFs: (1) Retail MMFs, which are 

limited to retail investors; (2) publiclyoffered institutional MMFs, which are 

held primarily by institutional investors 

and offered broadly to the public; and 

(3) non-publicly-offered institutional 

MMFs.12 Variations in portfolio 

holdings also correspond with investorspecific factors such as taxing 

jurisdictions and, to some extent, risk/ 

return preferences. 

Another significant difference among 

different types of MMFs is how they 

price the purchase and redemption of 

their shares. All government MMFs, as 

well as retail prime and retail taxexempt MMFs, are permitted to price 

their shares at a stable net asset value 

(‘‘NAV’’) per share (typically $1.00) 

without regard to small variations in the 

value of the assets in their portfolios. 

These MMFs must periodically compare 

their stable NAV per share to the 

market-based value per share of their 

portfolios (or ‘‘market-based price’’). If 

the deviation between these two values 

exceeds one-half of one percent (50 

basis points), the fund’s board must 

consider what action, if any, to take, 

including whether to adjust the fund’s 

share price. If the repricing is below the 

fund’s $1.00 share price, the event is 

commonly called ‘‘breaking the buck.’’ 

In light of the importance investors 

place on a stable $1.00 share price, such 

an action can lead to a loss of 

confidence in the fund and, if it is 

expected to extend beyond one fund, 

could lead to a loss of confidence in all 

similar funds. As discussed below, 

following the SEC’s 2014 reforms, 

institutional prime and institutional taxexempt MMFs are required to price their 

shares using a floating NAV, which 

reflects the market value of the fund’s 

investments and any changes in that 

value, thus reducing the risk of an 

adverse signaling effect from ‘‘breaking 

the buck.’’ 

As investors commonly use MMFs for 

principal preservation and as a cash 

management tool, many MMF investors 

may have a low tolerance for losses and 

liquidity limitations. However, MMFs 

offer shareholder redemptions on at 

least a daily basis (and in some cases at 

a stable NAV), even though a potentially 

significant portion of portfolio assets 

may not be converted into cash in that 

timeframe without a reduction in value. 

When the MMF does have to sell 

portfolio assets at a discount, the fund’s 

remaining shareholders generally bear 

those losses. These factors can lead to 

greater redemptions if investors believe 

they will be better off by redeeming 

earlier than other investors—a so-called 

‘‘first mover’’ advantage—when there is 

a perception that the fund may suffer a 

loss in value or liquidity. Historically, 

amid periods of stress for MMFs, 

institutional investors, who may have 

large holdings and the resources to 

monitor risks carefully, have redeemed 

shares more rapidly and extensively 

than retail investors. 

B. 2010 and 2014 Reforms 

The SEC has implemented a number 

of reforms over the past decade aimed 

at making MMFs more resilient to credit 

and liquidity stresses and addressing 

structural vulnerabilities in MMFs that 

were evident in the 2008 financial 

crisis, particularly the substantial 

reforms the SEC adopted in 2010 and 

2014.13 The 2010 reforms focused on, 

among other things, enhancing 

transparency and reducing credit, 

liquidity, and interest rate risks of fund 

portfolios to make MMFs more resilient 

and, in the case of stable NAV funds, 

less likely to break the buck. For 

example, the amendments introduced 

new liquidity requirements: At the time 

an MMF acquires an asset, it must hold 

at least 10 percent of its total assets in 

daily liquid assets (‘‘DLA’’) and at least 

30 percent of its total assets in weekly 

liquid assets (‘‘WLA’’).14 These 

requirements are designed to work in 

combination and ensure that a MMF has 

the legal right to receive enough cash 

within one or five business days to 

satisfy redemption requests. To address 

credit risks, the amendments added a 

new 120-day limit on funds’ portfolio 

weighted average life to limit exposure 

to credit spreads, as well as a reduction 

in the limit on funds’ portfolio weighted 

average maturity from 90 days to 60 

days to limit interest rate risk.15 The 

2010 reforms increased transparency by 

requiring MMFs to publicly disclose 

portfolio holdings each month. In 

addition, the amendments addressed 

other important issues such as stress 

testing, orderly fund liquidation, and 

repurchase agreements. 

The SEC’s subsequent 2014 reforms 

focused on the structural vulnerabilities 

that make MMFs susceptible to runs and 

provided tools intended to slow runs 

should they occur.16 These reforms 

included a floating NAV requirement for 

all prime and tax-exempt MMFs sold to 

institutional investors as a means of 

mitigating first mover advantages for 

investors who redeem from these funds 

when the value of their assets decline. 

Under the floating NAV requirement, 

these MMFs must sell and redeem their 

shares at prices based on the current 

market-based value of the assets in their 

underlying portfolios rounded to the 

fourth decimal place (e.g., $1.0000). 

Prior to the 2014 reforms, rule 2a–7 

8942 Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 

17 Government MMFs are permitted (but not 

required) to adopt fee and gate provisions. 

permitted these funds to maintain a 

stable NAV per share like all other 

MMFs. 

In addition, to provide tools to slow 

an investor run should it occur, the 

2014 reforms provided new fee and gate 

tools for all prime and tax-exempt 

MMFs, including retail funds.17 Under 

the fee and gate provisions, boards of 

these MMFs are permitted to impose 

liquidity (redemption) fees of up to 2 

percent or to temporarily suspend 

redemptions if the fund’s WLA falls 

below the 30 percent minimum 

required. In addition, funds must 

impose a 1 percent liquidity fee if WLA 

falls below 10 percent of total assets, 

unless the fund’s board determines that 

imposing the fee is not in the best 

interests of the fund. Liquidity fees 

provide investors continued access to 

cash redemptions but may reduce the 

incentive to redeem. Gates, on the other 

hand, stop redemptions altogether for 

up to ten business days but may cause 

investors to seek a first mover advantage 

and redeem in advance of the 

imposition of gates. 

Further, the 2014 amendments 

enhanced transparency for MMF 

investors and provided information 

about important MMF events more 

uniformly and efficiently. For instance, 

the amendments required MMFs to 

promptly report certain significant 

events in filings with the SEC, including 

the imposition or removal of fees or 

gates, portfolio security defaults, the use 

of sponsor support, and a fall in a retail 

or government MMF’s market-based 

price per share below $0.9975. The 2014 

reforms also generally required website 

disclosure of these events, as well as 

daily website disclosure of a fund’s 

DLA, WLA, market-based NAV, and net 

flows. In addition, the reforms 

addressed MMF diversification and 

valuation practices. 

C. State of the Money Market Fund 

Industry Following the 2008 Financial 

Crisis 

Since 2008, the composition of the 

MMF sector has changed substantially, 

and the industry continued to evolve 

through 2020. Chart 1 provides 

information about changes in net assets 

by type of MMF, while Chart 2 provides 

more detail about subcategories of prime 

and tax-exempt MMFs (i.e., retail and 

institutional funds). As of September 30, 

2020, total industry net assets were $4.9 

trillion, down slightly from an all-time 

high of $5.2 trillion in May 2020 (see 

Chart 1). 

BILLING CODE 8011–01–P 


EN10FE21.001</GPH>
Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 8943 

18The 2014 amendments introduced a regulatory 

definition of a retail MMF (and implemented it in 

2016). Because data on institutional and retail 

MMFs prior to October 2016 may not be entirely 

comparable with current statistics, Chart 2 does not 

include data on retail and institutional MMFs prior 

to October 2016. 

The drop in prime retail MMF assets in 

September 2020 is the result of a large prime retail 

MMF converting to a government MMF. 

19The compliance date for the floating NAV 

requirement for institutional prime and 

institutional tax-exempt MMFs and for the fee and 

gate provisions for all prime and tax-exempt funds 

was October 14, 2016. 

20Total CP outstanding at the end of February 

2020 was $1.1 trillion (source: Federal Reserve). 

Holdings of publicly-offered prime funds are based 

Continued 

BILLING CODE 8011–01–C 

The assets of government MMFs (the 

blue line in Chart 1), which were under 

$1 trillion in August 2008, have grown 

considerably since then. Much of the 

growth occurred in 2016, when 

government MMF assets increased more 

than $1 trillion as investors shifted 

money from prime and tax-exempt 

MMFs, which were required, starting in 

October 2016, to implement the more 

significant aspects of the 2014 

reforms.19 In March 2020, government 

MMF assets increased by $840 billion to 

$3.6 trillion, and their assets reached 

nearly $4.0 trillion at the end of April. 

As of September 2020, government 

MMFs accounted for 77 percent of 

industry net assets. 

The net assets of prime MMFs (the red 

line in Chart 1) contracted substantially 

in the year leading up to the October 

2016 deadline for implementing the 

2014 MMF reforms and were $550 

billion in December 2016. By February 

2020, these funds’ assets had recovered 

to $1.1 trillion, but their assets fell $125 

billion on net in March. As of 

September 2020, prime MMFs 

accounted for around 20 percent of 

industry net assets. 

Net assets in tax-exempt MMFs (the 

dashed green line in Chart 1) have also 

declined since 2008, when these funds 

had net assets exceeding $500 billion. 

Tax-exempt funds’ assets fell $120 

billion in the year before October 2016 

and were about $135 billion at the end 

of 2016. By February 2020, tax-exempt 

fund assets were about $140 billion, and 

they declined $9 billion in March 2020. 

The vast majority of tax-exempt MMF 

net assets are in retail funds (see Chart 

2). Tax-exempt MMFs represent under 

three percent of total industry net assets 

as of September 2020. 

III. Events in March 2020 

Amid escalating concerns about the 

economic impact of the COVID–19 

pandemic in March 2020, market 

participants sought to rapidly shift their 

holdings toward cash and short-term 

government securities. This rapid shift 

in asset allocation preferences placed 

stress on various components of shortterm funding markets, including prime 

and tax-exempt MMFs, the repo 

markets, the CP market, and short-term 

municipal securities markets (including 

the market for variable-rate demand 

notes (‘‘VRDNs’’)). As discussed in more 

detail below, pressures on prime and 

tax-exempt MMFs again revealed 

structural vulnerabilities in MMFs that 

led to increased redemptions and, in 

turn, began to contribute to and increase 

the general stress in short-term funding 

markets. 

A. Stresses in Short-Term Funding 

Markets 

Private short-term debt markets. In 

markets for private short-term debt 

instruments, such as CP and NCDs, 

conditions began to deteriorate rapidly 

in the second week of March. Spreads 

for instruments held by MMFs began 

widening sharply (see Chart 3). 

Specifically, spreads to overnight 

indexed swaps (‘‘OIS’’) for AA-rated 

nonfinancial CP reached new historical 

highs, while spreads for AA-rated 

financial CP and A2/P2-rated 

nonfinancial CP widened to the highest 

levels seen since the 2008 financial 

crisis. Along with widening spreads, 

new issuance of CP and NCDs declined 

markedly and shifted to short tenors. 

For instance, the share of CP issuance 

with overnight maturity climbed 

steadily to nearly 90 percent on March 

23. 

Pricing and liquidity concerns at 

MMFs were driven by, and began to 

contribute to, these market stresses. 

Widening spreads in short-term funding 

markets put downward pressure on the 

prices of assets in prime MMFs’ 

portfolios, and redemptions from MMFs 

likely contributed to stress in these 

markets, as prime funds reduced their 

CP holdings disproportionately 

compared to other holders. At the end 

of February, prime MMFs offered to the 

public owned about 19 percent of 

outstanding CP.20 From March 10 to 


EN10FE21.002</GPH>
8944 Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 

on data from iMoneyNet. Total prime MMF 

holdings of CP, including internal funds that are not 

offered to the public, were 29 percent of 

outstanding CP at the end of February 2020 (source: 

SEC Form N–MFP). 21About $6 billion of the reduction in MMF 

holdings of CP during this time was pledged as 

collateral to the MMLF. 

22Funds with WLAs below the 30 percent 

minimum threshold are prohibited from purchasing 

assets that are not WLAs, including CP and NCDs 

with maturities exceeding 7 days. On March 17 and 

18, one prime MMF offered to institutional 

investors reported WLAs below 30 percent. 23For example, large customer sales increased 

dealers’ inventories of Treasuries and mortgagebacked securities. Facing balance sheet constraints 

and internal risk limits amid the elevated volatility, 

dealers cut back on intermediation more generally. 

24According to DTCC’s Money Market Kinetics 

report as of March 31, 2020 (available at https://

www.dtcc.com/money-markets), the 12-month 

average of daily settlements for fixed and floating 

rate CP was approximately $80 billion, although 

only a small share of this volume appears to have 

been secondary market transactions, and further 

analysis of secondary market activity is needed. As 

previously noted, there was approximately $1.1 

trillion of total CP outstanding at the end of 

February 2020. 

March 24, these funds cut their CP 

holdings by $35 billion. This reduction 

accounted for 74 percent of the $48 

billion overall decline in outstanding CP 

over those two weeks.21 In addition, 

MMFs with WLAs close to 30 percent 

were likely reluctant to purchase assets 

with maturities of more than 7 days that 

would not qualify as WLA to avoid 

going below the regulatory 

requirements.22 Beyond MMFs, there 

were also other factors contributing to 

stress in CP markets, including outflows 

from other investment vehicles that 

invest in these markets (see below). 

Some market participants have 

suggested that another contributing 

factor to stress in CP markets was that 

dealers in CP markets (as well as issuing 

dealers and banks) were experiencing 

their own liquidity pressures and limits 

on their willingness to intermediate in 

money markets.23 Historically, however, 

because the vast majority of CP typically 

is held to maturity, dealers have not had 

a substantial role in making secondary 

markets in CP. This is also the case for 

other private short-term debt 

instruments that prime MMFs hold. 

Thus, there was no reason to expect 

dealers to take a materially increased 

intermediation role in these assets in 

March. There are also a large number of 

individual issues (i.e., CUSIPs) in the 

private short-term debt markets, which 

adds complexity to intermediation.24 In 

contrast to the private short-term debt 

markets, Treasury and agency securities 

markets have fewer CUSIPs, large daily 

trading volumes, and more liquid 

secondary markets, with primary 

dealers and others playing a large daily 

intermediation role in these markets. 

Short-term municipal debt markets. 

Conditions in short-term municipal debt 

markets also worsened rapidly in midMarch. Similar to the relationship 

between the CP market and prime 

MMFs discussed above, stresses in 

short-term municipal markets 

contributed to pricing pressures and 

outflows for tax-exempt MMFs which, 

in turn, contributed to increased stress 

in municipal markets. Beginning on 

March 12, tax-exempt MMFs 

experienced unusually large 

redemptions, with outflows accelerating 

over the next week. In response, taxexempt funds reduced their holdings of 

VRDNs by about 16 percent ($15 billion) 

in the two weeks from March 9 to March 

23, with primary dealer VRDN 

inventories nearly tripling in the week 

ending March 18. VRDNs have a 

demand or tender feature that allows 

tax-exempt MMFs to require the tender 

agent to repurchase the security at par 

plus accrued interest. When a taxexempt MMF tenders a VRDN, a 

remarketing agent typically remarkets 

the VRDN to other investors at a higher 

yield (and thus a lower price). 

The redemption stresses on taxexempt MMFs likely contributed to 

worsening conditions in short-term 

municipal debt markets. The SIFMA 7- 

day municipal swap index yield, a 

benchmark weekly rate in these 

markets, shot up 392 basis points on 


EN10FE21.003</GPH>
Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 8945 

25The following discussion provides data on the 

size of the largest outflows from different types of 

MMFs during a given two-week (10 business day) 

period in March. These two-week periods do not 

necessarily coincide. For example, the two-week 

period for institutional prime funds begins two days 

before that for retail prime funds, in part because 

institutional prime funds experienced heavy 

redemptions earlier than retail prime funds. Using 

data for one-week periods provides qualitatively 

similar results. For comparison purposes, we also 

provide data on outflows for a standard two-week 

period from March 9 to March 20 for all types of 

MMFs, based on SEC Form N–MFP weekly data. 

26 Data on daily MMF flows are from iMoneyNet. 

SEC Form N–MFP provides an official source of 

weekly flows data (for weeks ending on Fridays). 

For the two weeks from March 9 to 20, outflows 

from institutional prime funds that are offered to 

the public (as proxied by their presence in 

commercial databases) totaled $90 billion (27 

percent of assets). Form N–MFP weekly flows data 

are not available for the September 2008 crisis. 

27See footnote 12 and accompanying text for an 

explanation of publicly-offered funds versus nonpublic funds. 

28Source: SEC Form N–MFP. 

29Source: iMoneyNet daily data. Similarly, data 

from SEC Form N–MFP show retail prime fund 

outflows of 7 percent of assets ($33 billion) over the 

two week period from March 9 to 20. 

30See footnote 18 (explaining that data on 

institutional and retail MMFs prior to 2016 may not 

be entirely comparable with current statistics). 

31Source: iMoneyNet daily data. Similarly, data 

from SEC form N–MFP show tax-exempt fund 

outflows of 8 percent of assets ($11 billion) over the 

two weeks from March 9 to 20. 

32See Lei Li, Yi Li, Marco Macchiavelli, and Xing 

(Alex) Zhou, ‘‘Runs and Interventions in the Time 

of COVID–19: Evidence from Money Funds,’’ 

working paper (2020), available at https://

papers.ssrn.com/sol3/papers.cfm?abstract_

id=3607593. 

March 18, as remarketing agents offered 

VRDNs at higher yields in response to 

tax-exempt MMFs putting back their 

notes to tender agents. The spike in the 

SIFMA index yield caused a drop in 

market-based NAVs of tax-exempt 

MMFs (which mostly have stable, 

rounded NAVs). 

B. Stresses on Prime and Tax-Exempt 

Money Market Funds and Other MoneyMarket Investment Vehicles 

As part of the general deterioration in 

short-term funding market conditions, 

prime and tax-exempt MMFs 

experienced heavy redemptions 

beginning in the second week of March 

2020. Outflows increased quickly, 

peaking on March 17 for prime funds 

(the day the Federal Reserve announced 

the CPFF) and on March 23 for taxexempt funds (one business day after 

the Federal Reserve’s MMLF was 

expanded to include tax-exempt 

securities).25

Institutional prime fund outflows. 

Among institutional prime MMFs 

offered to the public, outflows as a 

percentage of fund size exceeded those 

in the September 2008 crisis. However, 

the dollar amount of outflows from 

these funds was much smaller in March 

2020, in part because their assets on the 

eve of the pandemic were less than onequarter of their size on the eve of the 

2008 crisis. Over the two-week period 

from March 11 to 24, net redemptions 

from publicly-offered institutional 

prime funds totaled 30 percent (about 

$100 billion) of the funds’ assets, and 

these funds’ outflows exceeded 5 

percent of their assets on three 

consecutive days beginning on March 

17. For comparison, in September 2008, 

the highest outflows from these funds 

over a two-week period were about 26 

percent (about $350 billion) of assets.26

A sizable portion of the institutional 

prime fund sector’s assets are in funds 

that are not offered to the public.27

These non-public funds had smaller 

outflows than their publicly-offered 

counterparts, indicating that, on 

average, the former do not demonstrate 

the same vulnerabilities as funds that 

are offered publicly to a broad range of 

unaffiliated institutional investors. This 

difference may be attributable to 

investor characteristics as much as or 

more than the nonpublic nature of the 

offering. Outflows from non-public 

institutional prime funds totaled 6 

percent ($17 billion) of assets from 

March 9 to March 20.28

Retail prime fund outflows. Although 

outflows from retail prime MMFs as a 

share of assets in March exceeded retail 

prime MMF outflows during the 2008 

crisis, the March outflows from retail 

prime MMFs were smaller than 

outflows from institutional prime 

MMFs. The redemptions from retail 

prime MMFs in March began a couple 

of days after those for institutional 

funds. Net redemptions totaled 9 

percent (just over $40 billion) of assets 

over the two weeks from March 13 to 

26.29 In September 2008, the heaviest 

retail outflows over a two-week period 

totaled 5 percent of assets. Retail prime 

funds had about 60 percent more assets 

in 2008 than in February 2020, so 

outflows were similar in dollar terms in 

both crises.30 Some retail prime MMFs 

experienced declining market-based 

prices in March, but none of these funds 

reported a market-based price below 

$0.9975. Moreover, retail prime MMF 

flows in March 2020 appear to have 

been unrelated to market-based prices, 

as funds with lower market-based prices 

did not experience larger outflows than 

other retail prime MMFs. 

Tax-exempt fund outflows and 

declining market-based prices. Outflows 

from tax-exempt MMFs, which are 

largely retail funds, were 8 percent ($11 

billion) of assets during the two weeks 

from March 12 to 25.31 In 2008, when 

tax-exempt MMF assets were more than 

four times larger than in February 2020, 

such funds had outflows of 7 percent 

(almost $40 billion) of assets in one twoweek period. In March, some retail taxexempt MMFs also had declining 

market-based prices. Although none of 

these funds broke the buck, one fund 

reported a market-based price below 

$0.9975. As with retail prime MMFs, 

there does not appear to have been a 

relationship between a decline in a 

particular retail tax-exempt MMF’s 

market-based price and the size of its 

outflows. 

Declining WLAs and relation to fees 

and gates. As prime funds experienced 

heavy redemptions, their WLAs 

declined, and some funds’ WLAs 

(which must be disclosed publicly each 

day) approached or fell below the 30 

percent minimum threshold that SEC 

rules require. Investor redemptions, 

which may have been further 

exacerbated by declining WLAs, can put 

additional pressure on fund liquidity 

during times of stress. As previously 

noted, when a fund’s WLA falls below 

30 percent, the fund can impose fees or 

gates on redemptions. Market 

participants reported concerns that the 

imposition of a fee or gate by one fund, 

as well as the perception that a fee or 

gate would be imposed by one fund, 

could spark widespread redemptions 

from other funds, leading to further 

stresses in the underlying markets. 

Although one institutional prime fund 

(with assets that declined from $3.8 

billion at the end of February to $1.5 

billion at the end of March) had WLAs 

below the 30 percent minimum, it did 

not impose a fee or gate in March. 

Preliminary research indicates that 

prime fund outflows accelerated as 

WLAs declined, suggesting that the 

potential imposition of a fee or gate 

when a fund’s WLA drops below 30 

percent encouraged institutional 

investors to redeem before that 

threshold was crossed.32 Additionally, 

some market participants and observers 

have suggested that investors’ potential 

motivation to redeem as a MMF moves 

toward the 30 percent threshold is 

primarily driven by concerns about 

gates, rather than liquidity fees, because 

MMF investors have a low tolerance for 

being unable to access cash on demand. 

Sponsor support. As strains on prime 

and tax-exempt MMFs worsened, two 

fund sponsors provided support for 

their funds. They did so by purchasing 

securities from three prime institutional 

MMFs and making a capital 

contribution to one tax-exempt fund. 

Other investment vehicles that invest 

in securities and other instruments 

8946 Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 

33The Office of the Comptroller of the Currency 

(‘‘OCC’’), which oversees national banks operating 

STIFs, issued an interim final rule and an 

administrative order allowing STIFs to extend their 

dollar-weighted average portfolio maturity and 

dollar-weighted average portfolio life maturity to 

alleviate pressure on STIF management’s ability to 

comply with these maturity limits in light of 

stressed market conditions. See Short-Term 

Investment Funds, 85 FR 16888 (Mar. 25, 2020), 

available at https://www.occ.gov/news-issuances/ 

federal-register/2020/85fr16888.pdf. 

34Source: Morningstar data. 

35Source: iMoneyNet data. 

36For example, leveraged non-bank entities, such 

as hedge funds using Treasury collateral and real 

estate investment trusts using agency mortgagebacked security collateral, may have also 

contributed to pressure in short-term funding 

markets. See, e.g., FSOC Annual Report 2020 at p. 

5, available at https://home.treasury.gov/system/ 

files/261/FSOC2020AnnualReport.pdf. 

37See paragraph accompanying footnote 20. 

38 Information about the MMLF is available on the 

Federal Reserve’s website at https://

www.federalreserve.gov/monetarypolicy/mmlf.htm. 

The Federal Reserve Bank of Boston operates the 

MMLF. 

39See Regulatory Capital Rule: Money Market 

Mutual Fund Liquidity Facility, 85 FR 16232 

(March 23, 2020), available at https://

www.federalregister.gov/documents/2020/03/23/ 

2020-06156/regulatory-capital-rule-money-marketmutual-fund-liquidity-facility; Liquidity Coverage 

Ratio Rule: Treatment of Certain Emergency 

Facilities, 85 FR 26835 (May 6, 2020), available at 

https://www.federalregister.gov/documents/2020/ 

05/06/2020-09716/liquidity-coverage-ratio-ruletreatment-of-certain-emergency-facilities. 

40The MMLF would not have worked in 

isolation, and other programs and monetary policy 

responses would not have worked as well without 

the MMLF. See SEC Staff Interconnectedness 

Report; Marco Cipriani et al., ‘‘Municipal Debt 

Markets and the COVID–19 Pandemic,’’ (June 29, 

2020), available at https://

libertystreeteconomics.newyorkfed.org/2020/06/ 

municipal-debt-markets-and-the-covid-19- 

pandemic.html. 

41The CARES Act also temporarily removed 

restrictions on Treasury’s authority to use the 

Exchange Stabilization Fund to guarantee money 

market funds. See section 4015 of the CARES Act. 

This authority has not been used. 

42See, e.g., ‘‘Federal Reserve Issues FOMC 

Statement’’ (March 15, 2020), available at https:// 

www.federalreserve.gov/newsevents/pressreleases/ 

monetary20200315a.htm; ‘‘Federal Reserve Actions 

to Support the Flow of Credit to Households and 

Businesses’’ (March 15, 2020), available at https:// 

www.federalreserve.gov/newsevents/pressreleases/ 

monetary20200315b.htm; ‘‘Federal Reserve Board 

Announces Establishment of a Commercial Paper 

Funding Facility (CPFF) to Support the Flow of 

Credit to Households and Businesses’’ (March 17, 

2020), available at https://www.federalreserve.gov/ 

newsevents/pressreleases/monetary20200317a.htm; 

‘‘Federal Reserve Board Announces Establishment 

of a Primary Dealer Credit Facility (PDCF) to 

Support the Credit Needs of Households and 

Businesses’’ (March 17, 2020), available at https:// 

www.federalreserve.gov/newsevents/pressreleases/ 

monetary20200317b.htm; ‘‘Federal Reserve Board 

Broadens Program of Support for the Flow of Credit 

to Households and Businesses by Establishing a 

Money Market Mutual Fund Liquidity Facility 

(MMLF)’’ (March 18, 2020), available at https://

www.federalreserve.gov/newsevents/pressreleases/ 

monetary20200318a.htm. 

similar to MMFs. Other investment 

vehicles that invest in instruments held 

by MMFs also experienced outflows and 

stress in March. Short-term investment 

funds (‘‘STIFs’’) operated by banks, 

which have assets of about $300 billion, 

had outflows in March and experienced 

related stress.33 Ultra-short corporate 

bond mutual funds, which had assets of 

$200 billion in February 2020, had 

outflows of $33 billion (16 percent of 

assets) in March.34 In addition, in the 

two weeks from March 12 to 25, 

outflows from European dollardenominated MMFs investing in assets 

similar to U.S. prime MMFs (so-called 

offshore MMFs, which are largely 

domiciled in Ireland and Luxembourg), 

totaled 25 percent (about $95 billion) of 

assets.35

Prime and tax-exempt MMFs’ role in 

short-term funding markets’ stress. 

Short-term funding markets are 

interconnected with other market 

segments, and stress in one market can 

lead to stress in others. Prime and taxexempt MMFs were not the sole 

contributors to the pressures in shortterm funding markets.36 However, it 

appears that MMF actions were 

particularly significant relative to 

market size. For example, as noted 

above, prime funds reduced their CP 

holdings disproportionately compared 

to other holders.37

C. Taxpayer-Supported Central Bank 

Intervention 

On March 18, 2020, the Federal 

Reserve, with the approval of the 

Secretary of the Treasury, authorized 

the MMLF, which began to operate on 

March 23.38 The MMLF provides nonrecourse loans to U.S. depository 

institutions and bank holding 

companies to finance their purchases of 

specified eligible assets from MMFs 

under certain conditions. The nonrecourse nature of the loan protects the 

borrower from any losses on the asset 

pledged to secure the MMLF loan. The 

Federal Reserve, along with the OCC 

and Federal Deposit Insurance 

Corporation (‘‘FDIC’’), also took steps to 

neutralize the effects of purchasing 

assets through the MMLF on risk-based 

and leveraged capital ratios and 

liquidity coverage ratio requirements of 

financial institutions to facilitate 

participation in the facility.39 The 

MMLF program, in combination with 

other programs, was intended to 

stabilize the U.S. financial system by 

allowing MMFs to raise cash to meet 

redemptions and to foster liquidity in 

the markets for the assets held by 

MMFs, including the markets for CP, 

NCDs, and short-term municipal 

securities.40 The Department of the 

Treasury provided $10 billion of credit 

protection to the Federal Reserve in 

connection with the MMLF from the 

Treasury’s Exchange Stabilization 

Fund.41 MMLF utilization ramped up 

quickly to a peak of just over $50 billion 

in early April, or about 5 percent of net 

assets in prime and tax-exempt MMFs at 

the time. 

Outflows from prime MMFs abated 

fairly quickly after the Federal Reserve’s 

announcement of programs and other 

actions to support short-term funding 

markets and the flow of credit to 

households and businesses more 

generally, including its initial 

announcement of the MMLF on March 

18.42 Overall market conditions also 

began to improve. For example, in the 

CP market, the share of CP issuance 

with overnight maturity began to fall on 

March 24 and spreads to OIS for most 

types of term CP started narrowing a few 

days later. After the expansion of the 

MMLF to include municipal securities 

on March 20 (and VRDNs on March 23), 

tax-exempt MMF outflows eased and 

conditions in short-term municipal debt 

markets improved. Beyond the MMLF, 

several other Federal Reserve actions 

and announcements in March likely 

contributed to these improved 

conditions. For example, the Federal 

Open Market Committee lowered the 

target range for the federal funds rates 

twice in March by a total of 150 basis 

points. A large increase in open market 

purchases of Treasury securities and 

agency mortgage-backed securities was 

announced on March 15, and 

establishments of the PDCF and the 

CPFF were announced on March 17. 

While stress affected a variety of 

money market instruments and 

investment vehicles, the broad policy 

responses from the Federal Reserve, 

including the availability of secondary 

market liquidity for MMFs through the 

MMLF, appeared to have had the 

intended broad calming effect on shortterm funding markets. For instance, 

although European dollar-denominated 

MMFs are not eligible to participate in 

the MMLF, outflows from these funds 

abated shortly after the MMLF began 

operations. The resulting stability in 

short-term funding markets, along with 

the fiscal stimulus provided by the 

CARES Act and the expectation of 

continued accommodative monetary 

policy, facilitated stability in the capital 

markets more generally. 

IV. Potential Policy Measures To 

Increase the Resilience of Prime and 

Tax-Exempt Money Market Funds 

While many of the post-2008 MMF 

reforms added stability to MMFs, the 

events of March 2020 show that more 

work is needed to reduce the risk that 

Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 8947 

structural vulnerabilities in prime and 

tax-exempt MMFs will lead to or 

exacerbate stresses in short-term 

funding markets. The following 

discussion sets forth potential policy 

measures that could address the risks 

prime and tax-exempt MMFs pose to 

short-term funding markets. This report 

is meant to facilitate discussion. The 

PWG is not endorsing any given 

measure at this time. 

These potential policy measures differ 

in terms of the scope and breadth of 

regulatory changes they would require. 

For example, many of the potential 

reforms would apply only to prime and 

tax-exempt MMFs, while reforms such 

as swing pricing could apply to mutual 

funds more generally. Moreover, some 

potential reforms would involve 

targeted amendments to SEC rules, 

which relevant MMFs could likely 

implement fairly quickly, while others 

would involve longer-term structural 

changes or may require coordinated 

action by multiple agencies. The 

different measures are not necessarily 

mutually exclusive, nor are they equally 

effective at mitigating the vulnerabilities 

of prime and tax-exempt MMFs. Policy 

makers could combine certain measures 

within a single set of reforms. Some 

policy measures listed below have been 

raised for consideration previously, 

including in the PWG’s October 2010 

report on MMF reform options and the 

FSOC’s 2012 proposed 

recommendations on MMF reform, and 

warrant renewed consideration in light 

of recent MMF stresses. 

This report focuses on reform 

measures for MMFs only. It is important 

to recognize MMFs’ role in the market 

events in March 2020 and to examine 

measures that would address concerns 

and structural vulnerabilities specific to 

MMFs. Although they are beyond the 

scope of this report, and as discussed 

generally above, there were other 

stresses in short-term funding markets 

in March 2020 that may have 

contributed to the pressure on MMFs. 

As discussed in more detail below, 

the potential policy measures for prime 

and tax-exempt MMFs explored in this 

report are: 

• Removal of Tie between MMF 

Liquidity and Fee and Gate Thresholds; 

• Reform of Conditions for Imposing 

Redemption Gates; 

• Minimum Balance at Risk (‘‘MBR’’); 

• Money Market Fund Liquidity 

Management Changes; 

• Countercyclical Weekly Liquid 

Asset Requirements; 

• Floating NAVs for All Prime and 

Tax-Exempt Money Market Funds; 

• Swing Pricing Requirement; 

• Capital Buffer Requirements; 

• Require Liquidity Exchange Bank 

(‘‘LEB’’) Membership; and 

• New Requirements Governing 

Sponsor Support. 

Overarching goals for MMF reform. As 

a threshold matter, it should be 

recognized that the various policy 

reforms, individually and in 

combination, should be evaluated in 

terms of their ability to effectively 

advance the overarching goals of reform. 

That is: 

• First, would they effectively 

address the MMF structural 

vulnerabilities that contributed to stress 

in short-term funding markets? 

• Second, would they improve the 

resilience and functioning of short-term 

funding markets? 

• Third, would they reduce the 

likelihood that official sector 

interventions and taxpayer support will 

be needed to halt future MMF runs or 

address stresses in short-term funding 

markets more generally? 

Assessment of the MMF reform 

options. An assessment of the 

effectiveness of reform options in 

achieving these goals should take into 

account: (a) How each option would 

address MMF structural vulnerabilities 

and contribute to the overarching goals; 

(b) the effect of each option on shortterm funding markets and the MMF 

sector more broadly, including through 

its effects on the resilience, functioning, 

and stability of short-term funding 

markets, as well as whether the reform 

option would trigger the growth of 

existing investment strategies and 

products, or the development of new 

strategies and products, that could 

either exacerbate or mitigate market 

vulnerabilities; and (c) potential 

drawbacks, limitations, or challenges 

specific to each reform option. The 

reform options considered in this report 

seek to achieve the goals in different 

ways. For example, some are intended 

to address the liquidity-related stresses 

that were evident in March 2020, while 

others also touch on potential creditrelated concerns. This menu of options 

reflects the possibility that future 

financial stress events may affect the 

liquidity of short-term investments, 

their credit quality, or both. 

(a) How the reform options would 

seek to achieve the goals. 

(1) Internalize liquidity costs of 

investors’ redemptions, particularly in 

stress periods. Some options would 

impose a cost on redeeming investors 

that rises as liquidity stress increases to 

reflect the costs of redemptions for the 

fund. These options, particularly swing 

pricing and the MBR, could reduce or 

eliminate first-mover advantages for 

redeeming investors and protect 

investors who do not redeem. 

(2) Decouple regulatory thresholds 

from consequences such as gates, fees, 

or a sudden drop in NAV. Some 

options, such as those that revise fee 

and gate thresholds or introduce the 

floating NAV for retail prime and taxexempt MMFs, could eliminate or 

diminish the importance of thresholds 

(such as 30 percent WLA or an NAV of 

$0.995) that may spur investor 

redemptions. By diminishing the 

importance of thresholds, these options 

could also give MMFs greater flexibility, 

for example, to tap their own liquid 

assets to meet redemptions. 

(3) Improve MMFs’ ability to use 

available liquidity in times of stress. In 

March 2020, some prime and taxexempt MMFs may have avoided using 

their liquid assets to meet redemptions. 

Options such as countercyclical WLA 

requirements or revisions to fee and gate 

thresholds could make MMFs more 

comfortable in deploying their liquid 

assets in times of stress. 

(4) Commit private resources ex ante 

to enable MMFs to withstand liquidity 

stress or a credit crisis. When prime and 

tax-exempt MMFs have encountered 

serious strains, official sector 

interventions have followed quickly. 

Options such as capital buffers, explicit 

sponsor support, and the LEB could 

provide committed private resources to 

supply liquidity or absorb losses and 

thus reduce the likelihood that official 

sector support would be needed to calm 

markets. 

(5) Further improve liquidity and 

portfolio risk management. Changes to 

liquidity management requirements 

could include raising required liquidasset buffers. Other options could 

motivate more conservative risk 

management by explicitly making fund 

sponsors or others responsible for 

absorbing any heightened liquidity 

needs or losses in their MMFs. 

(6) Clarify that MMF investors, rather 

than taxpayers, bear market risks. 

Government support has repeatedly 

provided emergency liquidity to prime 

and tax-exempt funds and also has 

obscured the risks of liquidity and 

credit shocks for MMFs. Some options, 

such as the floating NAV for retail prime 

and tax-exempt MMFs, swing pricing, 

and the MBR could make risks to 

investors more apparent. 

(b) Effects on short-term funding 

markets. The reform options are 

intended to reduce the structural 

vulnerabilities of MMFs, which could 

make them a more stable source of 

short-term funding for financial 

institutions, businesses, and state and 

local governments. This would improve 

8948 Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 

43See footnote 32, above. 

the stability and resilience of short-term 

funding markets. 

At the same time, some of the reform 

options would likely diminish the size 

of prime and tax-exempt MMFs, which 

would also affect the functioning of 

short-term funding markets. A shrinkage 

of MMFs could reduce the supply of 

short-term funding for financial 

institutions, businesses, and state and 

local governments. Making prime and 

tax-exempt MMFs less desirable as cashmanagement vehicles also could cause 

investors to move to less regulated and 

less transparent mutualized cashmanagement vehicles that are also 

susceptible to runs that cause stress in 

short-term funding markets. 

A reduction in the size of prime and 

tax-exempt MMFs may not necessarily 

be inappropriate if, for example, the 

growth of these funds has reflected in 

part the effects of implicit taxpayer 

subsidies and other externalities (that is, 

broader economic costs of runs that are 

not borne by investors or the funds). In 

addition, if these MMFs remain run 

prone, a reduction in the size of the 

industry could mitigate the effects of 

future runs from these funds on shortterm funding markets. 

The aftermath of the 2014 MMF 

reforms provides a precedent for the 

consequences of a substantial reduction 

in the size of prime and tax-exempt 

funds, although a future experience 

could differ. In the year before the 

October 2016 implementation deadline 

for those reforms, aggregate prime MMF 

assets shrank by $1.2 trillion (69 

percent) and tax-exempt MMF assets 

declined about $120 billion (47 

percent). Nonetheless, to the extent that 

spreads for instruments held by these 

MMFs were affected, they generally 

widened only temporarily, and investor 

migration to other mutualized cashmanagement vehicles was largely 

limited to shifts to government MMFs. 

(Over the next three years, prime MMFs 

regained about half of the 2015–2016 

decline.) 

These considerations are important, 

because some of the reform options 

could reduce the size of the prime and 

tax-exempt fund sectors by: 

• Reducing attractiveness of prime 

and tax-exempt MMFs for investors. The 

costs associated with some options, 

such as capital buffers and LEB 

membership, may reduce the funds’ 

yields. The MBR would limit the 

liquidity of their shares in some 

circumstances. The floating NAV 

requirement and swing pricing would 

make NAVs more volatile and MMF 

shares less cash-like. And investors may 

view some policies, such as swing 

pricing and the MBR, as unfamiliar, 

restrictive, and complicated. 

• Increasing costs associated with 

MMF sponsorship. Some options, such 

as the introduction of capital buffers, 

required LEB membership, and explicit 

sponsor support, could raise operating 

costs for sponsors. Other options, such 

as swing pricing and MBR, may also 

have sizable implementation costs. 

Increased costs and operational 

complexity could lead to increased 

concentration and a reduction in the 

overall size of the MMF industry. 

(c) Potential drawbacks, limitations, 

and challenges specific to each option. 

Evaluation of the reform options also 

should take into account potential 

drawbacks, limitations, and challenges 

of each option, such as implementation 

challenges or limits on an option’s 

ability to achieve the desired goals. The 

report discusses these considerations for 

each option below. 

Several specific policy options are 

described below, along with a high-level 

analysis of the potential benefits and 

drawbacks of each option. 

A. Removal of Tie Between MMF 

Liquidity and Fee and Gate Thresholds 

Liquidity fees and redemption gates 

are intended to give MMF boards tools 

to stem heavy redemptions by imposing 

a fee to reduce shareholders’ incentives 

to redeem or by stopping redemptions 

altogether for a period of time. 

Currently, MMF boards have discretion 

to impose fees or gates when WLAs fall 

below 30 percent of total assets and 

generally must impose a fee of 1 percent 

if WLAs fall below 10 percent, unless 

the board determines that such a fee 

would not be in the best interest of the 

fund or that a lower or higher (up to 2 

percent) liquidity fee is in the best 

interests of the fund. 

Definitive thresholds for permissible 

imposition of liquidity fees and 

redemption gates may have the 

unintended effect of triggering 

preemptive investor redemptions as 

funds approach the relevant thresholds. 

Some preliminary research suggests that 

redemptions accelerated in March 2020 

from funds with declining WLAs.43

Removing the tie between the 30 

percent and 10 percent WLA thresholds 

and the imposition of fees and gates is 

one possible reform. Fund boards could 

be permitted to impose fees or gates 

when doing so is in the best interest of 

the fund, without reference to any 

specific level of liquidity. 

Potential benefits: 

• Removing the tie between the WLA 

thresholds and funds’ ability to impose 

gates and fees would reduce the salience 

of these thresholds and could diminish 

the incentive for preemptive runs. 

• This may improve the usability of 

WLA buffers by making MMFs more 

comfortable in deploying their liquid 

assets in times of stress. 

Potential drawbacks, limitations, and 

challenges: 

• While this option would remove a 

focal point that may trigger runs, it 

would do little otherwise to mitigate run 

incentives. 

• If MMFs maintain fewer liquid 

assets (by holding WLA levels closer to 

30 percent) as a result of this change, 

the funds may be less equipped to 

manage significant redemptions without 

engaging in fire sales. 

• Permitting funds to impose fees or 

gates without reference to a specific 

threshold may cause broader contagion 

if investors fear the imposition of fees or 

gates in other funds that otherwise 

would have been seen as safe. 

B. Reform of Conditions for Imposing 

Redemption Gates 

Reforming rules regarding redemption 

gates to reduce the likelihood that gates 

may be imposed could diminish 

investors’ incentives to engage in 

preemptive runs. For example, funds 

could be required to obtain permission 

from the SEC or notify the SEC prior to 

imposing gates. Alternatively, fund 

boards could be required to consider 

liquidity fees before gates, making it less 

likely that gates would be imposed. 

Another option could be to lower the 

WLA threshold at which gates could be 

imposed to, for example, 10 percent. 

Gate rules also could be reformed to 

make gates ‘‘soft’’ or ‘‘partial.’’ With soft 

gates, for example, if redemptions on a 

particular day exceed a certain amount, 

a fund could reduce each investor’s 

redemption pro rata to bring total 

redemptions below that amount, with 

remaining redemption amounts deferred 

to the next business day (and continuing 

daily deferrals until all redemption 

requests are satisfied). This affords 

investors at least some liquidity, in 

contrast to the complete curtailment of 

liquidity when a fund suspends all 

redemptions. 

Potential benefits: 

• Reforming the rules around gates 

might reduce concerns that gates will be 

imposed immediately upon a breach of 

the 30 percent WLA requirement and 

reduce the salience of that threshold, 

particularly if investors are more 

concerned about gates than fees. 

• Gates could still be imposed, but 

only in very dire conditions when runs 

on funds are likely anyway. 

Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 8949 

44See, for example, FSOC Proposed 

Recommendations; Patrick E. McCabe, Marco 

Cipriani, Michael Holscher, and Antoine Martin, 

‘‘The Minimum Balance at Risk: A Proposal to 

Mitigate the Systemic Risks Posed by Money Market 

Funds,’’ Brookings Papers on Economic Activity 

(Spring 2013), available at https://

www.brookings.edu/wp-content/uploads/2016/07/ 

2013a_mccabe.pdf. 

45Many MMF investors hold their shares through 

intermediaries (such as broker-dealers, banks, trust 

companies, and retirement plan administrators) that 

establish omnibus accounts with the fund. An 

intermediary’s omnibus account aggregates shares 

held on behalf of its underlying clients or 

beneficiaries, and the fund does not have access to 

information about these underlying clients or 

beneficiaries. As a result, intermediaries would be 

involved in implementing MBR reforms. 

• This may improve the usability of 

WLA buffers by making MMFs more 

comfortable in deploying their liquid 

assets in times of stress. 

• A ‘‘soft’’ or ‘‘partial’’ gate could 

reduce disruptions caused by the 

imposition of a gate by allowing 

shareholders to redeem a portion of 

shares as normal, with a portion held for 

a limited time to help the fund slow the 

rate of redemptions during stress 

periods without engaging in fire sales. 

Potential drawbacks, limitations, and 

challenges: 

• If thresholds remain, they could 

still be focal points for runs on MMFs. 

• While this option could reduce the 

salience of a threshold that may trigger 

runs, it would do little otherwise to 

mitigate run incentives. 

• Reducing the likelihood that a gate 

may be imposed could reduce the 

potential utility of gates as a tool to slow 

investor redemptions. 

• Providing the SEC a role in granting 

permission for imposition of gates may 

result in less timely action than the 

current framework involving the MMF’s 

board, particularly if multiple MMFs 

seek SEC permission in a short period 

of time, which could allow runs to 

continue or accelerate. Absent a 

threshold, it could be challenging to 

develop objective criteria in advance for 

quickly approving or denying such 

requests in a consistent and appropriate 

manner amid a fast-moving crisis. 

• If MMFs maintain fewer liquid 

assets (by holding WLA levels closer to 

30 percent) as a result of this change, 

the funds may be less equipped to 

manage significant redemptions without 

engaging in fire sales. 

• Like other gates, a ‘‘soft’’ (or 

‘‘partial’’) gate may spur preemptive 

runs, but a soft gate may be less effective 

at slowing runs than a full gate, as 

investors can continue to redeem even 

after a soft gate has been imposed. 

• ‘‘Soft’’ or ‘‘partial’’ gates could 

introduce accounting and 

administrative complexities. 

C. Minimum Balance at Risk 

An MBR is a portion of each 

shareholder’s recent balances in a MMF 

that would be available for redemption 

only with a time delay to ensure that 

redeeming investors still remain 

partially invested in the fund over a 

certain time period. As such, even if the 

investor redeems all of her available 

shares, she would still share in any 

losses incurred by the fund during that 

timeframe. A ‘‘strong form’’ of MBR 

would also put a portion of redeeming 

investors’ MBRs first in line to absorb 

any losses, which creates a disincentive 

to redeem. The size of the MBR would 

be a specified fraction of the 

shareholder’s maximum recent balance 

(less an exempted amount). An MBR 

mechanism could be used in a floating 

NAV fund to allocate losses only under 

certain rare circumstances, such as 

when the fund suffers a large drop in 

NAV or is closed. 

Potential benefits: 

• A properly calibrated ‘‘strong’’ MBR 

could reduce the vulnerability of MMFs 

to runs. 

• A strong MBR can internalize the 

liquidity costs of investors’ redemptions 

and thus reduce or eliminate the firstmover advantage for redeeming 

investors. It would do so by 

subordinating a portion of their shares 

to put them at greater risk if the fund 

suffers a loss. This can weigh against 

incentives to redeem in a stress event, 

so it can be particularly helpful as 

liquidity costs rise.44

• The disincentive to redeem created 

by an MBR strengthens mechanically as 

stresses increase and put subordinated 

shares at greater risk. Hence, the MBR 

does not create a threshold effect that 

might spur redemptions. 

• Under a strong form of MBR, the 

subordinated shares of redeeming 

investors provide extra loss absorption 

to protect the investments of nonredeeming investors. 

• An MBR could provide more 

transparency to shareholders regarding 

their risk, as shareholders’ account 

information could include their 

balances and the size of their MBRs. 

Potential drawbacks, limitations, and 

challenges: 

• The MBR could present 

implementation and administration 

challenges. For example, MMFs, 

intermediaries, and service providers 

would need to update systems to: (1) 

Compute the MBR on an ongoing basis 

for each shareholder account and 

update the allocation of unrestricted, 

holdback, or subordinated holdback 

shares for each account to reflect any 

additional subscriptions or redemptions 

and the passage of time; and (2) prevent 

a shareholder from redeeming holdback 

or subordinated holdback shares in 

transaction processing systems.45 In 

addition, a ‘‘strong form’’ of MBR may 

create the need to convert existing MMF 

shares or issue new subordinated shares 

to comply with typical state law 

limitations on allocating losses to a 

subset of shares in a single share class. 

• An MBR mechanism may have 

different and unequal effects on 

investors in stable NAV and floating 

NAV MMFs. During the holdback 

period, investors in a stable NAV MMF 

would only experience losses if the fund 

breaks the buck, but investors in a 

floating NAV MMF are always exposed 

to changes in the fund’s NAV and 

would continue to be exposed to such 

risk for any shares held back. 

• The MBR is an unfamiliar concept 

in the fund industry that may result in 

investor discomfort or confusion, 

particularly when it is first introduced. 

• Calibrating the appropriate size for 

an MBR could be a challenge; an MBR 

that is too small may not create 

sufficient disincentives to redeem in 

stress events, but one that is too large 

would unnecessarily reduce the 

liquidity of the fund’s shares. 

D. Money Market Fund Liquidity 

Management Changes 

MMFs currently are subject to daily 

and weekly liquid asset requirements 

and must disclose the amount of daily 

and weekly liquid assets each day on 

the fund’s website. Changes to liquidity 

management requirements could 

include a new category of liquidity 

requirements. For example, instead of 

focusing solely on daily and weekly 

liquid assets, creating an additional 

category for assets with slightly longer 

maturities (e.g., biweekly liquid assets) 

could strengthen funds’ near-term 

portfolio liquidity when short-term 

funding markets become stressed. 

As another alternative, an additional 

threshold, such as a WLA threshold of 

40 percent, could be set to augment 

current liquidity buffers. If a fund’s 

WLAs fell below this threshold, 

penalties such as requiring the escrow 

of fund management fees until the level 

of WLA is restored could be imposed on 

fund managers, rather than investors. 

This effectively would require funds to 

maintain a larger amount of WLAs than 

currently required. 

Potential benefits: 

• An additional tier of liquidity may 

make MMFs more resilient to significant 

redemptions by ensuring they maintain 

assets that will soon become WLAs. 

Additional liquidity requirements also 

8950 Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 

46Retail prime MMFs and tax-exempt MMFs were 

under stress during March 2020, with one taxexempt MMF receiving sponsor support, although 

stress among retail funds was less severe than that 

for institutional prime MMFs. See Section III.B, 

above (explaining that outflows from retail prime 

funds totaled 9 percent (or just over $40 billion) of 

assets during the two weeks from March 13 to 26, 

and outflows from tax-exempt MMFs—which are 

largely retail funds—were 8 percent ($11 billion) of 

assets during the two weeks from March 12 to 25). 

could limit ‘‘barbell’’ strategies (where a 

fund offsets its short-term assets with 

riskier longer-term assets that enhance 

returns but increase the riskiness of the 

fund’s portfolio). 

• Rules to penalize fund managers 

first for having inadequate portfolio 

liquidity have the potential to diminish 

the salience of WLA thresholds to 

investors by ensuring that initial 

consequences for crossing the 

thresholds are not imposed directly on 

investors. 

Potential drawbacks, limitations, and 

challenges: 

• Requiring funds to purchase 

additional near-term liquid assets or 

maintain larger WLAs to avoid penalties 

might encourage funds to take greater 

risks in the less liquid parts of their 

portfolios, particularly in a low interest 

rate environment, absent other measures 

to constrain this behavior. 

• Imposing the escrow of fees or other 

penalties on fund managers if WLAs do 

not meet a new higher minimum 

requirement could further diminish the 

usability of WLA buffers by making 

MMFs less comfortable in deploying 

their liquid assets in times of stress. 

• Further increases in liquid asset 

requirements may provide funds only a 

little extra time during a run, as 

institutional prime fund outflows 

exceeded 5 percent of assets per day at 

the height of the run in March 2020. 

• Additional liquid asset 

requirements for MMFs could heighten 

roll-over risks for issuers of short-term 

debt that may see more demand for 

issuance in shorter tenors. In addition, 

to the extent that new investors would 

replace MMFs in the tenors outside the 

near-term liquidity requirements, 

transparency regarding the nature of 

these investors may be lower. 

• It is not clear whether the required 

escrow of fees or other penalties could 

be imposed on fund managers in a way 

that would not also affect MMF 

investors (e.g., fund managers may 

respond by reducing the amount of fees 

they waive). 

Additional considerations: 

• Funds that purchase additional 

near-term liquid assets or maintain 

larger WLAs to avoid penalties may 

generate lower yield compared to 

similar investment products, which may 

reduce investor demand for such funds. 

As noted above, a reduction in the size 

of the prime and tax-exempt MMF 

sectors could affect the resilience and 

functioning of short-term funding 

markets in a variety of ways. 

E. Countercyclical Weekly Liquid Asset 

Requirements 

During the market stress in March 

2020, prime and tax-exempt MMFs that 

were close to the 30 percent WLA 

threshold may have avoided using their 

liquid assets to meet redemptions. 

MMFs’ incentives to maintain WLAs 

well above the 30 percent minimum, 

even in the face of significant outflows, 

may include the desires to avoid: (1) 

Prohibitions on purchasing assets that 

are not WLAs; (2) raising investor 

concerns about the potential imposition 

of fees or gates; and (3) potential 

scrutiny resulting from public 

disclosure of low WLA amounts. A 

countercyclical WLA requirement could 

reduce some or all of these concerns. 

Under this approach, minimum WLA 

requirements could automatically 

decline in certain circumstances, such 

as when net redemptions are large or 

when the SEC provides temporary relief 

from WLA requirements. Any 

thresholds linked to a fund’s minimum 

WLA requirements (e.g., fee or gate 

thresholds) would also move with the 

minimum. 

Potential benefits: 

• A countercyclical WLA requirement 

could reduce the salience of the 30 

percent WLA threshold and may lessen 

redemption pressures when a fund is 

near that threshold. 

• This may improve the usability of 

WLA buffers by making MMFs more 

comfortable in deploying their liquid 

assets in times of stress. 

Potential drawbacks, limitations, and 

challenges: 

• Funds that reduce WLAs in stress 

events would be less equipped to 

manage additional redemptions without 

engaging in fire sales. 

• Even if the WLA threshold is 

reduced, threshold effects may still 

motivate investors to redeem. In 

addition, investors may still prefer to 

redeem from funds that are approaching 

or breaching the standard 30 percent 

threshold, and reduced WLA minimums 

may in fact call attention to potential 

stress and prompt greater investor 

outflows. 

• The benefits of this change for 

funds’ use of liquid assets may be 

modest, as current rules do not preclude 

funds from using WLAs to meet 

redemptions or prohibit funds from 

allowing their WLAs to fall below 30 

percent. 

• Appropriately calibrating a 

countercyclical WLA requirement, 

including determining whether it would 

be an automatic mechanism or one that 

the SEC has to adjust in a crisis, could 

be challenging. 

F. Floating NAVs for All Prime and TaxExempt Money Market Funds 

Retail prime MMFs and retail taxexempt MMFs currently can use a 

rounded NAV and value portfolio assets 

at their amortized cost, which permits 

the funds to sell and redeem shares at 

a stable share price (e.g., $1.00) without 

regard to small variations in the value 

of the securities in their portfolios. A 

floating NAV requirement would ensure 

that these MMFs instead sell and 

redeem their shares at a price that 

reflects the market value of a fund’s 

portfolio and any changes in that value. 

This would be consistent with floating 

NAV requirements that currently apply 

to institutional prime and institutional 

tax-exempt MMFs. Although this option 

would only affect retail MMFs, those 

funds had large outflows in March 2020, 

and outflows likely would have 

continued or worsened without official 

sector intervention.46

Potential benefits: 

• The floating NAV eliminates the 

salience of a MMF’s NAV dropping 

more than 0.5 percent ($0.995). Unlike 

stable NAV funds, MMFs with floating 

NAVs cannot ‘‘break the buck.’’ 

• Stable NAVs can create an incentive 

to redeem when MMF portfolios assets 

lose value because redeeming investors 

can receive more for their shares than 

they are worth, while losses are 

concentrated among non-redeeming 

investors. In contrast, a floating NAV 

mitigates that incentive to redeem as 

losses are spread across all shareholders 

on a pro rata basis whether they redeem 

or not. Thus, a floating NAV 

requirement may decrease retail prime 

and tax-exempt MMFs’ vulnerabilities 

to runs by mitigating the first mover 

advantage for redeeming investors. 

• Floating NAVs make portfolio risks 

more transparent by making fluctuations 

in share values readily observable, 

which could better align investors’ 

expectations with the risks of portfolio 

holdings. 

Potential drawbacks, limitations, and 

challenges: 

• A floating NAV requirement would 

not affect institutional MMFs, which 

have historically been the most 

vulnerable to runs but already have 

floating NAVs. 

Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 8951 

47 If a fund has net inflows above the swing 

threshold, swing pricing would instead adjust the 

fund’s NAV upward. 

48See, for example, Jin, Dunhong, Marcin 

Kacperczyk, Bige Kahraman, an Felix Suntheim, 

‘‘Swing Pricing and Fragility in Open-end Mutual 

Funds,’’ IMF Working Paper WP/19/227 (2019); 

Association of the Luxembourg Fund Industry, 

Swing Pricing Updae 2015 (Dec. 2015) (‘‘ALFI 

Survey 2015’’) at 21, available at http://www.alfi.lu/ 

sites/alfi.lu/files/ALFI-Swing-Pricing-Survey-2015- 

FINAL.pdf. 

49See, for example, Craig M. Lewis, ‘‘Money 

Market Fund Capital Buffers,’’ (April 6, 2015), 

available at https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=2687687; Samuel G. 

Hanson, David S. Scharfstein, and Adi Sunderam, 

‘‘An Evaluation of Money Market Fund Reform 

Proposals,’’ (May 2014), available at https://

www.imf.org/external/np/seminars/eng/2013/mmi/ 

pdf/Scharfstein-Hanson-Sunderam.pdf. 

• Institutional prime MMFs with 

floating NAVs still experienced runs in 

March; floating NAVs do not prevent 

runs. 

Additional considerations: 

• Floating NAVs could result in a 

reduction in the size of retail prime and 

retail tax-exempt MMF sectors by 

making retail MMF shares less cash-like, 

which could reduce investor demand. 

As noted above, a reduction in the size 

of the prime and tax-exempt MMF 

sectors could affect the resilience and 

functioning of short-term funding 

markets in a variety of ways. 

G. Swing Pricing Requirement 

Under current rules, MMF investors 

redeeming their shares in a prime or taxexempt fund typically do not incur the 

costs associated with this redemption 

activity. Instead, these costs are largely 

borne by other investors in the fund, 

and this contributes to a first-mover 

advantage for those who redeem quickly 

in a crisis. Swing pricing effectively 

allows a fund to impose the costs 

stemming from redemptions directly on 

redeeming investors by adjusting the 

fund’s NAV downward when net 

redemptions exceed a threshold.47 That 

is, when the NAV ‘‘swings’’ down, 

redeeming investors receive less for 

their shares. A swing pricing 

requirement could help ensure that 

redeeming shareholders bear liquidity 

costs throughout market cycles (i.e., not 

only in times of market stress). In the 

United States, an optional swing pricing 

framework is permissible for certain 

mutual funds, but not for MMFs. 

Although swing pricing is largely 

untested for MMFs, it has been helpful 

for other types of non-U.S. mutual 

funds.48

Potential benefits: 

• A properly calibrated swing pricing 

mechanism could reduce the 

vulnerability of MMFs to runs. 

• Swing pricing can internalize the 

liquidity costs of investors’ redemptions 

and thus reduce or eliminate the firstmover advantage for redeeming 

investors. By making redemptions 

costly, swing pricing can weigh against 

incentives to redeem in a stress event, 

so it can be particularly helpful as 

liquidity costs rise. Swing pricing also 

benefits investors who do not redeem by 

reducing dilution to the value of a 

fund’s shares and insulating these 

investors from the effects of others’ 

redemption activity. 

• Swing pricing can improve long-run 

fund performance by reducing dilution. 

• If swing pricing is available (and 

used occasionally) in ‘‘normal’’ times, 

its use can help investors understand 

that they bear liquidity risks in a MMF. 

Moreover, regular deployment of swing 

pricing would make its use in stress 

events less unsettling for investors. 

Potential drawbacks, limitations, and 

challenges: 

• Eligible U.S. mutual funds have yet 

to implement swing pricing, largely 

because implementation would require 

substantial reconfiguration of current 

distribution and order-processing 

practices. MMFs could face similar 

challenges. 

• Unlike other mutual funds, some 

MMFs strike their NAVs more than once 

per day and allow intraday purchases 

and redemptions for any orders received 

prior to a given NAV strike. The 

potential management of swing pricing 

considerations multiple times per day 

could be particularly challenging in 

times of market stress. 

• It may be challenging to design and 

calibrate a swing pricing mechanism 

that can effectively internalize liquidity 

costs for redeeming investors, especially 

during stress events. 

H. Capital Buffer Requirements 

Capital (or ‘‘NAV’’) buffers, which 

could be structured in a variety of ways, 

can provide dedicated resources within 

or alongside a fund to absorb losses and 

can serve to absorb fluctuations in the 

value of a fund’s portfolio, reducing the 

cost to taxpayers in case of a run.49 For 

a floating NAV fund, capital buffers 

could be reserved to absorb the fund’s 

losses only under certain rare 

circumstances, such as when it suffers 

a large drop in NAV or is closed. 

Potential benefits: 

• A capital buffer adds ex ante lossabsorption capacity to a MMF that 

would mitigate MMF shareholders’ risk 

of losses and their incentives to redeem 

in a stress event. 

• A buffer would mitigate the MMF 

industry’s reliance on discretionary, ex 

post sponsor support by assuring that 

MMFs already have resources in place 

to absorb losses. 

• Owners of capital will have 

incentives to mitigate risk-taking by the 

fund. For example, if capital is provided 

by the fund’s sponsor, the sponsor will 

have an explicit incentive to manage 

portfolio risks to preserve the capital. 

Potential drawbacks, limitations, and 

challenges: 

• A capital buffer financed from 

unaffiliated investors could be complex 

to administer. 

• Sizable capital buffers are costly to 

finance, and building adequate capital 

buffers from MMF income could take 

substantial time, particularly in a low 

interest rate environment, and could 

disadvantage current MMF investors for 

the benefit of future MMF investors. 

• Calibrating the appropriate size for 

a capital buffer could be a challenge; 

MMFs would continue to be vulnerable 

if the buffer is too small, but one that 

is too large would be unnecessarily 

costly. 

• A capital requirement could 

increase MMF industry concentration 

because provision of initial capital 

would be a substantial burden for some 

asset managers and could cause them to 

exit the industry. In addition, such a 

requirement may favor bank-sponsored 

funds. 

Additional considerations: 

• The costs of financing a capital 

buffer would be borne by MMF sponsors 

and investors, and these costs could 

result in a reduction in the size of the 

prime and tax-exempt MMF sectors. As 

noted above, a reduction in the size of 

these MMFs could affect the resilience 

and functioning of short-term funding 

markets in a variety of ways. 

I. Require Liquidity Exchange Bank 

Membership 

To provide a liquidity backstop 

during periods of market stress, prime 

and tax-exempt MMFs could be 

required to be members of a private 

liquidity exchange bank. The LEB 

would be a chartered bank. Under one 

LEB proposal, MMF members and their 

sponsors would capitalize the LEB 

through initial contributions and 

ongoing commitment fees. During times 

of market stress, the LEB would 

purchase eligible assets from MMFs that 

need cash, up to a maximum amount 

per fund. The LEB would not be 

intended to provide credit support. 

Potential benefits: 

• The existence of a liquidity 

backstop provided by an LEB could 

diminish investors’ incentives to run. 

• An LEB would commit private 

resources, including bank capital, ex 

ante to provide liquidity to MMFs. This 

8952 Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices 

50 12 U.S.C. 371c; 12 CFR 223. 

51 12 U.S.C. 1841 et seq. 

52See SEC 2014 Reforms, at paragraph 

accompanying footnote 53; 2010 PWG Report. A 

sponsor may also provide support when the fund 

is not under stress. As one example, a sponsor may 

provide support in a form of capital contribution to 

maintain a fund’s stable NAV when liquidating a 

fund that experienced small losses as assets 

matured. 

53See Investment Company Act rule 17a–9 [17 

CFR 270.17a–9]; SEC Form N–CR, Part C; and SEC 

Form N–MFP, Item C.18. 

54See Letters dated March 17, 2020, available at 

https://www.federalreserve.gov/supervisionreg/ 

legalinterpretations/fedreserseactint20200317.pdf. 

55See Letter to Susan Olson, Investment 

Company Institute (March 19, 2020), available at 

https://www.sec.gov/investment/investmentcompany-institute-031920-17a. 

56This reform could also include changes to 

obviate the need for future SEC staff no-action 

letters relating to the interaction of rule 17a–9 and 

certain banking law provisions, which may provide 

more certainty with respect to sponsor support. 

framework could partially internalize 

the costs of liquidity protection for the 

MMF industry and reduce distortions 

that can arise from an expectation of 

official sector support in times of stress. 

• Chartered banks generally have 

access to Federal Reserve liquidity 

through the discount window, although 

the duration and extent of access is not 

guaranteed. To the extent that the LEB 

has access to the discount window, that 

access may further mitigate liquidity 

pressures on MMFs and reduce the 

likelihood of fire sales. 

• Pooling liquidity resources for 

MMFs may offer efficiency gains. An 

LEB would provide liquidity to MMFs 

that need it, rather than requiring each 

MMF to hold liquidity separately. 

Potential drawbacks, limitations, and 

challenges: 

• Access to the LEB backstop during 

times of market stress, without further 

consideration of risk management 

measures, could have moral hazard 

effects that motivate some funds to take 

greater risks in the less-liquid parts of 

their portfolios. 

• The LEB, which would not provide 

traditional banking services, is not 

intended to operate as a commercial 

bank, and commercial banks are not 

organized to buy assets from entities 

facing financial difficulties. As such, it 

is unclear whether such an entity would 

be able to obtain a banking charter. 

• Access to the discount window by 

the LEB is not guaranteed, particularly 

in the size and term that may be needed 

to provide material liquidity support to 

MMFs under stress. 

• To the extent that liquidity 

provided by the Federal Reserve 

exceeds what is provided to a typical 

commercial bank, the LEB would not be 

significantly different from other types 

of historical official sector support. 

• As a bank, the LEB would be 

subject to supervision and regulation, 

including restrictions on transactions 

with affiliate funds.50 In addition, 

investors in the LEB may themselves 

become bank holding companies. If an 

investor became a bank holding 

company, it would be subject to 

consolidated supervision and 

regulation, and would be required to 

serve as a source of strength to the 

LEB.51

• The LEB would need significant 

capital to both be in a position to 

provide meaningful liquidity for MMFs 

in stress events and be seen as a credible 

liquidity backstop. Building adequate 

capacity from MMF income could take 

several years, particularly in a low 

interest rate environment. Moreover, the 

need to comply with applicable 

leverage-based capital requirements on a 

continuous basis—even during periods 

of peak usage under stress—could 

render the LEB’s lending capacity 

insufficiently robust in extremis. 

• News that an LEB is running out of 

capacity could accelerate runs. 

• Requiring fund sponsors to provide 

initial capital for an LEB would likely 

favor large and bank-affiliated sponsors 

and could cause some others to exit the 

industry, thus increasing industry 

concentration. 

• Administering an LEB may raise 

complex governance and fairness 

concerns, particularly in times of stress. 

Additional considerations: 

• Requiring membership in an LEB 

likely would impose a cost on sponsors 

and reduce yields for investors, both of 

which could result in a reduction in the 

size of the prime and tax-exempt MMF 

sectors. As noted above, a reduction in 

the size of these MMFs could affect the 

resilience and functioning of short-term 

funding markets in a variety of ways. 

J. New Requirements Governing Sponsor 

Support 

In times of market stress, sponsor 

support has been a tool for stabilizing 

MMF share prices and providing 

liquidity. Support of funds was 

relatively common during the 2008 

financial crisis as a number of MMF 

sponsors purchased large amounts of 

portfolio securities from their MMFs or 

provided capital support to their 

MMFs.52 However, the discretionary 

nature of sponsor support contributes to 

uncertainty about who will bear risks in 

periods of stress, including when there 

is a run on a MMF. Moreover, the 

inability of one sponsor to provide 

support for a distressed fund accelerated 

the run on MMFs in September 2008. 

Currently, sponsors may provide 

support to MMFs under certain 

conditions established by rule 17a–9 

under the Act, and must make public 

disclosure of any ‘‘financial support’’ to 

increase transparency about sponsor 

involvement.53 However, bank sponsors 

are subject to limits on transactions with 

affiliates under section 23A of the 

Federal Reserve Act. In March, the 

Federal Reserve, in conjunction with the 

FDIC and OCC, provided temporary 

relief from these restrictions.54 The SEC 

staff also issued a temporary no-action 

letter in March to permit the purchase 

of certain MMF securities by an affiliate 

where reliance on rule 17a–9 could 

conflict with sections 23A and 23B of 

the Federal Reserve Act.55

A regulatory framework governing 

sponsor support could clarify who bears 

MMF risks by establishing when a 

sponsor would be required to provide 

support.56

Potential benefits: 

• Explicit sponsor support, similar to 

a capital buffer, would commit private 

resources ex ante to absorb losses, 

mitigate risks to MMF shareholders, and 

reduce their incentives to redeem in a 

stress event. 

• Similar to a capital buffer financed 

by MMF sponsors, explicit sponsor 

support could strengthen sponsors’ 

incentives to reduce portfolio risks. 

Potential drawbacks, limitations, and 

challenges: 

• Making sponsor support for MMFs 

explicit would favor bank-sponsored 

funds and would likely increase MMF 

industry concentration. 

• Making support explicit would 

require new official sector oversight to 

ensure that sponsors have resources to 

provide support. 

Additional considerations: 

• Formalizing sponsor support would 

impose an expected cost on sponsors 

and likely would cause them to charge 

higher fees to investors, which could 

lead to a reduction in the size of the 

prime and tax-exempt MMF sectors. At 

the same time, explicit support could 

boost demand for these funds by making 

them less risky. As noted above, 

changes in the size of these MMFs could 

affect the resilience and functioning of 

short-term funding markets in a variety 

of ways. 

[FR Doc. 2021–02704 Filed 2–9–21; 8:45 am] 

BILLING CODE 8011–01–P