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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
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 6 For a more detailed discussion of the structure and significance of short-term funding markets and the effects of the COVID19 shock, as well as the effects of monetary and fiscal measures, see SEC
staff report, U.S. Credit Markets Interconnectedness and the Effects of COVID19
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. 1314, available at https
www.federalreserve.gov/publications/files/
financial-stability-report-20201109.pdf.

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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 7 The 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 Treasurys 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.
8 A 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.
9 For a more detailed discussion of the MMFrelated events in 2008, see Report of the Presidents 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.

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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 Presidents 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 FundsStructure, 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 2a7 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 10 The 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.

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