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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
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 18 The 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.
19 The 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.

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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 COVID19
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.

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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 20 Total CP outstanding at the end of February 2020 was $1.1 trillion source: Federal Reserve.
Holdings of publicly-offered prime funds are based
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