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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
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 7day municipal swap index yield, a benchmark weekly rate in these markets, shot up 392 basis points on
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 NMFP.
21 About $6 billion of the reduction in MMF
holdings of CP during this time was pledged as collateral to the MMLF.
22 Funds 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.
23 For 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.
24 According to DTCCs 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.

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