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Federal Register / Vol. 86, No. 26 / Wednesday, February 10, 2021 / Notices
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 33 The
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 managements 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.
34 Source: Morningstar data.
35 Source: iMoneyNet data.
36 For 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.
37 See paragraph accompanying footnote 20.
38 Information about the MMLF is available on the Federal Reserves website at https
www.federalreserve.gov/monetarypolicy/mmlf.htm.
The Federal Reserve Bank of Boston operates the MMLF.

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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 Treasurys 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 Reserves 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 39 See 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.
40 The 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 COVID19 Pandemic, June 29, 2020, available at https
libertystreeteconomics.newyorkfed.org/2020/06/
municipal-debt-markets-and-the-covid-19pandemic.html.
41 The CARES Act also temporarily removed restrictions on Treasurys 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.
42 See, 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
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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 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.

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