Since the 2008 financial crisis, there has been a vigorous debate among academics, policymakers, and money market participants surrounding the role of money market funds (MMFs) during the crisis. In response to large redemptions from MMFs during the crisis, the government intervened with the guarantee of MMF shares by the Department of the Treasury. In the wake of the financial crisis, under the apparent presumption that Reserve Primary’s “breaking the buck” precipitated a run on MMFs, the Securities and Exchange Commission (SEC) implemented an overhaul of MMF regulation through changes to Rule 2a-7 of the Investment Company Act that were adopted on January 27, 2010. The major changes to Rule 2a-7 tightened credit quality and liquidity constraints and mandated that MMFs conduct stress tests to determine whether net asset value (NAV) could be maintained in response to hypothetical risks. In addition, the SEC required new reporting standards with detailed monthly disclosures for MMFs.
Despite little specific evidence about the efficacy of the 2010 reforms, regulators such as SEC ChairmanMary Schapiro, Secretary of the Treasury Timothy Geithner, and Federal Reserve System Chairman Ben Bernanke continue to call for additional regulation of MMFs, largely based on what happened in 2008. The debate about furtherMMF reform needs to be informed by the impact of the 2010 reforms. This report starts to fill that gap by presenting some analysis of MMF data on liquidity, credit risk, redemption patterns, and net cash flows from 2008 to 2012, focusing in particular on what has happened in the industry since the 2010 reforms.We also examine whether redemptions from MMFs since the reforms have had any impact on the supply of funds in the commercial paper (CP) market. We used MMF data filed with the SEC to examine changes in liquidity, credit risk, redemptions, and net cash flow and CP data available from the Federal Reserve System to examine the impact of the MMF market on the CP market. Finally, we examine the issues in light of the post-2008 academic literature on MMFs.