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President's Working Group Reviews COVID-19 Impact on Money Market Funds

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

The President's Working Group on Financial Markets ("PWG") reviewed money market fund ("MMF") performance during the COVID-19 pandemic, and provided a number of "potential policy measures to increase the resilience of prime and tax-exempt money market funds."

In the new report, the members of the PWG, including the Treasury Secretary, Fed Chair, SEC Chair and CFTC Chair, found that government MMFs experienced "significant" inflows, while prime and tax-exempt MMFs experienced "significant" outflows. Prime and tax-exempt funds continue to be susceptible to redemption-driven runs and outflows only subsided when the Fed established the Money Market Mutual Fund Liquidity Facility. The PWG stated that policy makers "must recognize" that the availability of short-term funding, including prime and tax-exempt MMFs, is critical to the financial system.

The PWG listed a number of potential policy options that could reduce the volatility of money market funds in a financial crisis, but did not recommend any specific course of action at this time. The PWG noted that, were it not for government support of money market funds, they would have come under far more stress, and also that certain of the post-Dodd-Frank changes to money market fund regulations did not have the desired effect and may have been counterproductive.

In a separate statement on the Report, SEC Division of Investment Management Director Dalia Blass emphasized that certain PWG recommendations could be implemented under the statutory authority of the SEC, and requested feedback on (i) MMFs' structural vulnerabilities, (ii) how to improve short-term funding market resiliency and (iii) how to reduce the likelihood of official sector intervention during future MMF runs.

Commentary

This is a difficult issue. How can the government prevent holders of very liquid assets from dumping those assets during a market panic - other than by providing a governmental backstop? And if the government does provide a backstop, there is really no difference between a money market fund investing in private assets and a government securities fund, in that investors in both funds can look to the government as the ultimate obligor.

This is an issue that the incoming majority at the SEC will have to address. The solution is not at all obvious, if in fact one exists. How is it possible for there to be an instrument that promises immediate liquidity yet limits that liquidity when investors most demand it?

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