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Money Market Funds and Regulation

Money Market Funds and Regulation This article examines money market funds and the regulation that was promulgated in the wake of the Lehman Brothers bankruptcy during the financial crisis of 2007 and 2008. Various explanations for the ensuing run-like behavior are discussed, including a first-mover advantage related to potential fire sales, the ability to redeem shares at a stable $1.00 when funds are valued below $1.00, and flights to quality and transparency. We then discuss regulatory reform, beginning with the SEC's 2010 amendments and concluding with its 2014 Money Market Fund Reform rules, which require ( a ) all funds to implement liquidity fees and redemption gates and ( b ) institutional prime funds to price at their floating net asset value. The economic underpinnings of the SEC's final policy choices are discussed and compared to alternatives, such as capital buffers, that were considered but not adopted. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Annual Review of Financial Economics Annual Reviews

Money Market Funds and Regulation

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Publisher
Annual Reviews
Copyright
Copyright © 2016 by Annual Reviews. All rights reserved JEL codes: G18, G23, G28
ISSN
1941-1367
eISSN
1941-1375
DOI
10.1146/annurev-financial-121415-032823
Publisher site
See Article on Publisher Site

Abstract

This article examines money market funds and the regulation that was promulgated in the wake of the Lehman Brothers bankruptcy during the financial crisis of 2007 and 2008. Various explanations for the ensuing run-like behavior are discussed, including a first-mover advantage related to potential fire sales, the ability to redeem shares at a stable $1.00 when funds are valued below $1.00, and flights to quality and transparency. We then discuss regulatory reform, beginning with the SEC's 2010 amendments and concluding with its 2014 Money Market Fund Reform rules, which require ( a ) all funds to implement liquidity fees and redemption gates and ( b ) institutional prime funds to price at their floating net asset value. The economic underpinnings of the SEC's final policy choices are discussed and compared to alternatives, such as capital buffers, that were considered but not adopted.

Journal

Annual Review of Financial Economics – Annual Reviews

Published: Oct 23, 2016

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