Money market funds (MMFs) play an important role in our markets. They provide liquidity, short-term yield, and diversification. They invest in high-quality, short-term securities, such as Treasury bills, repurchase agreements, or commercial paper whose value is stable under normal market conditions. And, saliently, they are generally redeemable on demand, so investors can rely on MMFs to meet their everyday cash needs – perhaps for a company to make payroll or for a family to pay their mortgage.

However, we have seen – twice in the recent past – that certain MMFs are vulnerable to runs during times of stress; and, the sense of stability and reliability that investors have grown to expect in normal economic times can prove gossamer as markets turn. First in 2008, in the wake of the Lehman Brothers bankruptcy, and as investors sought to move their funds to safer, government instruments, we saw the Reserve Primary Fund break the buck.[1] Short-term credit markets froze, investors panicked, and there were widespread redemptions across the institutional prime MMF space. To address the crisis, the Treasury Department and the Federal Reserve Board stepped in. The Treasury Department temporarily guaranteed investments in MMFs;[2] and, the Federal Reserve Board supplemented that relief by creating a liquidity facility to extend to U.S. banks and bank holding companies to finance their purchases of commercial paper from MMFs.[3]

In the wake of 2008, the SEC put out reforms aimed at making MMFs more resilient in the face of future market disruptions. In 2010, the Commission enacted reforms designed to increase fund portfolio quality and liquidity, reduce credit risk, and enhance the transparency of assets held in fund portfolios.[4] In 2014, the Commission adopted further amendments to the MMF rules relating to valuation and risk limitations, including by requiring institutional non-governmental MMFs to use a floating NAV. The Commission also gave the boards of these funds a discretionary tool to stem a tide of redemptions by allowing them to impose liquidity fees or gates if a fund’s weekly liquid assets dipped below a 30% threshold.[5]

But by the Covid-19 pandemic in March 2020, investor redemptions from institutional prime funds once again soared and short-term funding markets experienced new stresses. Evidence suggests that the potential imposition of gates and fees (allowed by the 2014 rule) may have had the unintended consequence of causing investors to make redemptions from institutional prime MMFs.[6] Correspondingly, it appears that advisers were actively managing MMF portfolios to keep their liquid assets above the weekly liquidity thresholds, rather than using their liquid assets to meet redemptions, in order to avoid investor panic.[7] With the approval of the Department of Treasury, the Federal Reserve Board stepped in, as it had done before, to reduce these impending stresses. It established the Money Market Mutual Fund Liquidity Facility, which provided loans on favorable terms to financial institutions to purchase securities from MMFs that were raising liquidity.[8]

These two significant economic events make clear that these MMF products – which are often taken for granted as synonymous with stability – nonetheless can present structural, systemic, market concerns.

Today’s rule draws upon lessons learned from both 2008 and 2020. First, it removes the link between liquidity fees and redemption gates, on the one hand, and weekly liquid asset thresholds, on the other.[9] This decoupling will hopefully reduce incentives for a preemptive run on any given fund, and more broadly a system-wide run.[10]

The final rule also increases minimum daily liquid assets from 10 to 25%, and weekly liquid assets from 30 to 50%.[11] Increasing these thresholds should provide for a more substantial buffer to ensure that funds are able to meet the redemption needs of investors, even in times of stress.

The final rule laudably increases transparency, including by requiring a fund to report publicly if it experiences a liquidity threshold event.[12]

Finally, the rule imposes a new mandatory liquidity fee for institutional prime and tax-exempt funds, which would trigger when daily net redemptions exceed five percent and when the costs associated with such redemptions are more than de minimus.[13] During non-stressed times, we expect that the liquidity costs will in fact generally be de minimus, reducing some of the burdens associated with the new liquidity fee.

I proceed down today’s path with cautious optimism, based on the evidence, data and commentary that we have collected and studied. Hopefully, we have calibrated a rule that will allow MMFs to weather the next storm and build a more resilient ecosystem. I nonetheless want to be a steadfast observer of this space – watching to ensure that the protections we put in place now are the right ones.[14]

Thank you to the staff in the Division of Investment Management, the Office of the General Counsel, the Division of Economic and Risk Analysis for their hard work, thoughtful deliberation, and careful consideration in reaching this final rule. I also want to thank the many industry participants and advocates who provided comments on the proposal and who took the time to come in and meet with us. Your industry insights are invaluable and integral to this process.

I support this rule. Thank you.