The aftermath of money market fund reform

Jakob Wilhelmus () and Jonathon Adams-Kane
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Jakob Wilhelmus: Milken Institute, Postal: 1250 4th St,, Santa Monica, CA 90401, http://www.milkeninstitute.org/

Journal of Financial Transformation, 2018, vol. 47, 45-50

Abstract: Extensive regulatory overhaul changed the money market fund (MMF) industry considerably, especially for institutional clients. Nonetheless, MMFs continue to be an important cash management tool for institutions even though their asset allocations are now much more restricted to preserve the feature of a constant share price. This article shows how regulatory changes to MMFs correctly remove unviable promises of immediate liquidity at a constant share price while holding asset portfolios with varying risk exposures. We emphasize the importance of allowing price signals to reveal the impact of changes in the risk environment on asset holdings. We also believe that quantitative restrictions (e.g., withdrawal fees and gates) are counterproductive for preventing runs – they do not aid price discovery, and incentivize investors to circumvent the restrictions to access their otherwise liquid assets in times of heightened liquidity demand. These shifts in the money market and related channels of short-term financing should act as a reminder that regulatory pressure on one part of financial markets has repercussions throughout the financial system, leading to unexpected adaptation by market participants.

Keywords: Money Markets (search for similar items in EconPapers)
JEL-codes: E50 E60 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jofitr:1612

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