The John M. Olin Center

Paper Abstract

Untitled Document

64. Ledina Gocaj, Living with Money Market Fund Reform, 06/2016.

Abstract: Money market funds (MMFs) are a prominent example of capital-markets funding vehicles that have run characteristics.  Their distinction arose in part because of their exponential growth as a cash management vehicle for retail and institutional investors alike: beginning as a small financial innovation in the 1970s, MMFs quickly grew to a multi-trillion dollar market by the financial crisis of 2008.  Over the past three decades, however, MMFs have required multiple bailouts by their sponsors and, ultimately, the federal government.  This paper first traces the policy choices in the introduction of MMFs and their subsequent reforms.  The thrust of this paper asks whether MMFs still pose a systemic financial threat given the SEC’s substantive reforms in 2010 and 2014 and the limitations imposed by the Dodd-Frank Act on the Treasury’s ability to support MMFs in the future as well the on Federal Reserve’s § 13(3) power to act as lender of last resort.  I conclude that the SEC’s hybrid solution leaves risk of runs in MMFs and pushes certain activities to other short-term, runnable funding markets.  As firms race to meet the SEC’s October 2016 deadline for compliance with the most recent reforms, regulators must stay vigilant for structural changes in institutional investors’ cash management strategies in order to ensure the lasting effectiveness of MMF reform.  Absent significant restructuring of our financial system, the tools available to federal regulators in the face of a future run on MMFs, or their alternatives, are limited.