Money Market Fund Reforms Worked: ICI

The Investment Company Institute (ICI) study examines the impact of the Securities and Exchange Commission’s (SEC) 2010 reforms, which strengthened the maturity, credit risk and liquidity requirements for money market fund holdings. According to ICI’s research report, money market funds were hit in the summer of 2011 by two financial market shocks: the standoff over the U.S. federal debt ceiling and deteriorating conditions in Eurozone debt markets. The analysis shows money market fund managers reacted appropriately to both events, and money funds were well positioned to manage the events due to new requirements in place.  

Money market fund managers prepared for the likelihood that the U.S. federal government would default in 2011. Anticipating that concerns about the debt ceiling impasse might lead investors to redeem shares, both government and prime funds shortened their maturities in the weeks leading up to a key August 2011 deadline. Funds also maintained levels of liquidity well above new liquidity requirements.  

Money market funds gradually reduced their holdings to banks most exposed to the unfolding debt crisis in Europe. Money market funds also showed a careful and proactive response to the unfolding sovereign debt crisis in Europe during the 2011 market turmoil. Managers reduced their overall holdings of securities issued by banks in the Eurozone from 30% of their assets in May 2011 to 11% by December 2011. In addition, the evidence shows that prime funds also reduced their exposures to other European banks that, although outside the Eurozone itself, were exposed to Eurozone banks.  

Evidence from 2011 shows that prime money market funds took only marginally more credit risk than did Treasury-only money market funds. ICI analyzed data on credit default swap spreads in 2011 and found that prime money market funds took on or maintained only minimal credit risk, despite small increases in such risk as the Eurozone crisis progressed in the second half of 2011.  

“The study confirms that money market funds of 2013 are nothing like the funds of 2008, thanks to the SEC’s far-reaching amendments to money fund regulation,” said ICI President and CEO Paul Schott Stevens. “This is important analysis and perspective for regulators to consider as they look at additional regulations, and for the public to understand as the nation faces another debt ceiling debate in the coming weeks. Money market funds are stronger and well positioned today to deal with market issues.”