econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 29 October 2016

From The Vault: Funds, Flight, And Financial Stability

from Liberty Street Economics

-- this post authored by Anna Snider

The money market industry is in the midst of significant change. With the implementation this month of new Securities and Exchange Commission rules designed to make money market funds (MMFs) more resilient to stress, institutional prime and tax-exempt funds must report more accurate prices reflecting the net asset value (NAV) of shares based on market prices for the funds' asset holdings, rather than promising a fixed NAV of $1 per share.

The rules also permit prime funds, which invest in a mixture of corporate debt, certificates of deposit, and repurchase agreements, to impose fees or set limits on investors who redeem shares when market conditions sharply deteriorate. (Funds investing in government securities, which are more stable, are not subject to the new rules.) These changes, driven by a run on MMFs at the height of the financial crisis, add to earlier risk-limiting rules on portfolio holdings.

In what is being described as a “big sort," institutional MMF investors are rethinking their strategies for where to place large pools of cash; many areshifting investments from prime funds to funds that invest only in government securities, while others remain in place or undecided about their next move. Meanwhile, critics continue to debate whether the new rules go far enough, or perhaps too far. For readers interested in learning more, numerous posts in the Liberty Street Economics archive help illuminate the issues underlying the reforms.

In “Money Market Funds and Systemic Risk," our bloggers examine the vulnerability of MMFs, and show why, in theory, a floating NAV could stanch runs. As they explain, the end of “NAV rounding" (MMFs traditionally rounded their shares to $1 per unit even if the market NAV was only within a half penny of $1) would temper investors’ rush to redeem shares before others do when a fund suffers a loss, since there would be no more opportunity for arbitrage between the stable share price and the true value of the MMF share.

Elsewhere on the blog, our authors looked at the extent to which sponsor support has been vital to maintaining MMFs’ price stability. Their analysis, using information collected by regulators, showed that while the catalyst for the September 2008 run on MMFs - the Reserve Primary Fund - was the only fund to officially “break the buck" during the crisis, at least twenty-eight other funds would have also done so had their sponsors not provided crucial support in the form of cash infusions and purchases of the funds’ securities at above-market prices. The bloggers called for reforms “that would provide a form of stability to the MMF industry not predicated on voluntary and uncertain support from sponsors."

Our bloggers also explored MMFs’ significance as a potential source of systemic risk, particularly through MMFs’ increasing importance as a funding source for banks in recent decades. A check of the data at the end of 2012 revealed that MMFs held 43 percent of financial commercial paper, 29 percent of certificates of deposit, and 33 percent of repo agreements, prompting consideration of possible spillovers if MMFs reacted to run-like redemptions by fire-selling the bank assets in their portfolios.

Other blog analysis paid close attention to MMF investor movements during unsettling periods, such as the large outflows from prime funds that were exposed to the U.S. debt-ceiling and European debt crises in 2011, and weighed the pros and cons of fees and gates to reduce the run risk posed by investor redemptions.

Reading List

Money Markets and Systemic Risk

Marco Cipriani, Michael Holscher, Antoine Martin, and Patrick McCabe

The Fragility of an MMF-Intermediated Financial System

Marco Cipriani, Antoine Martin, and Bruno Maria Parigi

Twenty-Eight Money Market Funds That Could Have Broken the Buck: New Data on Losses during the 2008 Crisis

Marco Cipriani, Michael Holscher, Antoine Martin, and Patrick McCabe

Pick Your Poison: How Money Market Funds Reacted to Financial Stress in 2011

Neel Krishnan, Antoine Martin, and Asani Sarkar

Gates, Fees, and Preemptive Runs

Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno M. Parigi

Disclaimer

The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Source

http://libertystreeteconomics.newyorkfed.org/2016/10/from-the-vault-funds-flight-and-financial-stability.html


About the Author

Anna Snider is a cross-media editor in the Federal Reserve Bank of New York’s Research and Statistics Group.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Was Marx Right?
Angst in America, Part 5: The Crisis We Can’t Muddle Through
News Blog
Early Headlines: Trump Blames Dems And Constitution For Chaos, US Child Poverty, Winter Leaves North New England, Labour Gains In Polls, And More
Grading President Trump's First 100 Days: B!
The Most Important Gaming Platforms 2017
Earnings And Economic Reports: Week Starting 01 May 2017
Ancestors Of Flores 'Hobbits' May Have Been Pioneers Of First 'Human' Migration Out Of Africa
The Global Top 10 Android Apps
What We Read Today 29 April 2017
'Horrifying' Witnesses Describe Latest String Of Prisoner Executions In Arkansas
Apr 25, 2017 08:01 GMT What Trump's Next 100 Days Will Look Like
How Did Small Businesses Do In 2016?
Costs Of Building A 355-Ship US Navy
The Roots Of Rising Treasury Yields
How Will College Grads Do In 2017 In Their Job Search
Investing Blog
Technical Thoughts: Finding Contrarian Ideas
More People Have Access To Netflix Than A DVR
Opinion Blog
Investors: Super Size Me
How Our Addiction To Safety Could Lead To Another Financial Crisis
Precious Metals Blog
A New Age For Gold
Live Markets
28Apr2017 Market Close: Wall Street Closed Mostly Down On News The U.S. Economy Grew At Its Weakest Pace In Three Years, WTI Crude Settles In The Low 49 Handle
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government































 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved