From Barron's this morning.
The Fed Said It Will Backstop Prime Money-Market Funds. What That Means and Why It’s Important.
By Beverly Goodman
Updated March 19, 2020 8:03 am ET / Original March 19, 2020 1:18 am ET
The Federal Reserve announced late Wednesday night its plan to safeguard the $3.8 trillion held in money-market funds.
The Money Market Mutual Fund Liquidity Facility, or MMLF, will lend money to institutions to purchase high-quality securities from money-market funds. The loans will be secured by those assets. “The MMLF will assist money-market funds in meeting demands for redemptions...enhancing overall market functioning and credit provision to the broader economy,” according to a Fed statement. In other words, if money-market funds have trouble selling their holdings to meet increasing redemptions, the Federal Reserve Bank of Boston, which the program is being run through, will loan money to institutions to be the buyers for those securities. The program will be in effect through Sept. 2020.
The program only covers the $800 billion in prime money-market funds, which invest in very short-term corporate debt known as commercial paper. Money-market funds overall have seen inflows during the growing coronavirus pandemic and related economic crisis, but prime money-market funds have been facing outflows, according to Lipper.
Problems in prime money-market funds have arisen recently as the crisis has made it harder for less creditworthy companies to borrow money. Companies rated in the bottom half of the investment-grade scale have been paying increasingly expensive premiums to borrow cash for one- to 90-day periods. The interest rate lower-rated companies have to pay to borrow in that market has more than doubled to 3.33% over the past week, even as the Fed cut its policy rate to nearly zero.
Money-market funds have been subject to two waves of significant regulatory changes since the financial crisis, when the oldest money fund, the now-defunct Reserve Primary Fund, broke the buck. In 2010, the Securities and Exchange Commission (SEC) required money funds to hold 10% of their assets in securities that could be liquidated for cash in one day, and 30% in seven days. They also had to reduce the average maturity of their holdings to 60 days from 90 days. In 2016, the SEC separated money-market funds into two groups—retail funds, which were allowed to keep the longstanding $1 per share value so long as they only held government-issued securities, and institutional prime money-market funds, which would have a floating net asset value (NAV), based on the value of the underlying securities. That means prime funds can break the buck, or fall below $1 per share, if the short-term debt market sells off. All these changes were aimed at protecting investors from losing money in these ostensibly safe funds. (Money-market accounts, in contrast, are managed by banks and protected by the Federal Deposit Insurance Corporation, or FDIC. Money-market funds have no such protection.)
During the 2008-09 financial crisis, the Treasury Department had to lend support to the funds using a government cash reserve known as the Exchange Stabilization Fund. That fund will provide $10 billion in credit protection for the MMLF program. Reports had circulated earlier on Wednesday that the Treasury was seeking Congressional permission to use the Exchange Stabilization Fund to develop guarantees for money-market funds as part of a broader economic stimulus package. The $93 billion fund is typically used to intervene in currency markets and other monetary and financial-policy needs.
