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Money Market Funds and Regulation

Author

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  • Craig M. Lewis

    (Owen Graduate School of Management, Vanderbilt University, Nashville, Tennessee 37203)

Abstract

This article examines money market funds and the regulation that was promulgated in the wake of the Lehman Brothers bankruptcy during the financial crisis of 2007 and 2008. Various explanations for the ensuing run-like behavior are discussed, including a first-mover advantage related to potential fire sales, the ability to redeem shares at a stable $1.00 when funds are valued below $1.00, and flights to quality and transparency. We then discuss regulatory reform, beginning with the SEC's 2010 amendments and concluding with its 2014 Money Market Fund Reform rules, which require (a) all funds to implement liquidity fees and redemption gates and (b) institutional prime funds to price at their floating net asset value. The economic underpinnings of the SEC's final policy choices are discussed and compared to alternatives, such as capital buffers, that were considered but not adopted.

Suggested Citation

  • Craig M. Lewis, 2016. "Money Market Funds and Regulation," Annual Review of Financial Economics, Annual Reviews, vol. 8(1), pages 25-51, October.
    • Handle: RePEc:anr:refeco:v:8:y:2016:p:25-51
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    File URL: http://www.annualreviews.org/doi/10.1146/annurev-financial-121415-032823
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    Cited by:

    1. Capotă, Laura-Dona & Grill, Michael & Molestina Vivar, Luis & Schmitz, Niklas & Weistroffer, Christian, 2022. "Is the EU money market fund regulation fit for purpose? Lessons from the COVID-19 turmoil," Working Paper Series 2737, European Central Bank.

    More about this item

    Keywords

    financial crisis; liquidity runs; capital buffers; liquidity fees; redemption gates;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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