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Can Redemption Fees Prevent Runs on Funds?

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Abstract

We ask whether imposing fees on redeeming investors can prevent runs on money market mutual funds (MMFs) and related intermediation arrangements. We first show that imposing a fee only in extraordinary times often leaves the fund susceptible to a preemptive run where investors rush to redeem before the fee applies. We then show how a policy that imposes a fee when current redemption demand is above a threshold, even in normal times, can make the fund run proof. We characterize the best policy of this type, which is immune to a run of any size. We show that the reform adopted in the U.S. in 2023 leaves funds vulnerable to runs in some market conditions and imposes an inefficiently large fee in others.

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  • Xuesong Huang & Todd Keister, 2025. "Can Redemption Fees Prevent Runs on Funds?," Staff Reports 1160, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:101378
    DOI: 10.59576/sr.1160
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    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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