Money Market Funds
Operations and Technology
Money Market Funds and Liquidity Ratios: Why So High and Stable?
By Chris Plantier
February 19, 2014
Second in a series of posts about ICI’s new data release, a monthly compilation and summary of portfolio data from taxable money market funds. To find out more, read the first post about the new data summary or this list of answers to frequently asked questions.
The SEC’s 2010 money market fund reforms require taxable funds to hold at least 30 percent of their assets in securities that are deemed to be liquid within five business days (known as weekly liquidity) and at least 10 percent of their assets in securities that are deemed to be liquid in one business day (known as daily liquidity). In practice, money market funds—especially government money market funds—hold liquidity well above these minimum standards, and these ratios change very little in any given month.
Why is money market fund liquidity so high and stable?
In our latest release of data that ICI members report on SEC form N-MFP, Table 5 shows the daily and weekly liquidity ratios of government and prime money market funds. As discussed last month, government money market funds hold very high levels of weekly liquidity—more than 84 percent of their portfolios on average—because most of their holdings are made up of Treasury debt, short-dated agency debt, or repurchase agreements. Prime money market funds also have weekly liquidity ratios that, at nearly 37 percent, are above the minimum SEC requirements.
Funds’ liquidity ratios typically vary little from month to month, even during periods of substantial inflows or outflows. For example, the current data release shows that the average liquidity ratio of prime money market funds rose only slightly, to 36.73 percent in January from 36.36 percent in December.
Weekly Liquidity for Prime and Government Money Market Funds
Percentage of total assets, monthly, January 2011 to January 2013
Note: Weekly liquid assets include securities with a remaining maturity of five business days or less, Treasury securities, and agency securities with a remaining maturity of 60 days or less.
Source: Investment Company Institute
Liquidity ratios also tend to move little from month to month over longer stretches, despite significant market events. For example, the figure above—which shows weekly liquidity for government and prime money market funds from January 2011 to January 2014—indicates that funds maintained stable liquidity ratios in 2011, even in the face of significant uncertainty emanating from the eurozone debt crisis and the political impasse involving the U.S. federal debt ceiling.
The figure also underscores the importance of another aspect of the SEC’s 2010 reforms: “know your customer” procedures. These procedures are designed to ensure that a money market fund has sufficient portfolio liquidity to meet anticipated redemptions. By doing so, current high levels of liquidity can be maintained even when outflows occur.
For more on money market funds, please visit ICI’s Money Market Fund Resource Center.
Chris Plantier is an ICI Senior Economist.
ICI’s New Data Release: Further Enhancing the Transparency of Money Market Funds
By Chris Plantier
January 21, 2014
The 2010 reforms to money market mutual funds greatly enhanced the transparency of these funds, giving regulators, analysts, and investors greater insight into important elements of funds’ holdings and operations.
The reforms required funds to disclose their entire portfolio holdings to the public on their company websites five business days after the end of each month. Money market funds also are required to file a more detailed disclosure—SEC Form N-MFP—with the Securities and Exchange Commission directly. The SEC releases this more detailed data to the public 60 days after it’s filed. The SEC does not, however, summarize the data, leaving the public with no non-commercial access to a broad look at holdings across the industry.
Column Makes the Same Mistakes as OFR
By Paul Schott Stevens
January 20, 2014
In recent months, both the U.S. Treasury Department's Office of Financial Research (OFR) and international regulators such as the Financial Stability Board (FSB) have examined whether asset managers pose risks to financial stability. One report is deeply flawed; the other offers a more informed view. Unfortunately, Gretchen Morgenson’s New York Times column (“Bailout Risk, Far Beyond the Banks,” January 12) veers toward the flawed report.
Money Market Funds and the Debt Ceiling: What Do We Know?
By Brian Reid
October 14, 2013
As the U.S. Treasury reaches the limits of its borrowing authority this week, markets and the media are focusing on the risk that the United States will default on its debt and fail to pay interest or principal on maturing Treasury securities, perhaps before the end of October.