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{{short description|Open-end mutual fund}}
{{About|the type of mutual fund|the type of bank deposit account|Money market account}}

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A '''money market fund''' (also called a '''money market mutual fund''') is an open-end [[mutual fund]] that invests in short-term debt [[securities]] such as [[Treasury bill|US Treasury bills]] and [[commercial paper]].<ref>{{cite web|url=https://www.sec.gov/answers/mfmmkt.htm |title=U.S. Securities and Exchange Commission on Money Funds |publisher=Sec.gov |date=2013-01-16 |access-date=2014-07-28}}</ref> Money market funds are managed with the goal of maintaining a highly stable asset value through liquid investments, while paying income to investors in the form of dividends. Although they are not insured against loss, actual losses have been quite rare in practice.

Regulated in the United States under the [[Investment Company Act of 1940]], and in Europe under Regulation 2017/1131,<ref>{{Cite web|url=https://www.consilium.europa.eu/en/policies/money-market-funds/|title=Money market funds - Consilium|website=www.consilium.europa.eu|access-date=2019-06-27}}</ref> money market funds are important providers of [[liquidity]] to financial intermediaries.<ref>''See'' Markus K. Brunnermeir,''Deciphering the 2007-08 Liquidity and Credit Crunch,'' Journal of Economic Perspectives (May, 2008)(arguing that investment banks reliance on commercial paper and repo markets had increased over the last 3 years.  This reliance is seen in the fact that 25% of assets purchased by investment banks had been funded through the repo market.)</ref>

==Explanation==
Money market funds seek to limit exposure to losses due to [[credit risk|credit]], [[market risk|market]], and [[liquidity risk|liquidity]] risks. Money market funds in the [[United States]] are regulated by the [[U.S. Securities and Exchange Commission|Securities and Exchange Commission]] (SEC) under the [[Investment Company Act of 1940]]. Rule 2a-7 of the act restricts the quality, maturity and diversity of investments by money market funds.  Under this act, a money fund mainly buys the highest rated [[debt]], which matures in under 13 months. The portfolio must maintain a [[Maturity (finance)|weighted average maturity]] (WAM) of 60 days or less and not invest more than 5% in any one issuer, except for [[Government bond|government securities]] and [[repurchase agreement]]s.<ref name="SEC2009">{{citation | contribution = Money Market Fund Reform | title = Securities and Exchange Commission: Proposed Rules | editor-first = Elizabeth | editor-last = Murphy | publisher = Securities and Exchange Commission | pages = Release No. IC–28807; File No. S7–11–09 | date = June 30, 2009| contribution-url = https://www.sec.gov/rules/proposed/2009/ic-28807.pdf }}</ref>

[[Security (finance)|Securities]] in which money markets may invest include [[commercial paper]], [[repurchase agreement]]s, short-term [[Bond (finance)|bonds]] and other money funds. Money market securities must be highly liquid and of the highest quality.

== History ==
In 1971, [[Bruce R. Bent]] and [[Henry B. R. Brown]] established the first money market fund.<ref>Hershey, Robert D., Jr. [https://www.nytimes.com/1973/01/07/archives/overnight-mutual-funds-for-surplus-assets.html "Overnight Mutual Funds for Surplus Assets"], ''[[The New York Times]]'', January 7, 1973. Accessed June 22, 2010.</ref> It was named the [[Reserve Primary Fund|Reserve Fund]] and was offered to investors who were interested in preserving their cash and earning a small rate of return. Several more funds were shortly set up and the market grew significantly over the next few years. Money market funds are credited with popularizing mutual funds in general, which until that time, were not widely utilized.<ref>{{cite book|title=The Rise of Mutual Funds: An Insider's View|publisher=Oxford University Press|first=Matthew|last=Fink|page=82|date=October 27, 2008|access-date=February 4, 2017|url=https://books.google.com/books?id=6rk2NwWiAcwC|isbn=9780199714438}}</ref>

Money market funds in the United States created a solution to the limitations of [[Regulation Q]],<ref name="IMFOct2010">{{cite journal | title = Global Financial Stability Report: Sovereigns, Funding and Systemic Liquidity | journal = World Economic and Financial Surveys | date = October 2010 | pages = 65–83| url = http://www.imf.org/external/pubs/ft/gfsr/2010/02/index.htm | format = PDF | access-date = 2010-12-12}}</ref> which at the time prohibited [[transactional account|demand deposit account]]s from paying interest and capped the rate of interest on other types of bank accounts at 5.25%. Thus, money market funds were created as a substitute for bank accounts.

In the 1990s, bank interest rates in [[Lost Decade (Japan)|Japan]] were near zero for an extended period of time. To search for higher yields from these low rates in bank deposits, investors used money market funds for short-term deposits instead. However, several money market funds fell off short of their stable value in 2001 due to the [[Enron scandal|bankruptcy of Enron]], in which several Japanese funds had invested, and investors fled into government-insured bank accounts. Since then the total value of money markets have remained low.<ref name="IMFOct2010" />

Money market funds in Europe have always had much lower levels of investments capital than in the United States or Japan. Regulations in the [[European Union|EU]] have always encouraged investors to use banks rather than money market funds for short-term deposits.<ref name="IMFOct2010" />

==Breaking the buck==
<!-- Linked from [[Break the buck]] -->
Money market funds seek a stable [[net asset value]] (NAV) per share (which is generally $1.00 in the United States). They aim to never lose money. The $1.00 is maintained through the declaration of dividends to shareholders, typically daily, at an amount equal to the fund's net income. If a fund's NAV drops below $1.00, it is said that the fund "broke the buck".<ref>{{cite book |author1=Frederic Mishkin |author1-link=Frederic Mishkin |title=The Economics of Money, Banking and Financial Markets |date=2010 |publisher=[[Pearson Education]] |isbn=9780321649362 |page=291 |edition=9th |chapter=12 - Banking Industry: Structure and Competition}}</ref> For SEC registered money funds, maintaining the $1.00 flat NAV is usually accomplished under a provision under Rule 2a-7 of the 40 Act that allows a fund to value its investments at amortized cost rather than market value, provided that certain conditions are maintained. One such condition involves a side-test calculation of the NAV that uses the market value of the fund's investments. The fund's published, amortized value may not exceed this market value by more than 1/2 cent per share, a comparison that is generally made weekly. If the variance does exceed $0.005 per share, the fund could be considered to have broken the buck, and regulators may force it into liquidation.

Buck breaking has rarely happened. Before the [[2008 financial crisis]], only three money funds had broken the buck in the 37-year history of money funds.

While money market funds are typically managed in a fairly safe manner, there would have been many more failures over this period if the companies offering the money market funds had not stepped in when necessary to support their fund (by way of infusing capital to reimburse security losses) and avoid having the funds break the buck. This was done because the expected cost to the business from allowing the fund value to drop—in lost customers and reputation—was greater than the amount needed to bail it out.<ref>See for instance Gould, Carol [https://www.nytimes.com/1996/09/29/business/insurance-for-funds-safety-for-whom.html Insurance for Funds: Safety for Whom" ], ''[[The New York Times]]'', September 29, 1996 accessed June 13, 2011 and Deborah Brewster and Joanna Chung [http://www.ft.com/intl/cms/s/0/696e3dc0-84e4-11dd-b148-0000779fd18c.html#axzz1PBgup83O "Fear of money market funds 'breaking the buck'"],''[[The Financial Times]]'', September 18, 2011 accessed June 13, 2011.</ref>

The first money market mutual fund to break the buck was First Multifund for Daily Income (FMDI) in 1978, liquidating and restating NAV at 94 cents per share. An argument has been made that FMDI was not technically a money market fund as, at the time of liquidation, the average maturity of securities in its portfolio exceeded two years.<ref>[https://books.google.com/books?id=RgYEAAAAMBAJ&pg=PA8 "Is your Money Market Fund Safe?" ], ''[[Kiplinger's Personal Finance|Changing Times, The Kiplinger Magazine]]'', October 1981 accessed August 13, 2011.</ref>  However, prospective investors were informed that FMDI would invest "solely in Short-Term (30-90 days) MONEY MARKET obligations". Furthermore, the rule restricting the maturities which money market funds are permitted to invest in, Rule 2a-7 of the Investment Company Act of 1940, was not promulgated until 1983. Prior to the adoption of this rule, a mutual fund had to do little other than present itself as a money market fund, which FMDI did.  Seeking higher yield, FMDI had purchased increasingly longer maturity securities, and rising interest rates negatively impacted the value of its portfolio.  In order to meet increasing redemptions, the fund was forced to sell a certificate of deposit at a 3% loss, triggering a restatement of its NAV and the first instance of a money market fund "breaking the buck".<ref>[https://www.sec.gov/litigation/aljdec/1982/id19821229is.pdf "Administrative Proceeding File No. 3-5881"], December 29, 1982 accessed August 13, 2011.</ref>

The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was only the second failure in the then 23-year history of money funds and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an [[#Institutional money fund|institutional money fund]], not a [[#Retail money fund|retail money fund]], thus individuals were not directly affected.

No further failures occurred until September 2008, a month that saw tumultuous events for money funds. However, as noted above, other failures were only averted by infusions of capital from the fund sponsors.<ref>Deborah Brewster and Joanna Chung [http://www.ft.com/intl/cms/s/0/696e3dc0-84e4-11dd-b148-0000779fd18c.html#axzz1PBgup83O "Fear of money market funds 'breaking the buck'"],''[[The Financial Times]]'', September 18, 2011 accessed June 13, 2011.</ref>

==September 2008==
{{See also|2008 financial crisis}}
Money market funds increasingly became important to the wholesale money market leading up to the crisis. Their purchases of [[Asset-backed security|asset-backed securities]] and large-scale funding of foreign banks' short-term US-denominated debt put the funds in a pivotal position in the marketplace.<ref name="IMFOct2010" />

The week of September 15–19, 2008, was very turbulent for money funds and a key part of financial markets seizing up.<ref name="outflow">{{cite news|url=https://www.wsj.com/articles/SB122186683086958875
|title=Bailout of Money Funds Seems to Stanch Outflow: Fear That Had Gripped $3.4 Trillion Market Abates, Ending the Reluctance of Funds to Buy Vital Commercial Paper|first=Diya|last=Gullapalli|author2=Shefali Anand|date=2008-09-20|access-date=2008-09-21|work=The Wall Street Journal}}</ref>

===Events===
On Monday, September 15, 2008, [[Lehman Brothers Holdings Inc.]] filed for [[bankruptcy]]. On Tuesday, September 16, The Reserve Primary Fund broke the buck when its shares fell to 97 cents after [[Write-off|writing off]] debt issued by Lehman Brothers.<ref>{{cite web|url=https://www.bloomberg.com/apps/news?pid=20601087&sid=a5O2y1go1GRU|title=Reserve Primary Money Fund Falls Below $1 a Share|access-date=2008-09-16|author=Christopher Condon|date=2008-09-16|publisher=Bloomberg}}</ref>

Continuing [[Behavioral economics|investor anxiety]] as a result of the Lehman Brothers bankruptcy and other pending financial troubles caused significant redemptions from money funds in general, as investors redeemed their holdings and funds were forced to liquidate assets or impose limits on redemptions. Through Wednesday, September 17, prime institutional funds saw substantial redemptions.<ref name="henriques">{{cite news|url=https://www.nytimes.com/2008/09/20/business/20moneys.html?em|title=Treasury to Guarantee Money Market Funds|work=The New York Times|date=2008-09-19|access-date=2008-09-20|first=Diana B.|last=Henriques}}</ref> Retail funds saw net inflows of $4 billion, for a [[net capital outflow]] from all funds of $169 billion to $3.4 trillion (5%).

In response, on Friday, September 19, the [[United States Department of the Treasury|US Department of the Treasury]] announced an optional program to "insure the holdings of any publicly offered eligible money market mutual fund—both retail and institutional—that pays a fee to participate in the program". The insurance guaranteed that if a covered fund had broken the buck, it would have been restored to $1 NAV.<ref name="henriques" /><ref>{{cite web
|url=http://www.treasury.gov/press-center/press-releases/Pages/hp1147.aspx|title=Treasury Announces Guaranty Program for Money Market Funds|publisher=Treasury Department|date=2008-09-19|access-date=2013-12-29}}</ref> The program was similar to the [[Federal Deposit Insurance Corporation|FDIC]], in that it insured deposit-like holdings and sought to prevent [[Run on the bank|runs on the bank]].<ref name="outflow"/><ref name="henriques2">{{cite news|url=https://www.nytimes.com/2008/09/20/business/20fund.html|title=Rescue Plan for Funds Will Come at a Cost|work=The New York Times|date=2008-09-19|access-date=2008-09-21|first=Diana B.|last=Henriques}}</ref> The guarantee was backed by assets of the Treasury Department's [[Exchange Stabilization Fund]], up to a maximum of $50 billion. This program only covered assets invested in funds before September 19, and those who sold equities, for example, during the subsequent market crash and parked their assets in money funds, were at risk. The program immediately stabilized the system and stanched the outflows, but drew criticism from banking organizations, including the [[Independent Community Bankers of America]] and [[American Bankers Association]], who expected funds to drain out of bank deposits and into newly insured money funds, as these latter would combine higher yields with insurance.<ref name="outflow"/><ref name="henriques2"/> The guarantee program ended on September 18, 2009, after one year, with no losses and generated $1.2 billion (~${{Format price|{{Inflation|index=US-GDP|value=1200000000|start_year=2009}}}} in {{Inflation/year|US-GDP}}) in revenue from the participation fees.<ref>{{cite web
|url=https://home.treasury.gov/news/press-releases/tg293|title=Treasury Announces Expiration of Guarantee Program for Money Market Funds|publisher=Treasury Department|date=2009-09-18|access-date=2023-07-17}}</ref>

===Analysis===
The crisis, which eventually became the catalyst for the [[Emergency Economic Stabilization Act of 2008]], almost developed into a [[bank run|run]] on money funds: the redemptions caused a drop in demand for [[commercial paper]],<ref name="outflow"/> preventing companies from rolling over their short-term debt, potentially causing an acute [[Credit crunch|liquidity crisis]]: if companies cannot issue new debt to repay maturing debt, and do not have cash on hand to pay it back, they will [[Default (finance)|default]] on their obligations, and may have to file for [[bankruptcy]]. Thus there was concern that the run could cause extensive bankruptcies, a [[debt deflation]] spiral, and serious damage to the [[Economics|real economy]], as in the [[Great Depression]].{{Citation needed|date=September 2008}}

The drop in demand resulted in a "buyers strike", as money funds could not (because of redemptions) or would not (because of fear of redemptions) buy commercial paper, driving yields up dramatically: from around 2% the previous week to 8%,<ref name="outflow"/> and funds put their money in Treasuries, driving their yields close to 0%.

This is a bank run in the sense that there is a [[Asset-liability mismatch|mismatch in maturities]], and thus a money fund is a "virtual bank": the assets of money funds, while short term, nonetheless typically have maturities of several months, while investors can request redemption at any time, without waiting for obligations to come due. Thus if there is a sudden demand for redemptions, the assets may be liquidated in a [[fire sale]], depressing their sale price.

An earlier crisis occurred in 2007–2008, where the demand for [[asset-backed commercial paper]] dropped, causing the collapse of some [[structured investment vehicle]]s. As a result of the events, the Reserve Fund liquidated, paying shareholders 99.1 cents per share.<ref>{{cite web|url=http://www.primary-yieldplus-inliquidation.com/pdf/Fund-Update-92314.pdf|title=Additional Information Regarding Primary Fund-In Liquidation|date=September 23, 2014|access-date=February 4, 2017}}</ref>

== Statistics ==
The [[Investment Company Institute]] reports statistics on money funds weekly as part of its mutual fund statistics, as part of its industry statistics, including total assets and net flows, both for institutional and retail funds. It also provides annual reports in the ICI Fact Book.

At the end of 2011, there were 632 money market funds in operation,<ref name="ici">[http://www.ici.org/pdf/2012_factbook.pdf 2012 INVESTMENT COMPANY FACT BOOK]. Tables 37-39, Pages 170-172. Note: Data for funds that invest primarily in other mutual funds were excluded from the series.</ref> with total [[asset]]s of nearly US$2.7 trillion.<ref name="ici" /> Of this $2.7 trillion, retail money market funds had $940 billion in Assets Under Management (AUM). Institutional funds had $1.75 trillion under management.<ref name="ici" />

== Types and size of money funds ==

In the United States, the fund industry and its largest trade organization, the Investment Company Institute, generally categorize money funds into the type of investment strategy: Prime, Treasury or Tax-exempt as well as distribution channel/investor: Institutional or Retail.

=== Prime money fund ===
A fund that invests generally in variable-rate debt and commercial paper of corporations and securities of the US government and agencies. Can be considered of any money fund that is not a Treasury or Tax-exempt fund.

=== Government and Treasury money funds ===
A Government money fund (as of the SEC's July 24, 2014 rule release) is one that invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are "collateralized fully" (i.e., collateralized by cash or government securities). A Treasury fund is a type of government money fund that invests in US Treasury Bills, Bonds and Notes.

=== Tax-exempt money fund ===
The fund invests primarily in obligations of state and local jurisdictions ("municipal securities") generally exempt from US Federal Income Tax (and to some extent state income taxes).

=== Institutional money fund ===
Institutional money funds are high minimum investment, low expense share classes that are marketed to corporations, governments, or fiduciaries. They are often set up so that money is swept to them overnight from a company's main operating accounts. Large national chains often have many accounts with banks all across the country, but electronically pull a majority of funds on deposit with them to a concentrated money market fund.

=== Retail money fund ===
Retail money funds are offered primarily to individuals. Retail money market funds hold roughly 33% of all money market fund assets.

Fund yields are typically somewhat higher than bank [[savings account]]s,{{Citation needed|date=September 2008}} however these are different products with differing risks (e.g., money fund accounts are not insured and are not deposit accounts). Since retail funds generally have higher servicing needs and thus expenses than institutional funds, their yields are generally lower than institutional funds.

SEC rule amendments released July 24, 2014, have 'improved' the definition of a retail money fund to be one that has policies and procedures reasonably designed to limit its shareholders to natural persons.

=== Money fund sizes ===

As of February 2025 total money market fund assets were $6.9 trillion including $4.1 trillion held by institutional investors and nearly $2.8 trillion held by retail investors. The vast majority of those assets were held in government securities.<ref>{{Cite web |last=Investment Company Institute |date=February 13, 2025 |title=Money Market Fund Assets |url=https://www.ici.org/research/stats/mmf }}</ref> Among the largest companies offering institutional money funds are JPmorgan, [[BlackRock]], Western Asset, [[Federated Investors]], Bank of America, [[Dreyfus Corporation|Dreyfus]], AIM and [[Evergreen Investments|Evergreen]] ([[Wachovia]]). The largest retail money fund providers include: [[Fidelity Investments|Fidelity]], [[The Vanguard Group|Vanguard]], and [[Charles Schwab Corp.|Schwab]].

== Similar investments ==

=== Money market accounts ===
{{Main|Money market account}}

Banks in the United States offer savings and money market ''deposit accounts'', but these should not be confused with money ''mutual funds''. These bank accounts offer higher yields than traditional [[passbook]] [[savings account]]s, but often with higher minimum balance requirements and limited transactions. A money market account may refer to a money market mutual fund, a bank money market deposit account (MMDA) or a brokerage sweep free credit balance.

===Ultrashort bond funds===
Ultrashort bond funds are mutual funds, similar to money market funds, that, as the name implies, invest in bonds with extremely short maturities. Unlike money market funds, however, there are no restrictions on the quality of the investments they hold. Instead, ultrashort bond funds typically invest in riskier securities in order to increase their return. Since these high-risk securities can experience large swings in price or even default, ultrashort bond funds, unlike money market funds, do not seek to maintain a stable $1.00 NAV and may lose money or dip below the $1.00 mark in the short term.<ref>{{cite web|url=https://www.sec.gov/investor/pubs/ultra-short_bond_funds.htm |title=Ultra-Short Bond Funds: Know Where You're Parking Your Money |publisher=SEC.gov |date=2009-05-06 |access-date=2014-07-28}}</ref> Finally, because they invest in lower quality securities, ultrashort bond funds are more susceptible to adverse market conditions such as those brought on by the [[2008 financial crisis]].

=== Enhanced cash funds ===
'''Enhanced cash funds''' are [[bond fund]]s similar to money market funds, in that they aim to provide liquidity and principal preservation, but which:<ref name="PIMCOcash">{{cite web
|url=http://www.pimco.com/LeftNav/Bond+Basics/2006/Short+Term+Basics.htm
|title=Investing Cash: Money Market and Enhanced Cash Strategies
|date=April 2006
|work=Bond Basics
|access-date=2008-09-22
|archive-url = https://web.archive.org/web/20080518183537/http://www.pimco.com/LeftNav/Bond+Basics/2006/Short+Term+Basics.htm <!-- Bot retrieved archive --> |archive-date = 2008-05-18}}</ref>
* Invest in a wider variety of assets, and do not meet the restrictions of SEC Rule 2a-7;
* Aim for higher returns;
* Have less liquidity;
* Do not aim as strongly for stable NAV.

Enhanced cash funds will typically invest some of their portfolio in the same assets as money market funds, but others in riskier, higher yielding, less liquid assets such as:<ref name="PIMCOcash"/>
* Lower-rated bonds;
* Longer maturity;
* Foreign currency–denominated debt;
* [[Asset-backed commercial paper]] (ABCP);<ref name="PIMCOReisz">{{cite web
|url=http://www.pimco.com/LeftNav/PIMCO+Spotlight/2008/Spotlight+Sept+2008+Reisz+Money+Market.htm
|work=Spotlight
|date=September 2008
|title=Paul Reisz Discusses Cash Investing and the Impact of Recent Market Events
|first=Paul W.
|last=Reisz
}}</ref>
* [[Mortgage-backed security|Mortgage-backed securities]] (MBSs);<ref name="gefund">{{cite news
|url=http://www.marketwatch.com/News/Story/institutions-pull-600-million-loss-stricken/story.aspx?guid=%7B50F1A128%2D4D2E%2D4244%2DA9BF%2DF07C5F4C7DBD%7D
|title=Institutions pull $600 mln from loss-stricken GE fund
|first=Christopher
|last=Hinton
|publisher=MarketWatch
|date=2007-11-15
|access-date=2009-09-22
}}</ref>
* [[Structured investment vehicle]]s (SIVs).

In general, the NAV will stay close to $1, but is expected to fluctuate above and below, and will break the buck more often.<ref name="PIMCOReisz"/><ref name="gefund"/><ref>{{cite news
|url=http://www.marketwatch.com/news/story/bank-america-shutting-12-billion/story.aspx?guid=%7BF95A43CE-78D1-4F35-867C-3CCF31863757%7D
|title=Bank of America shutting $12 billion cash fund: Cash withdrawals halted; investor redemptions paid 'in kind'
|first=Alistair
|last= Barr
|publisher=MarketWatch
|date=2007-12-10
|access-date=2009-09-22
}}</ref> Different managers place different emphases on risk versus return in enhanced cash – some consider preservation of principal as paramount,<ref name="PIMCOReisz"/> and thus take few risks, while others see these as more bond-like, and an opportunity to increase yield without necessarily preserving principal. These are typically available only to institutional investors, not retail investors.

The purpose of enhanced cash funds is not to replace money markets, but to fit in the continuum between cash and bonds – to provide a higher yielding investment for more permanent cash. That is, within one's [[asset allocation]], one has a continuum between cash and long-term investments:
* Cash – most liquid and least risky, but low yielding;
* Money markets / cash equivalents;
* Enhanced cash;
* Long-term bonds and other non-cash long-term investments – least liquid and most risky, but highest yielding.

Enhanced cash funds were developed due to low spreads in traditional cash equivalents.<ref name="PIMCOReisz"/>

There are also funds which are billed as "money market funds", but are not 2a-7 funds (do not meet the requirements of the rule).<ref name="PIMCOcash"/> In addition to 2a-7 eligible securities, these funds invest in [[Eurodollar]]s and repos ([[repurchase agreement]]s), which are similarly liquid and stable to 2a-7 eligible securities, but are not allowed under the regulations.

==Systemic risk and global regulatory reform==
{{refimprove|section|date=January 2019}}

=== US regulatory reform ===
A deconstruction of the September 2008 events around money market funds, and the resulting fear, panic, contagion, classic [[bank run]], emergency need for substantial external propping up, etc. revealed that the US regulatory system covering the basic extension of credit has had substantial flaws that in hindsight date back at least two decades.

It has long been understood that regulation around the extension of credit requires substantial levels of integrity throughout the system. To the extent regulation can help insure that base levels of integrity persist throughout the chain, from borrower to lender, and it curtails the overall extension of credit to reasonable levels, episodic financial crisis may be averted.

In the 1970s, money market funds began disintermediating banks from their classic interposition between savers and borrowers. The funds provided a more direct link, with less overhead. Large banks are regulated by the [[Federal Reserve Board]] and the [[Office of the Comptroller of the Currency]]. Notably, the Fed is itself owned by the large ''private'' banks, and controls the overall supply of money in the United States. The OCC is housed within the Treasury Department, which in turn manages the issuance and maintenance of the multi-trillion dollar debt of the US government. The overall debt is of course connected to ongoing federal government spending vs. actual ongoing tax receipts. Unquestionably, the private banking industry, bank regulation, the national debt, and ongoing governmental spending politics are substantially interconnected. Interest rates incurred on the national debt is subject to rate setting by the Fed, and inflation (all else being equal) allows today's fixed debt obligation to be paid off in ever cheaper to obtain dollars. The third major bank regulator, designed to swiftly remove failing banks is the [[Federal Deposit Insurance Corporation]], a bailout fund and resolution authority that can eliminate banks that are failing, with minimum disruption to the banking industry itself. They also help ensure depositors continue to do business with banks after such failures by insuring their deposits.

From the outset, money market funds fell under the jurisdiction of the SEC as they appeared to be more like ''investments'' (most similar to traditional stocks and bonds) vs. ''deposits and loans'' (cash and ''cash equivalents'' the domain of the bankers). Although money market funds are quite close to and are often accounted for as ''cash equivalents'' their main regulator, the SEC, has zero mandate to control the supply of money, limit the overall extension of credit, mitigate against boom and bust cycles, etc. The SEC's focus remains on adequate disclosure of risk, and honesty and integrity in financial reporting and trading markets. After adequate disclosure, the SEC adopts a hands off, ''let the buyer beware'' attitude.

To many retail investors, money market funds are confusingly similar to traditional bank demand deposits. Virtually all large money market funds offer check writing, ACH transfers, wiring of funds, associated debit and credit cards, detailed monthly statements of all cash transactions, copies of canceled checks, etc. This makes it appear that ''cash'' is actually in the individual's account. With net asset values reported flat at $1.00, despite the market value variance of the actual underlying assets, an impression of rock solid stability is maintained. To help maintain this impression, money market fund managers frequently forgo being reimbursed legitimate fund expenses, or cut their management fee, on an ad hoc and informal basis, to maintain that solid appearance of stability.

To illustrate the various blending and blurring of functions between classic banking and investing activities at money market funds, a simplified example will help. Imagine only retail "depositors" on one end, and S&P 500 corporations borrowing through the commercial paper market on the other. The depositors assume:
* Extremely short duration (60 days or less)
* Extremely broad diversification (hundreds, if not thousands of positions)
* Very high grade investments.
After 10–20 years of stability the "depositors" here assume safety, and move all cash to money markets, enjoying the higher interest rates.

On the borrowing end, after 10–20 years, the S&P 500 corporations become extremely accustomed to obtaining funds via these money markets, which are very stable. Initially, perhaps they only borrowed in these markets for a highly seasonal cash needs, being a net borrower for only say 90 days per year. They would borrow here as they experienced their deepest cash needs over an operating cycle to temporarily finance short-term build ups in inventory and receivables. Or, they moved to this funding market from a former bank revolving line of credit, that was guaranteed to be available to them as they needed it, but had to be cleaned up to a zero balance for at least 60 days out of the year. In these situations the corporations had sufficient other equity and debt financing for all of their regular capital needs. They were however dependent on these sources to be available to them, as needed, on an immediate daily basis.

Over time, money market fund "depositors" felt more and more secure, and not really at risk. Likewise, on the other end, corporations saw the attractive interest rates and incredibly easy ability to constantly roll over short term commercial paper. Using rollovers they then funded longer and longer term obligations via the money markets. This expands credit. It's also over time clearly ''long-term borrowing'' on one end, funded by an ''on-demand'' depositor on the other, with some substantial obfuscation as to what is ultimately going on in between.

In the wake of the crisis two solutions have been proposed. One, repeatedly supported over the long term by the GAO and others is to consolidate the US financial industry regulators. A step along this line has been the creation of the [[Financial Stability Oversight Council]] to address [[systemic risk]] issues that have in the past, as amply illustrated by the money market fund crisis above, fallen neatly between the cracks of the standing isolated financial regulators. Proposals to merge the SEC and [[Commodity Futures Trading Commission|CFTC]] have also been made.

A second solution, more focused on money market funds directly, is to re-regulate them to address the common misunderstandings, and to ensure that money market "depositors", who enjoy greater interest rates, thoroughly understand the actual risk they are undertaking. These risks include substantial interconnectedness between and among money market participants, and various other substantial [[systemic risk]]s factors.

One solution is to report to money market "depositors" the actual, floating net asset value. This disclosure has come under strong opposition by [[Fidelity Investments]], [[The Vanguard Group]], [[BlackRock]], and the [[U.S. Chamber of Commerce|US Chamber of Commerce]] as well as others.<ref name=backoff>{{cite news|title=Ex-SEC officials to U.S. risk council: Back off on money funds|url=https://www.reuters.com/article/us-sec-moneyfunds-idUSBRE91K13A20130221|access-date=27 February 2013|publisher=Reuters|date=Feb 21, 2013}}</ref>

The SEC would normally be the regulator to address the risks to investors taken by money market funds, however to date the SEC has been internally politically gridlocked. The SEC is controlled by five commissioners, no more than three of which may be the same political party. They are also strongly enmeshed with the current mutual fund industry, and are largely divorced from traditional banking industry regulation. As such, the SEC is not concerned over overall credit extension, money supply, or bringing [[Shadow banking system|shadow banking]] under the regulatory umbrella of effective credit regulation.

As the SEC was gridlocked, the Financial Stability Oversight Council promulgated its own suggested money market reforms and threatens to move forward if the SEC doesn't button it up with an acceptable solution of their own on a timely basis. The SEC has argued vociferously that this is "their area" and FSOC should back off and let them handle it, a viewpoint shared by four former SEC chairmen, [[Roderick Hills]], [[David Ruder]], [[Richard Breeden]], and [[Harvey Pitt]], and two former commissioners, [[Roel Campos]] and [[Paul S. Atkins]].<ref name=backoff/>

=== US Reform: SEC Rule Amendments released July 24, 2014 ===

The Securities and Exchange Commission (SEC) issued final rules that are designed to address money funds’ susceptibility to heavy redemptions in times of stress, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, their benefits.

There are several key components:

'''Floating NAV required of institutional non-government money funds'''

The SEC is removing the valuation exemption that permitted these funds (whose investors historically have made the heaviest redemptions in times of stress) to maintain a stable NAV, i.e., they will have to transact sales and redemptions as a market value-based or "floating" NAV, rounded to the fourth decimal place (e.g., $1.0000).

'''Fees and gates'''

The SEC is giving money fund boards of directors the discretion whether to impose a liquidity fee if a fund's weekly liquidity level falls below the required regulatory threshold, and/or to suspend redemptions temporarily, i.e., to "gate" funds, under the same circumstances. These amendments will require all non-government money funds to impose a liquidity fee if the fund's weekly liquidity level falls below a designated threshold, unless the fund's board determines that imposing such a fee is not in the best interests of the fund.

'''Other provisions'''

In addition, the SEC is adopting amendments designed to make money market funds more resilient by increasing the diversification of their portfolios, enhancing their [[stress testing]], and improving transparency by requiring money market funds to report additional information to the SEC and to investors. Additionally, stress testing will be required and a key focus will be placed on the funds ability to maintain weekly liquid assets of at least 10%.<ref>{{cite web |url= http://www.pwc.com/us/en/financial-services/regulatory-services/publications/assets/first-take-secs-money-market-reform.pdf |title= First take: Ten key points form the SEC's final money market rule |publisher= PwC Financial Services Regulatory Practice|date= July 2014|access-date=February 4, 2017}}</ref> Finally, the amendments require investment advisers to certain large unregistered liquidity funds, which can have many of the same economic features as money market funds, to provide additional information about those funds to the SEC.<ref>Securities and Exchange Commission: Money Market Fund Reform; Amendments to Form PF https://www.sec.gov/rules/final/2014/33-9616.pdf</ref>

=== EU regulatory reform ===
In parallel with the US Reform, the EU completed drafting of a similar regulation for the money market fund product.

On June 30, 2017, Regulation (EU) 2017/1131 for money market funds<ref>{{Cite web|url=https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32017R1131&from=EN|title=L_2017169EN.01000801.xml|website=eur-lex.europa.eu|access-date=2019-06-27}}</ref> was published in the Official Journal of the European Union, introducing new rules for MMFs domiciled, managed or marketed in the European Union. This entered into effect in March 2019. The regulation introduces four new categories of fund structures for MMFs:<ref>{{Cite web|url=https://www.immfa.org/about-mmfs/investor-help.html|title=New MMF types - Institutional Money Market Funds Association|website=www.immfa.org|access-date=2019-06-27}}</ref> 

* Public Debt Constant Net Asset Value (CNAV) MMFs are short-term MMFs. Funds must invest 99.5% in government assets. Units in the fund are purchased or redeemed at a constant price rounded to the nearest percentage point. 
* Low Volatility Net Asset Value (LVNAV) MMFs are short-term MMFs. Funds around are purchased or redeemed at a constant price so long as the value of the underlying assets do not deviate by more than 0.2% (20bit/s) from par (i.e. 1.00).
* Short Term Variable NAV – Short-term Variable Net Asset Value (VNAV) MMFs are primarily invested in money market instruments, deposits and other MMFs. Funds are subject to looser liquidity rules than Public Debt CNAV and LVNAV funds. Units in the funds are purchased or redeemed at a variable price calculated to the equivalent of at least four significant figures (e.g. 10,000.00).
* Standard Variable NAV VNAV– Standard MMFs must be VNAV funds. Funds are primarily invested in money market instruments, deposits and other short-term assets. Funds are subject to looser liquidity rules than Public Debt CNAV and LVNAV funds AND may invest in assets of much longer maturity. Units in the funds are purchased or redeemed at a variable price calculated to the equivalent of at least four significant figures (e.g. 10,000.00).

Although the starting products were similar, there are now considerable differences between US and EU MMFs. Whilst EU MMF investors mostly moved to successor fund types, investors in US MMFs undertook a huge and persisting switch from Prime into Government MMF. 

The EU MMF Regulation does not make any reference to either fund or portfolio external credit rating requirements. Throughout the transition EU MMFs overwhelmingly retained their existing ratings, and the credit rating agencies have confirmed their commitment to the MMF-specific rating criteria they each maintain.

A major difference in scope is that, on a like-for-like basis, US MMFs may be compared only to EU short-term MMFs.

== See also ==
* [[Bond fund]]
* [[Income fund]]
* [[Money market]]
* [[Money supply]]
* [[Shadow banking system]]
* [[Stable value fund]]
* [[Stock fund]]
* [[Sweep account]]
* [[Target date fund]]

== References ==
{{reflist|2}}

== External links ==
* [http://www.icifactbook.org/ ICI Fact Book]
* [https://www.swfinstitute.org/news/83615/what-is-a-money-market-fund Definition of a Money Market Fund and Difference Between Money Market Account]
* Joan Ohlbaum Swirsky, ''[https://www.stradley.com/professionals/s/~/media/3DB2A508C51D44D69EE8A9DF3D4CEDEB.ashx The Guide to Rule 2a-7: A Map Through the Maze for the Money Market Professional]'' (3rd ed., 2017) 

{{Investment funds}}

{{DEFAULTSORT:Money Market Fund}}
[[Category:Money markets]]
[[Category:Mutual funds]]
[[Category:Subprime mortgage crisis]]