Caveat Emptor:
Rule 2a-7 and Money Market Mutual Funds
Ozgur (Ozzy) Akay
Office of Financial Research, U.S. Department of the Treasury
Texas Tech University
Mark D. Griffiths
Jack Anderson Professor of Finance
Miami University
And
Drew B. Winters
Lucille and Raymond Pickering Chair in Finance
Texas Tech University
10/22/2012
Preliminary Draft– Please do not quote
Views and opinions expressed are those of the authors and do not necessarily represent official OFR or
Treasury positions or policy.
1
Caveat Emptor:
Rule 2a-7 and Money Market Mutual Funds
Abstract
Rule 2a-7 defines the quality, maturity and diversity of investments in
money market fund (MMF) portfolios. Following the financial crisis, the
SEC modified rule 2a-7 to improve liquidity and the credit quality of
MMFs. We analyze the portfolio composition of 298 taxable money
market mutual funds (MMFs) to determine if liquidity and credit quality
were problems during the crisis and whether the changes to the rule
address the issues. We find that the problems in the MMF industry
during the crisis stem from informational opacity and the lack of
definition of specific asset classes allowable for investment resulted in
risky MMF portfolios. We argue that the proposed modifications to Rule
2a-7 are only a partial solution towards making MMFs more resilient to
market disruptions and propose a two-tier system based on asset classes,
where Tier One would comprise traditional informationally-insensitive
money market securities and Tier Two would consist of other less
transparent qualifying securities.
2
Caveat Emptor:
Rule 2a-7 and Money Market Mutual Funds
1.
Introduction:
Financial system regulatory reform is at the center of policy makers’ response to the
recent financial crisis with the Dodd-Frank Wall Street Reform and Consumer Protection Act
being the signature regulatory change. A second regulatory reform stemming from the financial
crisis is the SEC amendment (January 2010) to Rule 2a-7 (Rule) of the Investment Act of 1940.
This Rule was added to the Act in 1997 in response to the substantial growth in money markets
and money market mutual funds (MMFs) and provides a definition of a MMF based on the
characteristics of assets held. The SEC amended the rule in January 2010 because asset-backed
commercial paper (ABCP) was at the center of the financial crisis and thus, drew MMFs holding
ABCP into the middle of the crisis. The focus of the reform of rule 2a-7 is to enhance MMF
liquidity and asset quality to prevent a re-occurrence of the issues faced by MMFs during the
financial crisis.
Subsequent to the change in rule 2a-7, the Chair of the SEC has continued to push for
additional regulation of MMFs. In the summer of 2012 the SEC passed the issue to the Financial
Stability Oversight Council (FSOC) to determine if additional regulation of MMFs is needed. 1
The continued push for additional regulation suggests that policy makers believe that current
regulations are not sufficient. However, before pushing forward, we believe it would be prudent
to determine whether the policy makers correctly identified the problems that MMFs faced
1
The FSOC was established by the Dodd-Frank Act and charged with three purposes: (1) to identify risk to financial
stability from large, interconnected, bank holding companies or nonbank financial companies, (2) to promote market
discipline and to eliminate expectations that the US government will protect investors from losses, and (3) to
respond to emerging threats to the stability of the US financial system.
3
during the financial crisis and whether the amendments to rule 2a-7 can reasonably be expected
to address the problems. To date, a systematic analysis of whether liquidity and credit risk were
the sources of the MMF problems during the financial crisis and whether the change in rule 2a-7
addressed the problems has not been done. This paper fills this important gap in our knowledge
in an attempt to inform the policy debate on additional regulation.
1.1.
Summary of Results
Using Morningstar Direct data we identify a sample of 298 taxable and 129 tax-free
money market funds run by 132 fund families between January 2004 and December 2009. After
restricting our analysis to the taxable MMFs, we begin our analysis by examining the portfolio
mixes of different types of MMFs: Agency MMFs, Cash MMFs and Prime MMFs. Agency
MMFs generally hold government agency securities (74%) and repos (16%). Cash MMFs hold
primarily T-bills (32%) and repos (39%). Prime MMFs generally hold commercial paper (43%)
and corporate bonds (31%). We find that about 9% of the agency securities and corporate bonds
have remaining lives in excess of 397 days (the maturity limit under Rule 2a-7). The Prime
MMFs hold riskier securities and we find Prime MMFs earned statistically significantly higher
returns on a monthly basis across the sample period.
We also find that the reform to Rule 2a-7 restricts the maturity definition, reduces the
allowable days to maturity and reinforces asset quality by reducing the portfolio percentage
weights allowed in risky securities. From a preliminary review of our analysis, one could
conclude that the reforms to Rule 2a-7 address the MMF problems.
However, the MMF
difficulties during the financial crisis were focused primarily in ABCP and the holdings of these
less transparent assets were centered in the Prime MMFs. Accordingly, we extend our analysis
4
with a comparison of Prime MMFs that participate in the Federal Reserve’s AMLF program with
those Prime MMFs that did not participate under the assumption that the participants struggled
with liquidity and asset quality issues.
The AMLF (Asset-backed Commercial Paper Money Market Mutual Fund Liquidity
Facility) was designed to provide liquidity to MMFs during the financial crisis. Specifically, the
program provided loans to depositories and bank holding companies to purchase high-quality
asset-backed commercial paper (ABCP) from MMFs to assist with meeting demand for investor
redemptions. We find that AMLF participants have a weighted average mean (median) life of 55
(23) weeks while the non-AMLF funds have a weighted average mean (median) life of 30 (12)
weeks, a substantial and statistically significant difference in potential liquidity. Analyzing
monthly redemptions2 for participating and non-participating MMFs, we find that there is no
statistically significant difference between the two sub-samples. Since there is a similar drain on
both groups, we contend that the liquidity of the portfolios was not the problem during the crisis.
However, net cash flows (i.e., purchases less redemptions) were substantially different between
the two sub-samples with significantly higher net cash flow to non-participating MMFs. That is,
substantially more cash flowed into non-struggling Prime MMFs which represents a market
recognized difference in asset quality.3
Riskier assets are expected to earn higher returns and AMLF participating MMFs have an
average return (net of expenses) of 21.43 basis points per month (2.60% annually), while the
non-AMLF funds have an average return of 19.78 basis points (2.40% annually). The monthly
difference of 1.65 basis points is significant at the 1% level. AMLF participants earn higher
Net cash flow is defined as cash flow less redemptions. A Moody’s report dated 8/2/2010 discusses sponsor
support of MMFs during the financial crisis. In our analysis, we observe funds with negative net cash flows and
substantial increases in net assets. Accordingly, sponsor support is not included in MMF net cash flows.
3
Our results are broadly consistent with Wermers (2011) who finds that Prime MMF institutional investors tend to
leave MMFs at the same time and that the correlations of the funds flows are high for the less liquid MMFs.
2
5
returns both before and during the financial crisis. While the vast majority of MMF assets are
rated M1/P1/F1, the Prime MMFs participating in AMLF earned statistically significantly higher
returns on a monthly basis.
Our analysis provides evidence that MMFs did not have liquidity problems during the
financial crisis so much as they had issues with asset quality. Our investigation of the amended
rule 2a-7 shows that liquidity has been improved although only slightly and, while asset quality
is discussed, it is not improved. Accordingly, the amendment to rule 2a-7 does not address the
cause of the problems faced by MMFs during the crisis. We provide a policy suggestion
designed to address the issue of asset quality.
2.
Background
It is generally accepted that the financial crisis stemmed from the housing bubble
bursting and the collapse of the sub-prime mortgage market (Taylor and Williams, 2009).
Concerns about significant defaults in sub-prime mortgages caused turmoil in the mortgagebacked securities markets which in turn, caused systemic uncertainty about the size and timing of
cash flows and hence, the value of the asset-backed commercial paper market that funded these
securities. A substantial portion of the asset-backed commercial paper market was held by
money market funds (MMF). 4
In the United States, MMFs are covered under the Securities and Exchange Commission's
(SEC) Investment Company Act of 1940 with rule 2a-7. Specifically, on December 9, 1997, rule
2a-7 amended the Investment Company Act of 1940 to define the portfolio composition required
4
Data from the Federal Reserve Board H6 report show total MMF assets in December of 2006 at $2.18 trillion. This
amount increases to $3.51 trillion in December of 2008, but has declined through the recession to $2.60 trillion in
December 2010. In comparison, Pozar et al. (2010) report that by May 2008 the size of the traditional banking sector
was approximately $15 trillion. Contrary to general belief, MMFs are not solely designed for and used by individual
investors; Brennan et al. (2009) report that money market mutual funds managed 24 percent of US business shortterm assets in 2006.
6
for a mutual fund to claim status as a money market fund.5 This rule focuses on definitions of
maturity and asset quality rather than defining specific allowable investments.
In response to the difficulties that MMFs experienced at the height of the crisis, the SEC
issued a release on June 30, 2009 (effective January 2010) proposing new rules. The new rules
would modify rule 2a-7 to increase the oversight of the operations of money market funds. The
new regulations are intended to make the funds more resilient to market disruptions and less
likely to “break the buck”.6
In this section, we detail the specifics of the original rule 2a-7 and of its amendment.
However, we first discuss the issue of informationally-insensitive investments, a key concept in
the money markets, an underpinning of the rules, and the source of a significant failure during
the crisis.
2.1.
Informationally-insensitive investments
Money market investors demand short-term debt securities that are of low default risk
and high marketability.
The demand for low default risk manifests in what is generally
considered the traditional set of money market securities: T-bills, short-term agency debt,
repurchase agreements (repos), certificates of deposit (CDs), and non-financial commercial
paper. These securities fit the Gorton (2009a, 2009b) definition of “informationally-insensitive”
debt.
Gorton defines “informationally-insensitive” debt as debt that is not subject to adverse
information, because it is not profitable to produce private information to speculate on these
5
Money market mutual funds did not exist in 1940; Rule 2a-7 is an amendment to Investment Company Act and
was added as [62 FR 64978].
6
Breaking the buck refers to MMFs trading at a net asset value (NAV) below $1.
7
securities. That is, the cash flow(s) and the present value of the cash flow(s) are sufficiently
certain that the cost of generating new information always exceeds the expected benefits.
The traditional money market securities are generally viewed as informationallyinsensitive for two reasons with the first being the short-term nature of the debt. The second
component is the source of the cash flows. T-bills have an explicit government guarantee and
short-term agency debt has an implicit government guarantee. Repos typically use T-bills and
short-term agency debt as the underlying collateral (with a haircut) thus limiting risk. Banks
almost never default on CDs making CDs informationally-insensitive. While non-financial
commercial paper has risky cash flows, these securities have historically been made
informational-insensitive by only lending to companies that are understood to have reliable cash
flows, high credit ratings and unused stand-by lines of credit.
As mentioned earlier, ABCP was at the heart of the financial crisis. ABCP is not a
traditional money market security and is not inherently informationally-insensitive. Instead,
ABCP is rendered informationally-insensitive by relying on portfolio construction techniques,
external guarantees and credit ratings. For example, a Special Purpose Vehicle (SPV) provides
for the segregation of specific assets (such as, accounts receivable, car loans, or mortgages) and
supports the cash flows of the segregated assets with Nationally Recognized Statistical Rating
Organizations7 (NRSRO) ratings and external guarantees. Then, the SPV sells claims (ABCP)
7
A Nationally Recognized Statistical Rating Organization (NRSRO) is a credit rating agency (CRA) which issues
credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for
certain regulatory purposes. As of September 25, 2008, ten organizations were designated as NRSROs: Moody's
Investor Service, Standard & Poor's, Fitch Ratings, A. M. Best Company, Dominion Bond Rating Service, Ltd.,
Japan Credit Rating Agency, Ltd., R&I, Inc., Egan-Jones Rating Company, LACE Financial and Realpoint LLC.
8
against the cash flows.
The ratings and guarantees on these cash flows make the ABCP
‘informationally-insensitive’, even though the segregated assets and their cash flows are opaque.
Generally, ABCP sponsors work collaboratively with NRSROs to obtain the desired
ratings while avoiding over-commitment of assets and guarantees. This process makes the
valuation of the assets comprising the securitized portfolio more opaque as demonstrated by the
following explanation drawn from Fitch (2001:5):
“The primary objective of Fitch’s transaction review is to determine the required amount
of transaction specific credit enhancement and structural protections necessary to reduce
the risk of the transaction to a level commensurate with the credit rating of the CP. This
credit enhancement may take the form of overcollateralization, a third-party guarantee,
recourse to a qualified seller, loss reserves, or another form acceptable to Fitch. Also,
transaction-specific liquidity facilities may be structured to provide credit protection for
the associated transaction and may qualify as a substitute for traditional forms of
transaction-specific credit enhancement.”
There is a clear information sensitivity difference between assets funded the (AB)CP
reviewed by Fitch above and that these assets funded by traditional CP, the most risky of the
traditional money market securities. As stated above, Prime MMFs generally hold commercial
paper (43%) and corporate bonds (31%). Corporate bonds would also be more informationally
sensitive than traditional CP, especially variable rate debt with more than one year remaining
until maturity.
Understanding the difference between traditional informationally-insensitive securities
and derived informationally-insensitive securities is vital to understanding the underpinnings of
the crisis. We demonstrate why understanding the difference is vital for designing appropriate
policy recommendations.
9
2.2.
Regulations Governing Money Market Funds
2.2.1. Rule 2a-7 of December 9, 1997
Rule 2a-7 states that, to hold itself out as a money market fund, an investment company
must meet the following conditions:
[a]
The money market fund shall maintain a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset value, and will not [i] acquire
any instrument with a remaining maturity of greater than 397 days,8,9 and [ii] maintain a
dollar-weighted average portfolio maturity that exceeds 90 days.
[b] The money market fund shall limit its portfolio investments to those U.S. dollar-denominated
securities that the fund’s board of directors determines present minimal credit risks
(based on credit quality factors in addition to ratings assigned by Nationally Recognized
Statistical Rating Organization (NRSRO)) and that are, at the time of acquisition, eligible
securities. Eligible securities are defined as: [i] a rated security with a remaining maturity
of 397 calendar days or less that has received a NRSRO rating in one of the two highest
short-term rating categories, or [ii] an unrated security that is of similar quality to an
eligible rated security as determined by the fund’s board of directors. An unrated security
with an original maturity in excess of 397 days must have a remaining maturity of 397
8
Funds not using the amortized cost method can acquire government securities with maturities up to 762 days.
However, Cook and Duffield (1993) state: In order to maintain a constant share value, most money market funds
use the "amortized cost" method of valuation. Under this method securities are valued at acquisition cost rather
than market value, and interest earned on each security (plus any discount received or less any premium paid upon
purchase) is accrued uniformly over the remaining maturity of the purchase. By declaring these accruals as a daily
dividend to its shareholders, the fund is able to maintain a stable price of $1 per share.
9
Maturity is defined as period remaining until the principal amount must be unconditionally paid. For most
securities that is the end of the life of the debt contract. However, there are three important exceptions under 2a-7.
First, a variable rate government security has a maturity equal to the time remaining until the next interest reset date.
Second, a floating rate government security has a maturity of one day. Third, any security with a demand feature has
a maturity equal to the length of the demand period which is either 30 days or at fixed intervals not to exceed 397
days and upon no more than 30 days’ notice. See, McConnell and Saretto (2010) for a discussion auction rate
securities and variable-rate demand obligations.
10
days or less and must have been rated in one of the top three ratings for long-term debt.
[iii] an asset-backed security must have a NRSRO rating (unless it is has municipal
issuer).
[c] The money market fund shall be diversified with respect to issuers of securities acquired by
the fund, i.e., [i] a money market fund (other than a single state fund) shall not have more
than 5% of its total assets in the securities of one issuer. [ii] a taxable money fund shall
not have more than the greater of 1% of total assets or $1 million invested in second tier
securities. [iii] a first tier security is an eligible security that has a NRSRO rating in the
highest short-term rating category or is an unrated security of similar credit quality as
determined by the fund’s board, is a security issued by a registered money market fund,
or is a government security. A second tier security is an eligible security that is not a first
tier security. [iv] a repo may be deemed as the acquisition of the underlying security.
2.2.2. SEC modifications to Rule 2a-7as of January 2010 10
The SEC adopted the following changes to rule 2a-7 with respect to enhancing liquidity
and reducing risk:
[a] Daily liquidity requires that at least 10% of a fund’s assets mature within one day. Weekly
liquidity requires that at least 30% of a fund’s assets mature or can be converted to cash
within one week. Investment in illiquid securities (cannot be sold in ordinary business in
seven days) is limited to 5% of total assets.
10
The modifications to rule 2a-7 were approved on January 27, 2010. Compliance dates are spread across 2010 and
2011 and the details are available at: http://www.sec.gov/rules/final/2010/ic-29132.pdf
11
[b] Second-tier securities are limited to no more than 3% of fund assets. Further, a MMF is
limited to ½ of 1% of fund assets in a single second-tier security and all second-tier
securities must be of a maturity of 45 days or less.
[c] Interest rate risk is limited by reducing the portfolio maturity. That is, the maximum weighted
average maturity is (WAM) reduced from 90 days (old rule) to 60 days (new rule) and, a
new limit of 120 days of weighted average life of the portfolio is imposed.11
[d] The provision that allowed a MMF to hold government securities with maturity up to 762
calendar days has been deleted.
[e] Stress testing will be required of all funds to determine its ability maintain a stable NAV.
[f] Funds that break the buck will be allowed to promptly suspend redemptions and liquidate its
portfolio in an orderly manner.
[g] The SEC also places more stringent constraints on repurchase agreements collateralized with
private debt instruments. The concern with long-term debt collateral is that if a fund had
to take possession, it would violate fund oversight rules.
2.2.3. Discussion
There is a notable difference between the original 1997 rule and the 2010 modification.
The original rule 2a-7 allows interest-rate reset dates as maturity dates. Thus, an appropriately
rated bond with semi-annual resets and 30 years to maturity is considered a six-month security
and qualifies to be held in an MMF. The addition of a limit on the average life partially addresses
11
The difference between maturity and life is that maturity can be an interim interest rate reset date on variable rate
securities while life is the final maturity date. Footnote 156 of the SEC amendment to rule 2a-7 states “Because the
WAM limitation allows the use of interest rate reset dates to shorten the maturity of a security, each of the 397-day
floating-rate securities and the 30-day floating-rate securities would be considered to have a maturity of one day. In
contrast, under the WAL limitation we are today adopting each adjustable-rate security without a Demand Feature
would have a maturity equal to its final legal maturity. As a result, if spreads on these securities widen to different
degrees due to changing market perceptions of credit risk or liquidity, the WAL limitation will capture these
different risk exposures.”
12
this problem but still allows MMFs to hold these securities in limited quantities. Also, as
footnote 9 shows, there are still exceptions to rules on the life of the instrument. Note that the
amended rule still relies on external credit ratings to create informationally-insensitive
securities.12
3.
Data and Descriptive Statistics
The initial holdings database provided by Morningstar comprises 750 money market
funds.13 We impose two restrictions on the sample: [1] we require that Morningstar Direct has
the historical return and cash flow data as well as certain other cross-sectional variables and [2]
MMFs have at least six quarters of holdings data available. The restrictions result in a sample of
298 taxable and 129 tax-free money market funds run by 132 fund families, comprising 4,661
fund-quarter observations between January 2004 and December 2009. The average fund in the
sample has a mean (median) of 15.64 (16) quarters of holdings data.
Table 1 provides summary statistics for the sample of 298 taxable funds and 129 tax-free
funds. The sample means are similar for the two types of funds in terms of age, expense ratio,
and manager tenure. However, taxable funds average about three times more in assets than the
tax-free funds. Table 1 also indicates that 40 taxable and 12 tax-free MMFs were either
liquidated or merged during our sample period. All the tax-free and 38 of the 40 taxable funds in
In the interest of brevity, we exclude a discussion of the additional policy options considered by the President’s
Working Group other than to note that they include: floating net asset values, the creation of a liquidity bank,
mandatory redemptions in kind for large withdrawals, credit loss insurance, separating limited risk MMFs from
MMFs with additional risk, separating institutional and retail investors and regulating MMFs as special purpose
banks.
13
MMFs evolved in the early 1970’s as interest rate ceilings were eliminated and banks were allowed to conduct
business in a number of different financial activities. The largest cash providers to the money market are MMFs
(25%-33%) and securities dealers (25%) that seek short-term investments for their temporarily available cash
(Copeland et al, 2010). There were more than 4,000 individual firms active as cash investors. The growth in MMFs
provides a substantial portion of the cash that funds the general banking sector.
12
13
this group ceased to exist during the financial crisis. Ten of the taxable funds that went out of
existence during the crisis did so after participating in the AMLF program. Further, 21 of the
funds which ceased to exist were Prime funds, a disproportionate number given ratings but
consistent with the notion of informational opacity leading to greater expected risk.
Table 2 provides summary statistics on the number of individual holdings by year across
the sample. The mean (median) number of holdings in the full sample is 83.39 (60), while the
minimum and maximum number of holdings is 2 and 1,224, respectively. The mean (median)
number of holdings increased roughly monotonically from 71.58 (49) in 2004 to 91.69 (67 in
2009.14
Our dataset contains 59 different types of assets which we classify into 6 broad groups:
Agency securities, corporate bonds, commercial paper, cash equivalents, municipal securities
and others. Table 3 summarizes the average percentage of investments held in each broad asset
classes by year. On average, taxable funds hold: 20.56% in agency debt, 18.47% in corporate
bonds, 23.96% in commercial paper, 34.86% in cash equivalents, and 1.95% in municipal
securities. Given the high percentage of assets in the limited number of asset classes, one can
question whether the MMFs conform to the diversification component of rule 2a-7. Our data do
not contain sufficient detail to determine the issuer of the majority of the securities; hence, we
cannot analyze compliance with the diversification component of the Rule. Our maintained
hypothesis is that MMFs comply with the Investment Act of 1940 and rule 2a-7 and then we
investigate their positions and activity.
Table 3 also reports that tax-free funds hold over 95% of their assets in municipal
securities with less than 2% in any other class of security. This composition provides little
14
Holding one asset would appear to violate the portfolio diversification component of rule 2a-7. Table 2 reports
holdings by year and there are 269 fund-month observations where a MMF holds 100% of its assets in a single
security. The single asset is almost always cash.
14
information relative to our research questions. Accordingly, we remove the tax-free MMFs from
further analysis and continue the remainder of our analysis on the 298 taxable funds.
4.
Detailed Analysis of Taxable Money Market Fund (MMF) Holdings
Table 4 provides a more detailed summary of taxable MMF holdings by year across the
sample. Specifically, it provides details on the components of the cash equivalent column for
taxable MMFs from Table 3 and provides for a discussion of the portfolio composition of taxable
MMFs.15
On average, commercial paper constitutes the largest portion of taxable MMF holdings
(23.96%). The next highest holdings are government agency securities (20.57%) (issued by
FAMC, FFCB, FHLB, FHLM, FNMA, Overseas Private Investment Corporation) having a wide
range of maturities which we discuss below.
Corporate bonds comprise 18.47% of the sample portfolio and, while permitted, are
generally not considered traditional money market securities. Arguably if, an AAA bond has one
year or less remaining in its life, there is no reason to expect that it is more risky or less liquid
than any other AAA rated security given the informational insensitivity conferred by the NRSRO
rating. However, this does not describe all of the bonds in the sample since several have over 10
years of life remaining. Variable coupon bonds may have little price risk, but tend to be less
liquid than conventional money market securities. Rule 2a-7 assigns a maturity of one day to
floating rate notes and also assigns a maturity to variable rate bonds with scheduled principal
repayment in excess of 397 days as, the longer of the time to the interest rate reset date or, the
15
The Other column in Table represents the few securities (less than 0.1% of total holdings) that we are unable to
identify.
15
time until the principal can be recovered through demand. These bonds are consequently also
less liquid, although the taxable funds average holding almost 18% of their portfolios in this
asset class.
The taxable funds hold sizable amounts of traditional money market securities: T-bills
(8.66%), repos (14.78%), CDs (8.27%) and CP (23.96%). Across the sample period, we observe
several changes in the portfolio mix. Holdings in CP decline substantially (from 33% to 14%).
The decline in CP is countered by increases of 4.93% in T-bills, 3.57% in repos, and 5.10% in
CDs; a fight-to-quality movement toward less risk. There is also an increase in agency securities
which may result from a perceived reduction in default risk due to the government’s implied
guarantee. In general, there is a movement away from securities that are informationally opaque
to those that are more transparent.
Table 5 provides the portfolio composition on the 295 taxable funds by fund type: A =
agency (n=53), C = cash (n=71), and P = prime (n=171) which we define by the asset class with
the greatest weight. The portfolio mix is substantially different across the three types of MMFs.
Three funds are taxable municipal funds and are excluded from Table 5 and the remainder of the
analysis.16
Agency MMFs hold 73.67% of their assets in agencies securities and 15.90% in repos.17
Examining the agency securities holdings, we find that about 9.65% of the agency securities held
by the agency MMFs had maturities longer than 397 days, whereas 86.95% had less than 397
days.18 We cannot identify the days until maturity for approximately 3.4% of the agency
16
All 129 tax-free MMFs are municipal funds. There are only three taxable municipal funds. We identify this for
sample purposes here, but exclude it from all subsequent analysis.
17
Repos are frequently done on agency securities. However, our data do not allow us to specifically determine if
this is the case for the repos held in these MMF portfolios.
18
The securities with maturities longer than 397 days average 1,677 days (about 4.5 years) to maturity. The
securities with maturities of less than 397 days average 95 days to maturity.
16
securities. Morningstar reports actual maturity for all holdings, which suggests superficially at
least, that some of the agency securities do not conform to the 397 day maturity limit. However,
rule 2a-7 allows various types of reset dates to be used as a security’s (effective) maturity date.
Finding agency securities with maturities in excess of 397 days to maturity thus suggests
investment in variable rate securities or securities with demand features.
The cash MMFs are heavily invested in traditional cash equivalents (T-bill and repos).
These are the most informationally-insensitive and transparent money market securities.
The prime funds (P) have portfolios comprising 42.53% CP and 30.55% corporate bonds.
About 8.89% of the portfolio holdings had final maturities greater than 397 days with the
average maturity of these bonds being 3,857 days (about 10.5 years). Again, this is an issue of
effective maturity under the Rule rather than the actual maturity of the debt. The bonds with
maturity less than 397 days have an average maturity of 76 days. Based on this mix, it appears
that prime MMFs focus on securities that are more informationally-opaque and thus, potentially
of greater risk than the NRSRO ratings would suggest. We investigate this point further in the
following section.
In the aftermath of the financial crisis, the SEC adopted another new rule (30b1-7)
requiring MMFs to report detailed portfolio holdings information monthly on form N-MFP
which collects data on both the final maturity date and the maturity date allowed under rule 2a-7.
Therefore, we can compute the difference between weighted average life (WAL) and weighted
average maturity (WAM) of money market fund portfolios, which we believe is a better proxy
for measuring the illiquidity of the portfolios than the WAM.19 The monthly data are available
19
A sample form can be accessed at http://www.sec.gov/about/forms/formn-mfp.pdf .
17
as of November of 2010. Figure 1 Panel A plots average portfolio life in days while Figure 1
Panel B plots the difference between average life and average maturity in days.
Panel A shows that Agency MMFs average life between 64 and 69 days, Prime MMFs
vary from 52 days to 62 and Cash MMFs vary from 45 days to 57 days. The amended rule 2a-7
imposes a new limit 120 days of weighted average life thus, on average; MMFs are now in
compliance with the new life restriction. Only cash funds show a significantly negative trend in
weighted average life (WAL). Panel B provides the difference between portfolio average life
and portfolio average maturity. The difference occurs when rule 2a-7 allows a maturity date that
is different from that of the final maturity. The Cash MMFs vary between 11 days and 14 days,
Prime MMFs vary between 17 days and 21 days with the Agency MMFs varying between 24 and
29 days. These differences suggest that both Prime MMFs and Agency MMFs continue to use
more long term securities with maturity reset dates than do Cash MMFs.
5.
Portfolio Performance
The portfolio compositions of our final sample indicate that the prime MMFs hold
portfolios that may generally be considered as more risky and less liquid. Mutual fund managers
compete for funds flows through portfolio returns, so we test whether the funds that moved away
from more transparent money market securities to more opaque risky securities are chasing
returns. In this section, we analyze fund performance based on our portfolio types of Agency,
Cash and Prime. Panels A and B of Table 6 provide performance measures along with other
information for three groups of portfolios.
The mean assets under management (AUM) for the cash funds are about 48% larger than
the mean AUM of the agency funds and about 35% larger than that of prime funds. The cash
18
funds also have lower expense ratios consistent with passive portfolios of cash equivalents while
the other funds are actively managed to earn higher returns. The cash funds earn an average net
monthly return of 24.38 basis points, which annualizes to 2.97%.20 The agency funds earn an
average of 24.33 basis points per month (2.96% annualized) and the prime funds earn 25.39 basis
points per month (3.09% annualized). Stigum and Crescenzi (2007:432) note that money market
dealers view 5 to 10 basis points as an attractive opportunity. Accordingly, the 12 additional
basis points earned by the prime funds would be attractive to money market investors assuming,
ceteris paribus.21
The agency funds have an expense ratio of 67 basis points, 11 basis points higher than the
expense ratio of the cash funds. The higher expense ratio with almost the same net return
suggests the agency funds earn marginally higher gross returns that disappears into a higher fee
structure. The prime funds have a net expense ratio of 63 basis points or, 7 basis points higher
than the cash funds. However, the somewhat higher expense ratio of the prime funds does not
offset the higher returns from these funds.
The prime funds generate a higher net annual return of 12 basis points. Further, as Table
6, Panel B reveals the portfolio return to the prime funds is both economically and statistically
greater (at the 1% level) than the returns to the Agency and Cash MMFs suggesting that despite
similar NRSRO ratings, the perceived increased risk attributable to information opacity is
supported by higher expected returns. Is the return worth the additional risk? This is an
20
Expressed in percentage terms, Morningstar's calculation of total return is determined each month by taking the
change in monthly net asset value, reinvesting all income and capital-gains distributions during that month, and
dividing by the starting NAV. Reinvestments are made using the actual reinvestment NAV, and daily payoffs are
reinvested monthly. Morningstar does not adjust total returns for sales charges (such as front-end loads, deferred
loads and redemption fees), preferring to give a clearer picture of a fund's performance. The total returns do account
for management, administrative, 12b-1 fees and other costs taken out of fund assets. Total returns for periods longer
than one year are expressed in terms of compounded average annual returns, affording a more meaningful picture of
fund performance than non-annualized figures.
21
The return difference between cash funds and agency funds is not statistically significant. The return difference
between cash funds and prime funds is statistically significant.
19
individual investor question that we cannot answer. Did the portfolio choices of the different
groups lead to problems during the financial crisis? We can indirectly examine which MMFs had
problems by identifying the funds in our sample that chose to participate in the Federal Reserve’s
AMLF program and examine their portfolio composition and performance.
6.
AMLF
The AMLF was designed to provide liquidity for MMFs during the financial crisis.
Specifically, the program provided loans to depositories and bank holding companies to purchase
high-quality asset-backed commercial paper from MMFs to assist with meeting demand for
redemptions. By the time of the AMLF program, it was clear that the worst of the problems in
commercial paper were in asset-backed commercial paper (see, Griffiths, Kotomin and Winters
(2011)).
In this section, we provide two analyses relative to the AMLF program. First, seventyone of the funds in our prime funds sample used the facility for the sale of ABCP for a mean
(median) of 14.46 (9) times, where the mean (median) face amount of the ABCP in any given
transaction was $49.06 ($25.00) million. We compare the AMLF participating Prime funds
against the 100 Prime MMFs that did not participate in AMLF. Second, we use the beginning of
the AMLF program as a reference point and examine fund flows of Agency, Cash and Prime
MMFs at that point in time.
6.1.
Prime MMFs and AMLF
The AMLF program provides loans to purchase ABCP from MMFs. Table 7 provides
the portfolio composition of prime MMFs by whether or not the MMF participated in AMLF.
20
The largest holding for both groups is commercial paper. Our data do not allow us to determine
the type of CP each MMF holds, but given that both participants and non-participants hold
approximately 40% of their assets in CP it seems reasonable to assume that AMLF participation
is a choice available to all of the Prime MMFs. The second largest holding for both groups is
corporate bonds. AMLF participants hold 34.92% of their assets in corporate bonds while the
non-AMLF funds hold 27.44% of their assets in this class.
The two groups do not have significantly different portfolio compositions based on
general asset classes. However, within these assets classes, they could hold assets with different
degrees of liquidity. Specifically, one group may have substantially longer time to maturity.
Table 8 provides summary statistics on portfolio weighted average life (time to final maturity)
relative to AMLF participation and provides a number of important insights. First, the mean of
both groups is substantially larger than the median. We have winsorized the data and the means
remain substantially larger than the medians. Second, using sample medians to minimize the
effect of the sample skewness, we find that the AMLF participants have almost 78 more days to
maturity than non-AMLF funds. The result is that AMLF participants have a weighted average
median maturity of 23.5 weeks while the non-AMLF funds have a weighted average median
maturity of 12.5 weeks, a significant and substantial reduction in potential liquidity. Third, both
groups reduced their weighted average median maturity substantially during the financial crisis
suggesting that fund managers viewed their long maturities as problematic and actively pursued
a plan to reduce their maturities.22 Finally, the modification to rule 2a-7 restricts MMFs to a
weighted average life (time to final maturity) of 120 days. None of the means from before the
crisis conforms to the 120 day rule. During the crisis, the medians dip under the 120 day limit,
but the means do not potentially indicating that MMFs are moving toward reducing their
22
This activity may also have been in anticipation of changes to the Rule.
21
maturities, but that a substantial portion of MMFs have a way to go before conforming to the
new rules.
We extend our original data with the new N-MFP data which begins in November of
2010 and plot monthly average portfolio life in Panel A of Figure 2 with Panel B plotting the
difference between average life and average maturity. Panel A shows that AMLF participant’s
average life varies between 52 days and 65 days while the average life of non-participants varies
between 51 days and 59 days. This is a substantial decrease from the full sample Prime MMF
results reported in Table 8. Panel B shows that the difference between maturity and life for
AMLF participants varies between 19 days and 23 days, while the difference for non-participants
varies 16 days and 20 days. The spread in Panel B between AMLF participants and nonparticipants is not statistically significant. This suggests that in the aftermath of the financial
crisis whether a Prime MMF participated in AMLF is not a differentiating factor in its maturity
structure.
In Table 9, we examine returns differences between these two groups. The AMLFparticipating prime MMFs have an average return (net of expenses) of 24.32 basis points per
month (2.96% annually), while the non-AMLF funds have an average return of 23.02 basis
points (2.82% annually). The difference of 1.30 basis points per month is significant at the 1%
level again suggesting that AMLF participating funds are more risky. Table 9 also provides
group means from before and during the financial crisis. AMLF participants earn higher returns
both before and during the financial crisis although, average returns decline for both groups
during the financial crisis.
22
Table 10 provides monthly redemptions from June through December of 2008, which
surrounds the beginning of AMLF, for participating and non-participating prime MMFs.23
Monthly redemptions range from 19.61% to 34.59% of fund net assets. Statistically, there is no
difference in the monthly redemptions between AMLF participants and non-participants.
However, redemptions tell only one aspect of a fund’s cash flow picture.
Table 11 provides data on the much more important and informative variable namely, net
cash flows. Net cash flow is defined as cash inflows less redemptions.24 While the differences
are not statistically significant, a 9.92% reduction in the net cash flows in AMLF participating
MMFs is economically different from an 18.66% increase in the net cash flows of nonparticipating MMFs in the September 2008. These results suggest that the redemptions reported
in Table 10 contribute to a drain on participating funds, but not on the non-participating funds.
Since the participating and non-participating funds had similar portfolios in terms of
broad asset classes and also had similar average quarterly redemptions, we employ a probit
regression model to further analyze the determinants of participation in the AMLF. Our model
takes the following form:
P( AMLFi ,t  1 | X )  (  0  1 Size i ,t   2 ABCPi ,t   3 WAL i ,t   4 REDi ,t   5 NCFi ,t )
(1)
where,
AMLFi,t = 1 if fund i participates in the AMFL in month t, 0 otherwise
Sizei,t
= size of fund i at the end of month t.
23
We collect monthly redemptions and net cash flow data (compiled by Morningstar from N-SAR reports available
on SEC’s EDGAR website) around the beginning of the AMLF program (September 2008) for all the taxable MMFs
in sample where data are available. The first transaction of the AMLF program is on 9/22/2008 and the vast
majority of the program’s transactions occur from 9/22/2008 through 9/30/2008 (see, Akay, Griffiths, Kotomin and
Winters (2012)).
24
A Moody’s report dated 8/2/2010 discusses sponsor support of MMFs during the financial crisis. In our analysis,
we observe funds with negative net cash flows and substantial increases in net assets. Accordingly, sponsor support
is not included in MMF net cash flows.
23
ABCPi,t = the percentage weight of ABCP in the portfolio at the end of month t.
WALi,t = the weighted average life of fund i’s portfolio at the end of month t.
REDi,t
= investor redemption at fund i in month t stated as a percentage of the fund size
at the beginning of the month.
NCFi,t
= net cash flow of fund i in month t stated as a percentage of the fund size at
the beginning of the month.
In our model, the dependent variable takes a value of 1 if fund i participated in the
program in month t. We run the model for the whole sample, and separately for September 2008,
October 2008 and May 2009. We also control for fund fixed effects in our model. Note that for
this analysis, we switch from quarterly data to monthly data to allow model estimation in the
months where the majority of the AMLF transactions occurred. The results are reported in Table
12.
In the full sample, we find that all variables have the expected sign. One noteworthy
finding is that redemption (RED) gains its statistical significance once net cash flow (NCF) is
introduced into the model. When we analyze the three months where the facility was most
actively used, we find that RED was an important determinant in October only. This result may
trouble readers familiar with the AMLF rules as currently provided on the Federal Reserve’s web
page because those rules state that participation in AMLF requires that a MMF experience
substantial redemptions.
However, the redemption rule was a late addition to the AMLF
program and was not in force during the months under analysis.
The weighted average life of the fund portfolio, a proxy for the illiquidity of fund assets,
is both statistically and economically significant throughout the sample. To illustrate, we graph
the probability of participating in the AMLF in September 2008 – where most of the activity in
the facility was observed – by changing the weighted average life of the portfolio from its 5 th
24
percentile (29 days) to its 95th percentile (429 days), keeping other variables at their mean values.
Figure 3 shows that the probability of participation increases from around 23% to 43% as we
move from 5th percentile of weighted average life to the 95th. Therefore, we suggest that the
illiquidity of the portfolios – caused by the long-term variable rate demand notes and FRNs –
magnified the problem for funds that had already invested in ABCP.
6.2.
MMFs flows around the start of AMLF
The first transaction under AMLF occurs seven days after the Lehman Brothers
bankruptcy in September of 2008, which places the beginning of AMLF at the center of the
financial crisis and at a point when ABCP was under duress. In this section, we examine fund
flows of the three principal types of MMFs. The funds flows for the Prime MMFs reported here
carry forward from Tables 10 and 11 and, we continue to report Prime MMF flows by
participation in AMLF.
Table 13 provides monthly redemptions for the latter half of 2008. Redemptions range
from 19.38% to 52.64%. However, redemption from Prime MMFs is different from Cash and
Agency MMFs. Across the seven months, in only one month do Prime MMFs have redemptions
in excess of 30% (September, 2008) and it appears in the AMLF participating Prime MMFs. All
seven months for both Cash and Agency MMFs show redemptions in excess of 30% with almost
half of both the Agency MMFs and Cash MMFs being redeemed in September. In Table 5 we
show that Prime funds hold 42.53% of their portfolios in CP while Agency funds hold only
3.45%, and Cash funds hold only 2.58% their portfolios in CP. Since Agency and Cash MMF
redemptions are substantially larger than Prime MMF redemptions in September 2008, it would
suggest that redemptions were not the problem. Hence, we turn again to the issue of cash flow.
25
As Table 14 shows, the majority of the monthly net cash flows are under 5% and near
zero with the obvious exception of September 2008. At this time, the Agency and Cash MMFs
which experience almost 50% redemptions, exhibit positive net cash flows of 35.90% and
27.99%, respectively. In addition, the Prime MMFs that did not participate in AMLF also have
positive net cash flows of 18.66% in September while the AMLF participating Prime MMFs
exhibit negative net cash flows of 9.92% in September suggesting the concern over redemption
was actually a cash inflow problem in an informationally opaque and riskier subset of MMFs.25
7.
Discussion and Policy Implications
Rule 2a-7 was added to the Investment Company Act of 1940 in December 1997 to
provide structure to the MMF industry. Specifically, the rule addressed portfolio maturity,
quality and diversification. However during the crisis, MMFs faced perceived problems with
liquidity and valuation suggesting the Rule was not adequate. The SEC then modified of rule 2a7 effective in 2010. We examine the MMF industry across the financial crisis to determine if the
popular depiction of the MMFs and their problems at this time is accurate and, to determine if
the modifications to rule 2a-7 address the problems. Our intent is to inform the ongoing policy
debate.
We focus our analysis on 298 taxable MMFs and find that they hold assets primarily in
four different categories: cash equivalents, agency securities, commercial paper, and corporate
bonds. Further analysis of the portfolio mix of MMFs shows three distinct types of taxable
MMFs: Cash, Agency and Prime. Cash and Agency MMFs focus their holdings in what are
generally informationally-insensitive money market securities, while Prime MMFs focus their
25
Our results are consistent with McCabe (2010). McCabe finds that riskier MMFs had larger outflows of funds.
26
holdings in more informationally opaque commercial paper and corporate bonds. While our data
do not provide a description of the type of CP in the Prime MMF portfolios, participation in the
AMLF program requires holdings of ABCP and the MMFs that participated in AMLF exhibit
substantial negative net cash flows at the peak of the financial crisis while all other categories of
MMFs show positive net cash flows at this time. This analysis allows us to discuss whether the
modification of rule 2a-7 addresses the shortcoming of the original rule.
From the changes in rule 2a-7, it is clear that the liquidity/redemption problem was one
focus of the modification. Two facts are clear about liquidity/redemption from our analysis.
First, the liquidity/redemption problem during the financial crisis was not common to all MMFs.
Instead, it was only a problem to a riskier subset of Prime MMFs. Second, the problem was not
a liquidity/redemption problem rather, it was a net cash flow problem directly related to asset
quality. The asset quality of ABCP was in question because of a lack of transparency concerning
the valuation of the underlying assets. Accordingly, modifying the maturity definition in rule 2a7 does not address this issue. A more appropriate maturity definition would move MMFs to
shorter maturities based upon actual principal repayment dates rather than effective maturity
based upon resets dates, which eliminates investment in some higher risk assets.
The other main focus of the changes is asset quality which focused on the portfolio mix
and holdings of rated securities.
Traditional money market securities are informationally-
transparent with respect to the likelihood and timing of principal repayment. That is, there are
little to no questions about the quality of the cash flows. We find that the Cash and Agency
MMFs that focus on these securities had few issues with liquidity/redemptions or net cash flows
during the crisis. Alternatively, the Prime funds tend to invest heavily in securities that are
informational-opaque relying on external guarantees and ratings. The modification of rule 2a-7
27
continues to rely on NRSRO ratings limiting risk which, as demonstrated earlier with the Fitch
quotation, does not provide the investor with specifics as to either the provision of liquidity or
credit enhancement, a major problem in the sub-prime mortgage-backed security debacle.
Continuing to rely on NRSRO ratings thus does not address the credit risk problem in MMFs.
In fact, the Dodd-Frank Act moves toward removing the codification of the use of
NRSRO ratings. Specifically, Sec 939 of the Dodd-Frank Act is titled “Removal of Statutory
Reference to Credit Rating.” Further, paragraph (c) states “Investment Company Act of 1940 is
amended by striking ‘is rated investment grade by not less than 1 nationally recognized
statistical rating organization’ and inserting ‘meets such standards of credit-worthiness as the
Commission shall adopt’.” This regulatory change (if or when it is implemented) will require an
alternative for managing risk. We offer the following policy recommendation.
The President’s Working Group has suggested a two-tier system of MMFs. One tier has
stable NAV with very limited risk while the second tier has floating NAV with additional risk.
Floating NAV is not viable since such a scheme requires active secondary markets from which
current prices can be observed. However, the majority of money market securities do not trade
actively.
As a viable alternative, we suggest two tiers based on asset characteristics. MMFs that
invest solely in informationally-transparent money market securities would be in Tier One (low
risk) and MMFs that invest in other more opaque qualifying securities such as ABCP or
corporate bonds would be in Tier Two (higher risk). Thus, a higher level of valuation
transparency would be required to qualify for Tier One investments.
28
References
Akay, O., M. Griffiths, V. Kotomin and D. Winters, 2012, A Look Inside AMLF: What Traded
and Who Benefited, Texas Tech University working paper.
Brennan, J., and others. 2009. “Report of the Money Market Working Group.” Washington:
Investment Company Institute (March 17).
Cook, T., and J. Duffield, Chapter 12 – Money market funds and Other Short-Term Investment
Pools, Instruments of the Money Market, Federal Reserve Bank of Richmond, 1993,
available at
http://www.richmondfed.org/publications/economic_research/instruments_of_the_money
_market/ch12.cfm
Copeland, A., A. Martin and M. Walker, 2010, The Tri-Party Repo Market before the 2010
Reforms, Federal Reserve Bank of New York Staff Report no. 477.
Fitch, 2001. Asset-Backed Commercial Paper Explained. Available at www.fitchratings.com
accessed 5/4/2012.
Griffiths, M., V. Kotomin, and D. Winters, 2011, The Federal Reserve and the 2007-2009
financial crisis: Treating a virus with Antibiotics? Evidence from the commercial paper
market, Financial Review, 46, 541-567.
Gorton, G., 2009a, Information, Liquidity, and the (Ongoing) Panic of 2007, NBER Working
Paper 14649.
Gorton, G., 2009b, Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007,
prepared for the Federal Reserve Bank of Atlanta’s Financial Markets Conference,
available at www.frbatlanta.org.
McCabe, P., 2010, The cross section of money market fund risks and financial crises, Federal
Reserve Board working paper #2010-51.
McConnell, J., and A. Saretto, 2010, Auction failures and the market for auction rate securities,
Journal of Financial Economics, 97, 451-469.
Pozar, Z., T. Adrian, A. Ashcraft, and H. Boesky, 2010. Shadow Banking. Staff Report 458,
FRB of New York, July.
Stigum, M., and A. Crescenzi, 2007, Money Markets, 4th Edition, McGraw-Hill, New York, New
York 10121.
29
Taylor, J. and J. Williams, 2009, A black swan in the money market, American Economic
Journal: Macroeconomics, 58-83.
Wermers, R., 2011, Runs on money market mutual funds, University of Maryland Working
Paper, September.
30
Table 1. Summary of the MMFs
Taxable
298
21
19
13.87
4,235.29
0.62
6.58
N
Liquidated
Merged
Mean Age (in years)
Mean Size ($millions)
Prospectus Net Expense Ratio (annual)
Manager Tenure (in years)
Tax-free
129
7
5
15.23
1,337.44
0.62
6.63
The table reports the number of taxable and tax-free Money market Funds (MMF)
in our sample, along with the average age, size and prospectus net expense ratio of
the funds, average manager tenure and the number of funds that liquidated or
merged in our sample period.
Table 2. Number of Holdings by Year
Year
2004
2005
2006
2007
2008
2009
Mean
71.58
66.63
75.88
84.17
90.77
91.69
Sample
83.39
Median
49
48
54
60
67
67
Minimum
7
3
2
3
2
3
60
2
Maximum
345
698
748
677
1224
1176
1,224
Std. Dev.
67.12
65.27
83.32
87.42
92.05
101.47
88.72
The table reports the mean, median, minimum, maximum and standard deviation of the
number of holdings by money market funds for each year between 2004 and 2009 and in the
full sample.
31
Table 3. Percentage of Holdings by Broad Asset Classes
Taxable MMFs
Tax-free MMFs
Year
2004
2005
2006
2007
2008
2009
A
20.72
17.18
16.41
16.05
23.17
26.00
B
20.31
16.75
17.55
19.82
18.43
16.95
P
31.91
30.82
29.66
24.47
17.42
12.58
C
24.40
33.07
34.31
37.61
39.10
41.61
M
2.52
2.04
2.00
1.89
1.71
2.79
A
0.79
1.24
1.19
0.92
0.42
0.56
B
0.79
1.33
1.47
1.42
1.19
0.91
P
0.13
0.49
0.89
0.69
0.54
0.42
C
0.38
1.39
1.35
0.70
2.14
1.46
M
97.91
95.55
95.10
96.26
95.66
96.63
Full Sample
20.56
18.47
23.96
34.86
1.95
0.82
1.25
0.58
1.15
96.17
The table reports the percentage of holdings in 5 broad asset classes separately for taxable and tax-free
bonds in the sample. A indicates government agency securities, B indicates corporate bond investments,
P indicates commercial paper, C indicates cash instruments, M indicates municipal securities. Equity
instruments and undefined securities are not reported since they represent less than 0.1% of the total
holdings.
Table 4. Detailed Holdings Summary of Taxable MMFs
Year
2004
2005
2006
2007
2008
2009
AGY
20.04
17.43
16.82
16.22
23.79
27.16
COR
19.96
16.92
17.26
20.19
19.23
17.84
CP
33.89
31.57
31.02
25.75
18.64
13.82
TRE
1.82
1.19
1.22
1.09
0.85
1.34
T-bill
6.32
8.21
7.01
7.68
9.34
11.25
MMF
0.61
0.40
0.32
0.38
0.77
1.56
RP
8.78
15.14
16.64
17.23
14.23
12.35
CD
5.27
6.80
6.75
7.86
9.62
10.37
CUR
0.20
0.26
1.33
1.58
1.81
1.30
Muni
2.69
1.89
1.56
1.60
1.59
2.91
Other
0.42
0.19
0.08
0.41
0.13
0.10
Sample
20.57
18.47
23.96
1.16
8.66
0.71
14.78
8.27
1.27
1.95
0.19
The table provides the average percentage weight of various investment types in 355 taxable funds. The
coding is as follows: Government agency securities (AGY), corporate bonds (COR), commercial paper
(CP), U.S. Treasury bonds (TRE), U.S. Treasury bill (T-bill), money market funds (MMF), repurchase
agreements (RP), certificate of deposit/time deposit (CD), cash held in U.S. currency (CUR), other cash
instruments such as bank loans, other liabilities, etc. (OC), and other assets including municipal securities,
equity and undefined securities (Other).
32
Table 5. Detailed Holdings Summary for Taxable Funds by Type
Label
N
AGY
COR
CP
TRE
T-bill MMF
RP
CD
CUR
MUN
Other
A
53
73.67
1.45
3.45
0.04
1.48
0.60
15.90
1.83
0.54
0.73
0.31
C
71
9.04
2.18
2.58
4.27
32.29
0.24
39.12
6.45
3.13
0.20
0.51
P
171
7.10
30.55
42.53
0.08
0.17
0.46
5.09
10.92
1.15
1.81
0.14
The table provides the average percentage weight of various investment types in taxable funds by the label
we assign: C (cash funds), A (government agency funds), P (commercial paper funds), B (corporate bond
funds). The coding is as follows: Government agency bonds (AGY), Corporate bonds (COR), commercial
paper (CP), Treasury bonds (TRE), U.S. Treasury bill (T-bill), money market funds (MMF), repurchase
agreements (RP), certificate of deposit/time deposit (CD), cash held in U.S. currency (CUR), municipal
securities (MUN), and other assets (Other).
Table 6 Panel A - Summary Statistics by the Type of the Fund
Fund Type
A
53
3,597.28
C
71
5,337.78
P
171
3,943.17
Mean Age (in years)
14.50
14.17
13.52
Prospectus Net Expense Ratio (annual)
0.67
0.56
0.63
Mean Monthly Return (in b.p.)
24.33
24.38
25.39
Mean Monthly Standard Deviation (in b.p.)
12.38
12.54
13.00
Mean Monthly Excess Return (in b.p.)
-1.14
-1.35
-0.35
Mean monthly Excess Return Std. Dev. (in b.p.)
4.24
3.56
5.33
N
Size ($mil.) (Assets under Management)
The table reports the mean size, age, prospectus net expense ratio, number of funds in the
family, monthly return and standard deviation of returns by the type of the fund: Government
agency funds (A), Cash funds (C), Prime funds (P).
33
Table 6 Panel B - Mean Monthly Return Differences
Month
08/2007
09/2007
10/2007
11/2007
12/2007
01/2008
02/2008
03/2008
04/2008
05/2008
06/2008
07/2008
08/2008
09/2008
10/2008
11/2008
12/2008
A-C
0.75
1.66
1.57
1.66
2.34
4.30
2.70
3.01
1.80
1.55
0.95
1.21
1.29
2.66
5.62
4.48
2.19
P-A
2.18
1.32
3.13
2.44
3.12
2.89
3.51
2.75
3.79
3.90
1.94
2.83
2.64
1.90
4.62
3.86
3.30
*
*
*
**
**
**
**
*
*
*
**
**
**
**
*
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
P-C
2.93
2.98
4.70
4.11
5.46
7.18
6.21
5.76
5.59
5.46
2.89
4.04
3.93
4.56
10.24
8.34
5.49
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
**
The table reports mean monthly return differences in basis points
between Agency (A), Cash (C) and Prime (P) funds. *, ** denotes
significance at 5% and 1% level, respectively.
34
Table 7. Detailed Holdings Summary of Prime Funds by AMLF Participation
AMLF
N
AGY
COR
CP
TRE
T-bill MMF
RP
CD
CUR
MUN
Other
Yes
71
2.58
34.92
37.14
0.01
0.01
0.50
5.27
15.47
1.68
2.31
0.11
No
100
10.32
27.44
46.36
0.13
0.28
0.43
4.96
7.70
0.77
1.46
0.16
The table provides the average percentage weight of various investment types in prime funds (P) by AMLF
participation. The coding is as follows: Government agency bonds (AGY), Corporate bonds (COR),
commercial paper (CP), Treasury bonds (TRE), U.S. Treasury bill (T-bill), money market funds (MMF),
repurchase agreements (RP), certificate of deposit/time deposit (CD), cash held in U.S. currency (CUR),
municipal securities (MUN), and other assets (Other).
Table 8. Mean and Median Weighted Average Life of Prime Funds by AMLF Participation
AMLF
Before 6/07 (days)
After 6/07 (days)
Yes (N=71)
Mean
Median
442.26
238.09
333.42
113.77
No (N=100)
Mean
Median
273.73
114.46
157.60
78.19
Full Sample (days)
384.59
214.47
164.50
86.57
The table reports the mean and median duration of 171 prime funds in the sample by AMLF
participation before and after 6/2007.
35
Table 9. Raw Return Comparison Across Prime Funds By AMLF Participation
Before and After the Crisis
AMLF Participation
Before 6/07
After 6/07
Difference
Yes (N=71)
24.32
17.60
6.72**
No (N=100)
23.02
15.51
7.51**
Difference
1.30***
2.09***
Full Sample
21.43
19.78
1.65***
The table compares the performance of 171 prime income funds in our sample
before and after 6/2007 based on whether they participated in the AMLF. Raw
returns are reported in basis points. *, **, *** denote significance at the 10%, 5%
and 1%, significantly.
Table 10. Average Monthly Redemption as a Percentage of Fund Net Assets
Month
6 / 2008
7 / 2008
8 / 2008
9 / 2008
10 / 2008
11 / 2008
12 / 2008
AMLF Participation
Yes ( N=47)
No (N=46)
25.95%
19.38%
25.75%
23.42%
22.44%
22.10%
34.59%
29.56%
29.69%
26.71%
19.85%
20.22%
25.03%
25.73%
Difference
6.57%
2.34%
0.35%
5.03%
2.98%
-0.37%
-0.70%
t-stat
1.46
0.43
0.07
0.66
0.57
-0.08
-0.10
The table reports the average monthly redemptions of prime money markets
funds as a percentage of total fund net assets at the beginning of the month.
36
Table 11. Average Monthly Net Cash Flow as a Percentage of Fund Net Assets
Month
6 / 2008
7 / 2008
8 / 2008
9 / 2008
10 / 2008
11 / 2008
12 / 2008
AMLF Participation
Yes ( N=47)
No (N=46)
-0.01%
0.76%
1.26%
1.75%
-1.09%
-0.69%
-9.92%
18.66%
-1.54%
1.40%
2.16%
-0.19%
1.31%
13.08%
Difference
-0.77%
-0.49%
-0.40%
-28.57%
-2.94%
2.35%
-11.77%
t-stat
-0.60
-0.40
-0.15
-1.58
1.57
0.89
-1.12
The table reports the average net monthly cash flows of prime money markets
funds as a percentage of total fund net assets at the beginning of the month.
37
Table 12. Binary Probit Regression of Prime Funds’ Participation in the AMLF
Full Sample
Sep '08
Oct '08
(1)
(2)
(1)
(2)
Intercept
-3.830 **
0.671
-4.014 **
0.770
-5.340 **
1.021
-5.857 **
1.337
-2.167 *
1.047
-2.254 *
1.092
-3.921
2.382
-2.351
1.391
Log (Fund size)
0.381 **
0.093
0.360 **
0.093
0.613 **
0.148
0.601 **
0.181
-0.124
0.167
-0.107
0.453
1.012 **
0.344
0.603 **
0.205
% ABCP
0.020 *
0.016
0.028 **
0.008
0.034 **
0.012
0.046 **
0.013
0.049 *
0.023
0.048 *
0.022
0.010
0.055
0.009
0.031
WAL
0.001 *
0.000
0.001 **
0.000
0.001 *
0.001
0.001 **
0.001
0.001 **
0.000
0.001 **
0.000
-0.060 *
0.026
-0.034 *
0.015
% RED
0.647
0.800
1.105 **
0.403
0.130
0.679
0.895 *
0.456
3.999 **
1.361
3.880 **
2.254
-7.168
4.173
-4.712
3.027
% NCF
AMLF = Yes
AMLF = No
-2.933 **
0.754
55
119
(1)
May '09
(2)
-3.022 **
0.885
37
45
(1)
(2)
-0.769
2.282
8
38
1.883
7.008
10
36
The table reports the probit regression results on AMLF participation. The dependent variable takes the value of 1 if the fund participated in
the program and 0 otherwise. The independent variables are natural logarithm of fund size, the percentage weight of ABCP in the fund’s
portfolio, natural logarithm of portfolio weighted average life (WAL), monthly redemption stated as a percentage of fund assets at the
beginning of the month and net cash flow states as a percentage of fund assets at the beginning of the month. Standard errors are provided in
italics. The model includes an intercept (not reported) and fund fixed effects. **, * denote statistical significance at the 1% and 5% level,
respectively.
38
Table 13. Average Monthly Redemption as a Percentage of Fund Net Assets
Month
6 / 2008
7 / 2008
8 / 2008
9 / 2008
10 / 2008
11 / 2008
12 / 2008
A (N=42)
38.85%
42.83%
36.75%
52.64%
45.45%
30.96%
37.50%
C (N=55)
42.77%
42.33%
37.13%
47.91%
47.13%
33.23%
42.05%
P (N=93)
AMLF (Y=47)
AMLF (N=46)
25.95%
19.38%
25.75%
23.42%
22.44%
22.10%
34.59%
29.56%
29.69%
26.71%
19.85%
20.22%
25.03%
25.73%
The table reports the average monthly redemption of money markets funds as a percentage of total
fund net assets at the beginning of the month. A denotes Agency funds, C denotes Cash funds, and P
denotes Prime funds.
Table 14. Average Monthly Net Cash Flows as a Percentage of Fund Net Assets
Month
6 / 2008
7 / 2008
8 / 2008
9 / 2008
10 / 2008
11 / 2008
12 / 2008
A (N=42)
-0.81%
4.30%
0.69%
35.96%
3.20%
2.07%
2.77%
C (N=55)
-3.16%
4.28%
1.54%
27.99%
9.97%
-0.43%
-3.41%
P (N=93)
AMLF (Y=47)
AMLF (N=46)
-0.01%
0.76%
1.26%
1.75%
-1.09%
-0.69%
-9.92%
18.66%
-1.54%
1.40%
2.16%
-0.19%
1.31%
13.08%
The table reports the average monthly net cash flow of money markets funds as a percentage of
total fund net assets at the beginning of the month. A denotes Agency funds, C denotes Cash
funds, and P denotes Prime funds.
39
Figure 1
Panel A:
Weighted Average Life
70
65.69
66.87
66.54
68.71
68.58
61.79
60
59.50
57.43
68.75
66.35
56.42
54.67
53.53
59.51
56.15
64.43
50
58.65
55.46
53.28
53.68
64.50
60.69
59.75
57.46
68.29
52.89
51.90
49.61
48.02
45.23
40
A (N=46)
Panel B:
C (N=54)
P (N=133)
Difference between Weighted Average Life (WAL) and Weighted Average
Maturity (WAM)
30
27.80
26.24
24.42
27.70
29.37
28.34
27.17
26.09
26.64
24.02
21.25
20
19.67
14.09
18.54
13.13
19.74
19.96
20.87
19.91
20.27
19.17
17.41
13.04
13.08
13.23
13.07
13.11
10
A (N=46)
C (N=54)
40
12.83
12.62
P (N=133)
11.36
Figure 2
Panel A:
Weighted Average Life – Prime Funds only
70
64.88
62.42
63.55
62.71
60.81
60
57.33
57.13
55.74
59.23
56.13
59.39
58.77
59.30
56.91
58.46
58.56
56.30
52.46
54.46
50
AMLF = 'No' (N=76)
Panel B:
51.22
AMLF = 'Yes' (N=57)
Difference between Weighted Average Life (WAL) and Weighted Average
Maturity (WAM) – Prime Funds only
30
22.16
20.61
21.88
23.20
22.98
21.44
19.90
17.83
16.99
22.55
21.11
20
18.14
22.30
17.55
19.70
18.68
18.38
10
AMLF = 'No' (N=76)
AMLF = 'Yes' (N=57)
41
17.53 18.73
16.35
Figure 3. Probability of Participation in the AMLF in September 2008 Conditioned on the
Weighted Average Life of the Portfolio
Probability of Participation in the AMLF
50%
45%
40%
35%
30%
25%
20%
Weighted Average Life
42