November 30, 1993
TO: BOARD OF GOVERNORS NO. 111-93
RE: FEDERAL RESERVE BOARD RESEARCH PAPER ON MONEY MARKET FUNDS
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Attached is a copy of a recent paper by two economists with the Federal
Reserve Board concerning the effects of the SEC's amendments to Rule 2a-7 in
1991, which tightened the limits on portfolios of taxable money market funds.
While much of the paper is rather technical, some of its conclusions are highly
significant.
For example, the paper concludes that the riskiness of taxable money funds
fell significantly after the SEC's amendments were proposed in 1990 (i.e., much
of the adjustment to the new requirements occurred before the amendments were
finally adopted). To offset some of the resulting decrease in yield, funds
lengthened their average portfolio maturities.
The paper also concludes that the amendments to Rule 2a-7 may have reduced
the risk that the Federal Reserve would have to act as a "lender of last resort
in a crisis involving money funds." The paper states:
Had widespread runs on money funds in fact developed in 1989
and 1990, following the well-publicized defaults in the commercial
paper market, the Federal Reserve might have felt considerable
pressure to open its discount window to ensure adequate liquidity
among money market funds faced with widespread redemptions. The
amended Rule, by significantly reducing the prospects for runs on
money funds therefore also lowered the probability that the Federal
Reserve would ever be called on to act as a lender of last resort
because of money funds. [Footnote omitted.]
Matthew P. Fink
President
Attachment