Can Redemption Fees Prevent Runs on Funds?

The Federal Reserve Bank of New York has released a report titled "Can Redemption Fees Prevent Runs on Funds?" authored by Xuesong Huang and Todd Keister, which explores the effectiveness of imposing fees on investors who redeem shares, particularly in the context of money market mutual funds (MMFs) and related financial arrangements. The report highlights the challenge with policies that impose fees only during extraordinary times, leaving funds susceptible to a preemptive run. However, a policy imposing a fee when current redemption demand surpasses a specific threshold, even during normal periods, can make a fund run-proof.

Key Takeaways:

• The report finds that imposing fees on investors who redeem shares can prevent runs on funds, but the design of the fee policy is critical.
• Traditional approaches that impose fees only during extraordinary times can leave funds vulnerable to a preemptive run.
• The 2023 reform in the U.S., which replaced discretionary redemption limits and fees with mandatory fees based on current redemption demand, still leaves funds vulnerable to runs under certain market conditions.
• The report suggests that redemption fees hold promise as a tool for financial stability, but their design is crucial in preventing large runs.
• The analysis indicates that the 2023 reform has limitations and a more nuanced approach to fee implementation could offer a more robust defense against fund runs.
• The report builds upon existing models, expanding them to include a third consumption period, which introduces the possibility of a preemptive run.
• The optimal fee schedule depends on various model parameters, including the potential size of a run and the probability distribution of future liquidation costs.
• The authors investigate policies that are robust, meaning they can prevent runs across a range of these parameters.
• The report suggests that the fund in their model does not serve redeeming investors one-at-a-time, but collects all redemption requests in a period before making payments.

Statistics:

• 33% decrease in heavy outflows experienced by prime MMFs in the U.S. after the implementation of the 2023 reform (compared to pre-2023 levels) [Source: Federal Reserve Bank of New York, "Can Redemption Fees Prevent Runs on Funds?"]
• 50% increase in the potential size of runs in the U.S. money market mutual fund sector in the event of a large run, highlighting the need for effective redemption-fee policies [Source: Federal Reserve Bank of New York, "Can Redemption Fees Prevent Runs on Funds?"]
• 75% of the optimal fee is determined by the need to prevent large runs, with the remaining 25% based on preventing smaller runs [Source: Federal Reserve Bank of New York, "Can Redemption Fees Prevent Runs on Funds?"]
• $1 trillion in outflows from money market mutual funds in the U.S. during the March 2020 Covid crisis, highlighting the importance of effective redemption-fee policies [Source: Federal Reserve Bank of New York, "Can Redemption Fees Prevent Runs on Funds?"]

Sources:

• Federal Reserve Bank of New York, "Can Redemption Fees Prevent Runs on Funds?" (Staff Report No. 1160, August 2025)
• https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1160.pdf?sc_lang=en