COVID-19 Pandemic Triggers Heavy Outflows from Prime Money Market Funds

Strategic Insights -

The COVID-19 pandemic led to a significant increase in concerns among investors, resulting in massive outflows from U.S. dollar-denominated prime money market funds (MMFs) in March 2020. A total of $143.1 billion was redeemed from domestic and offshore MMFs, with investors withdrawing their shares en masse from funds domiciled in the United States and Europe. This unprecedented outflow raised concerns about the stability of the financial system and highlighted the need for regulatory reforms.

Key Takeaways:

  • The COVID-19 pandemic triggered heavy outflows from prime MMFs, with $143.1 billion redeemed in March 2020.
  • Offshore U.S. dollar (USD) MMFs invested in assets with similar credit and liquidity profiles as domestic funds, but catered almost exclusively to institutional investors.
  • The European Union adopted a reform of the MMF industry in response to the 2008 financial crisis, dividing offshore prime MMFs into low-volatility net asset value (LVNAV) funds and variable NAV (VNAV) funds.
  • Only LVNAV funds are allowed to impose redemption gates or liquidity fees in Europe, while all prime MMFs can do so in the United States.
  • Regression analysis showed that daily outflows from VNAV funds were 1.3 percentage points lower than those from domestic institutional prime funds during the run period, a cumulative difference of about 20 percentage points.
  • The study found that lower WLA levels led to relatively larger outflows during the March 2020 run, with a 10 percentage point reduction in WLA leading to an increase in daily outflows by 0.6 percentage point.

Statistics:

  • $143.1 billion: Total amount redeemed from domestic and offshore MMFs in March 2020
  • 20 percentage points: Cumulative difference in daily outflows between VNAV and domestic institutional prime funds during the run period
  • 0.6 percentage points: Increase in daily outflows from LVNAV funds for every 10 percentage point reduction in WLA
  • 10 percentage points: Increase in cumulative outflows from LVNAV funds for every 10 percentage point reduction in WLA

Sources:

  • Federal Reserve Board (no date)
  • European Union (2017)
  • Securities and Exchange Commission (2014)
  • Securities and Exchange Commission (2020)