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Money Market Funds - moving to VNAV would neither halt nor prevent a run

Treasury Strategies have just submitted a commentary to the Securities and Exchange Commisson (SEC) on their June 2013 proposals for reform of the Money Market Funds (MMF) market by introducing Variable Net Asset Value (VNAV) MMFs. 

Game theory analysis and overall conclusion

The paper presents a game theory analysis of the SEC’s June 2013 proposals for reform of Money Market Funds (MMFs). Game theory is relevant to this policy debate as regulators have depicted investor behaviour using terminology of shareholder runs and first mover advantage – a framework classically employed in game models of bank runs. 

Treasury Strategies believe their analysis demonstrates that when implemented properly, the Fee and/or Gate alternative would effectively halt and even prevent runs from taking place. However, the alternative of moving to a fluctuating net asset value would neither halt nor prevent a run.

Four primary questions

Treasury Strategies analysed four primary questions:

  • will requiring a variable net asset value (VNAV) prevent or stop a run on money fund assets?
  • will maintaining a constant net asset value (CNAV) and providing MMF board discretion to impose liquidity or redemption fees (Fees) prevent or stop a run on money fund assets?
  • will maintaining a constant net asset value (CNAV) and providing MMF board discretion to impose a temporary redemption gate (Gates) prevent or stop a run on money fund assets?
  • will combining VNAV with Fees and/or Gates prevent or stop a run on money fund assets?

The detailed analysis of these questions is given in the paper.

Other conclusions

The main other conclusions in this paper were:

  • a variable NAV structure is ineffective at either preventing or stopping a run.
  • both the Fee and Gate alternatives are effective in stopping a run in progress. Gates do so by definition. Fees stop a run provided that the Fee is of sufficient magnitude. In either case, it is essential that fund boards have the latitude to implement Fees or Gates when they deem necessary. In particular, a requirement that boards wait until the end of day would render these alternatives ineffective.
  • Fees and Gates are also effective in preventing runs, provided that boards are sufficiently preemptive in their actions. Investors must believe that they will be unable to redeem in a way that disadvantages other shareholders. Game theory provides an analytic prescription for how boards must set Fee/Gate policy that is based on setting investor expectations. 
  • We find that effective run prevention is attainable within the approaches contemplated by the SEC, while requiring that fund boards be given discretion to take protective action.
  • The proposal to combine VNAV with Fees/Gates would be effective at both stopping and preventing runs, due almost entirely to the effect of Fees/Gates. It would also eliminate any first mover effects of an initial shadow price beneath $1. However, it is likely that this proposal is completely ineffective as a practical matter due to the inevitable regulatory arbitrage.

Treasury Strategies’s final conclusion, sums up what a mess the SEC have got themselves into, i.e. “The combination of VNAV with Fees/Gates is an example of a policy prescription that weighs systemic risk concerns so heavily that investment utility of the resulting product is undermined. Other rules could have a similar effect.”


CTMfile take: This 38 page detailed analysis is an important contribution to the debate on how to control financial exposures to the MMF business. It should be required reading for the regulatory authorities in Europe.

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