How Regulation Has Mitigated—but Not Eliminated—Run Risk in Money Market Funds

The history of money market mutual funds (MMMFs) shows they emerged in the early 1970s largely as regulatory arbitrage around Regulation Q, enabling investors to earn returns above regulated bank deposit rates. [1] Core features—stable $1 NAVs, investment in high-quality short-term credit—became standard under SEC Rule 2a-7 (1983), governing maturity, credit quality, and liquidity. [1]

However, financial crises exposed vulnerabilities. In 2008, the Reserve Primary Fund “broke the buck,” triggering massive redemptions and concern over systemic spillovers from MMMFs to bank funding and the commercial paper market. The Fed responded with several emergency liquidity facilities (AMLF, others) under Section 13(3) of the Federal Reserve Act. [1][6]

More recently, in 2020, outflows from prime MMMFs amid pandemic-driven uncertainty led to the Money Market Mutual Fund Liquidity Facility (MMLF) launched by the Fed, again aiming to shore up liquidity in short-term credit markets. [5][1]

Reforms undertaken by the SEC in 2014 (Rule 2a-7 amendments) and more sweeping ones in 2023 have sought to reduce structural liquidity mismatches. Key changes include eliminating gates, mandating liquidity fees, and increasing daily and weekly liquid asset minimums. [3][4] These aim to reduce run risk and ensure MMMFs can meet redemptions without threatening broader financial stability.

Asset trends as of late 2025 show continued growth: total MMMF assets exceeded $7.3 trillion as of October 2025, with strong inflows into government funds and taxable MMMFs; institutional prime MMMFs have shrunk relative to retail or government funds. [2][1]

Strategic implications for investors, regulators, and banks revolve around: (i) how institutional prime MMMFs adapt to the new regulatory environment; (ii) potential shifts in banking sector funding as MMMFs increasingly lean on government or Fed instruments (e.g., overnight reverse repo) over bank deposits; (iii) whether reforms are sufficient to guard against MMMF runs in stress; and (iv) monitoring non-MMMF cash-management vehicles that mimic MMMFs in risk but with less oversight. [1][4][5]