Regulatory Constraints for Money Market Funds : The Impossible Trinity?

Despite substantial regulatory reforms, MMFs exposed to private assets experienced severe stress in March 2020. In the EU, Low Volatility Net Asset Value (LVNAVs) MMFs faced acute challenges to meet regulatory requirements while facing high redemptions. Such funds have to maintain their mark-to-market net asset value within 20 basis points of a constant net asset value, and their weekly liquidity asset above the 30% requirement. We provide a stylized model to show that under certain conditions related to outflows and market liquidity of their assets, LVNAVs may face difficulties in fulfilling both regulatory constraints at the same time. We calibrate the model to EU data to assess possible reforms to MMFs. Increasing the NAV deviation and improving the market liquidity of the assets MMFs invest in would substantially improve the resilience of MMFs. Introducing countercyclical liquidity buffers would also enhance their resilience especially in times of stress, and the effect is larger than increasing liquidity requirements