Prime Time to Re-examine Prime Funds
On October 2016, the SEC introduced a new reform requiring prime money market funds (PMMFs) to float their prices and impose redemption gates during periods of stress. We examine the economic implications of this reform for institutional investor flows, portfolio liquidity and holdings risk, and gross performance of PMMFs. We show a significant reduction in the performance-chasing behavior and overall sophistication of prime institutional investors. We find that in response to the new risk profile of institutional investors, PMMFs have gradually: (i) shortened aggregate portfolio maturity; (ii) lowered gross yields; (iii) boosted daily and weekly portfolio liquidity; and (iii) increased their holdings of safe assets. Using cross sectional differences in intraday prices of PMMFs, we confirm that funds facing greater liquidity risk reduced markedly their maturity risk exposure. Our evidence supports the view that the new SEC reform contributed to increasing the portfolio liquidity and improving the overall resilience of PMMFs.
Dr Chau Chak Wing Building