Money Market Funds Reform
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Born out of the US Q regulation (which capped the interest one could earn on deposit accounts) in the 1970s in the US, the contemporary money market fund/UCITS industry is one of the largest and prominent segments of the shadow banking market globally. They fund large volumes of treasury paper, commercial paper and corporate bonds globally. The idea of those funds was and is to earn to (slightly) higher return than on a deposit account, with no risk and full and continuous liquidity. That has proven problematic and liquidity dried up in the early parts of the 2007–2009 crisis. These funds are subject to a ‘first-mover advantage’, that is, those that exit first leave possible value distortions or capital destruction for remaining investors. Possible solutions and decisions taken vary quite a bit across the world but every single possible technique in the playbook has been implemented to avoid the market instability that leads to run on those funds. But doubt still very much exists among scholars as to whether the right decisions were taken to keep these funds going under severe forms of market distress as they continue to be prone to market contagion. It is time for a comprehensive analysis.