Yesterday I posted a summary of the Federal Reserve Bank of Boston’s Money Market Mutual Fund Liquidity Facility (the “Facility”). Today it expanded the Facility to include tax exempt money market funds and municipal securities. Rather than write a separate post, I updated my original post so all the information is in one place and up to date. The blog editor does not have search functions, so forgive me if I haven’t removed every reference to “Prime” or inserted “Muni” in every appropriate spot.

A favorite client has also furnished me with a companion no-action letter obtained by the Investment Company Institute (“ICI”). I cannot link to the letter because I have not found it on either the SEC’s or ICI’s website. The letter is summarized below.

The Federal Reserve Bank of Boston (“FRBB”) has established a new Money Market Mutual Fund Liquidity Facility. (I’m not sure what acronym to use here; “mmm … Fund Liquidity” would work. Let’s just call it the “Facility.”) The Facility opened on March 23, 2020. This post summarizes the significant terms of the Facility and suggests an idea for fund boards to consider.

In a previous post, I noted that recent changes to Rule 2a-7 hit tax exempt money market funds hard, with the loss of half of their pre-reform assets. There are reasons to think these funds will recover, however. Foremost, prior to the post-election surge in interest rates, tax exempt funds were out-yielding every other type of money market fund. According Crane Data, tax exempt funds (which are nearly all retail) out-yielded both institutional and retail prime funds, to say nothing of government funds. These are pre-tax yields; on an after-tax basis, tax exempt funds offer very competitive yields.

Currently, managers and directors of money market funds are wrestling with the question of how to make certain that every intermediary selling their funds can implement a liquidity fee. Intermediaries, in turn, are worried about implementing different fees for different funds that may change continuously.

This series of posts asks a different question: How would intermediaries adapt to receiving redemptions proceeds net of any liquidity fee?

Part One of this series of posts explained how intermediaries could avoid calculating, collecting and remitting liquidity fees to money market funds by (1) having the transfer agent (“TA”) calculate and retain the fees from the redemption proceeds paid to the intermediary and (2) prorating the proceeds received from the TA among the intermediary’s clients based on the dollar or share amount of each client’s redemption. This method should address an intermediary’s concern that it might need to impose multiple and constantly changing liquidity fees for various money market funds during a financial crisis. The only question is how to handle contemporaneous purchases by the intermediary’s clients, which ordinarily would be netted against the other clients’ redemptions.

Why Would Anyone Buy Shares Subject to a Liquidity Fee?

Before addressing this question, we should consider how unlikely it would be for anyone to purchase shares subject to a liquidity fee.

I continue to hear about intermediaries fretting over whether and how to redesign their trading systems to accommodate the possibility of money market fund liquidity fees. This series of blogs will explain why this should be a problem only for the funds’ transfer agents (“TAs”). An intermediary should never need to collect and remit a liquidity fee.


Reforms adopted by the SEC in July 2014 permit the board of directors of a money market fund (including a majority of the independent directors, the “Board”) to:

  • suspend redemptions for a period of not more than 10 business days (known as “gating”), or
  • impose a fee of not more than 2% on all redemptions (a “liquidity fee”).