Public Information – Released November 9, 2020

Public Information – Released November 9, 2020

Primer: Money Market Funds and the Commercial Paper Market

Viktoria Baklanova, Isaac Kuznits, Trevor Tatum 1

What is commercial paper?

Commercial paper (CP) is unsecured, short-term

debt issued for a specified amount to be paid at a

specified date. CPs are issued at a discount, with

minimum denominations of $100,000 and terms

normally ranging from 1 to 270 days.

Figure 1: CP outstanding declined sharply after the

financial crisis and stayed at around $1 trillion

$ trillion

2.5

2.0

What is the size of the U.S. CP market?

1.5

Total U.S. CP outstanding was at $1,007 billion at

the end of June 2020, down by $37 billion since the end

of 2019 (Figure 1). This is around one half of $2.2

trillion, the all-time high in CP outstanding reached in

July 2007. The majority of the decline in CP

outstanding since the financial crisis can be attributed

to reduction in the asset-backed commercial paper

(ABCP) issuance.

1.0

Non-U.S. financials and others

Nonfinancials

U.S. financials (ex-ABCP)

ABCP

0.5

0.0

Mar

Mar

Mar

Mar

Mar

Mar

Mar

2000 2003 2006 2009 2012 2015 2018

Source: Financial Accounts of the United States as of Jun 2020

Who are the main CP issuers?

As of June 2020, ABCP outstanding were at $214 Figure 2: Nonfinancials account for the largest share of

billion accounting for 21% of the total CP outstanding CP holdings at 25% followed by MMFs at 22%

Nonfinancials

Money market funds

(Figure 1). CP issued by U.S. financial firms were at

Mutual funds

State and local governments

$189 billion (or 19% of the total); CP issued by

Pensions Other financials Others

nonfinancial firms were at $166 billion (or 17% of the 100%

total); and non-U.S. financial and other firms were at

80%

$438 billion (or 43% of the total).

Who are the main investors in the CP market?

60%

Many types of institutional investors participate in

the CP market, including investment companies,

retirement accounts, state and local governments,

financial and nonfinancial firms. As of June 2020,

nonfinancial firms were the largest investors accounting

for 25% of the total CP market followed by money

40%

20%

0%

Mar

Mar

Mar

Mar

Mar

Mar

Mar

2000 2003 2006 2009 2012 2015 2018

Source: Financial Accounts of the United States as of Jun 2020

This is a report by the staff of the Division of Investment Management’s Analytics Office of the U.S. Securities

and Exchange Commission (Commission). The Commission, as a matter of policy, disclaims responsibility for any

private publication or statement of any of its employees. The views expressed herein are those of the authors and do

not necessarily reflect the views of the Commission or other members of the Commission staff.

If you have any questions or comments about this report, please contact Viktoria Baklanova

(baklanovav@sec.gov), Isaac Kuznits (kuznitsi@sec.gov), or Trevor Tatum (tatumt@sec.gov) in the Division of

Investment Management’s Analytics Office.

1

1

Public Information – Released November 9, 2020

market funds (MMFs) at 22% (Figure 2). Investments Figure 3: Total MMF assets reached $5.2 trillion

by financial firms were at 19% of the total. Other large in April, up 29% from February levels

CP investors are mutual funds (ex-MMFs) at 10%, state $ trillion

and local governments at 7% and pension accounts at 6

Government

5%. The “Others” category includes smaller CP

5

Tax-Exempt

investors that collectively account for around 13% of

Prime

4

the total CP outstanding.

The investor base in the CP market has changed 3

over time. For example, MMFs used to account for a

substantially larger share of the CP market at close to 2

47% in September 2001. Over the last 20 years, MMF 1

participation in the CP market has declined markedly.

One reason for the decline is that assets under 0Nov

Jul

Mar

Nov

Jul

Mar

management in government MMFs, which do not invest 2010 2012 2014 2015 2017 2019

in the CP market, have grown (Figure 3). 2 Assets in Source: Form N-MFP

prime MMFs have declined resulting in lower demand

for CP from MMFs. 3 On the other hand, CP investments of nonfinancial corporations have increased almost

six-fold since 2000 to $250 billion in June 2020 (or 25% of the total CP market) from $46 billion in March

2000 (or 3% of the total CP market).

What happened in the CP market in mid-March 2020?

In mid-March 2020, CP rates increased, which is normally associated with a lack of investor demand

(Figure 4). However, the broad scope of market developments at the onset of the COVID-19 pandemic

complicates the attribution analysis. Corporate investors in the CP market may have reduced their

allocations in anticipation of reduction in revenues. MMFs and mutual funds may have decreased their CP

investments in anticipation of investor redemptions. Available data show that prime MMFs and short-term

and ultra-short corporate bond mutual funds

Figure 4: CP rates spiked in mid-March, but

experienced significant outflows in March (Figures 5

remained subdued in the recent months

and

6). Prime MMFs lost around 11% of their net assets

%

3M AA nonfinancial CP

in March. Similarly, short-term and ultra-short bond

3M AA financial CP

2.5

Interest on bank reserves

mutual funds lost around 10% of their assets.

Reverse repo facility

2.0

At the same time, some CP issuers may have turned

to the CP market to bridge their funding needs. Overall,

the CP outstanding increased in the first quarter of 2020

by $44 billion, despite the spike in the CP rates. During

the second quarter, CP issuers had fewer immediate

1.5

1.0

0.5

0.0

Oct

2019

Dec

2019

Feb

2020

Apr

2020

Jun

2020

Aug

2020

Oct

2020

Sources: Bloomberg, Federal Reserve

2

Government MMFs invest 99.5% or more of their total assets in short-term Treasury securities, securities issued

by governmental agencies, repurchase agreements backed by these securities, or cash.

3

Prime MMFs can invest in a broad range of short-term, high quality assets such as U.S. Treasury bills, federal

agency notes, certificates of deposit, corporate commercial paper, repurchase agreements, and obligations of states,

cities, or other types of municipal agencies.

2

Public Information – Released November 9, 2020

borrowing needs amidst reduced economic activity and the CP outstandinding declined by $82 billion. 4

Figure 5: Prime MMFs saw large redemptions in

March and reversal of flows in subsequent weeks

$ billion

Figure 6: Short-term and ultrashort corporate bond

mutual funds experienced significant outflows in

March and reversal of flows in subsequent months

$ billion

40

20

0

0

-40

Institutional

-80

-120

Retail

3/6 3/27 4/17 5/8 5/29 6/19 7/10 7/31 8/21 9/11

Note: Weekly asset changes take into account asset flows and

valuation changes.

Source: Form N-MFP

-20

-40

-60

Mutual funds (ex ETFs)

ETFs

Jan Feb Mar Apr May Jun Jul Aug Sep

2020 2020 2020 2020 2020 2020 2020 2020 2020

Note: ETF - exchange-traded funds.

Source: Morningstar

What was the impact of the Federal Reserve’s Money Market Fund Liqudity Facility?

The Federal Reserve established the Money Market Mutual Fund Liquidity Facility (MMLF) on March

18, 2020, to broaden its program of support for the flow of credit to households and businesses. 5 MMLF

makes loans available to banks to finance assets purchased from prime and tax-exempt MMFs. MMLF

started its operations on March 23 and initially intended to provide loans for purchases of CPs, but was

extended to included purchases of certificates of deposit (CDs) and certain municipal securities. MMLF

also enabled banks that purchased assets from affiliated MMFs to finance these purchases with loans from

MMLF. In addition, since March, financial regulatory agencies have announced multiple emergency relief

provisions for banks, advisers and funds. Following these actions, both market conditions and broader

economic conditions in the U.S. appeared to improve.

The outstanding amount of MMLF loans has been declining since April. The maximum MMLF

utilization reached $51 billion in the first two weeks of April, or under 5% of the net assets in eligible

MMFs. For context, lending by a similar Asset-Backed Commercial Paper Money Market Mutual Fund

Liquidity Facility (AMLF) utilized in September 2008 reached about $150 billion in its first 10 days of

operation, or around 7.5% of assets in prime MMFs at that time. 6 As of September 30, 2020, the total

amount of oustanding MMLF loans was around $7 billion; MMLF accrued revenues from interest and fees

4

Additional information about the effects of the COVID-19 economic shock on the CP market can be found in

the SEC staff report entitled “U.S. Credit Markets: Interconnectedness and the Effects of the COVID-19 Economic

Shock.”

5

See the description of MMLF. In the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748, CARES

Act), signed into law as P.L. 116-136 on March 27, 2020, Congress appropriated up to $500 billion for the Treasury’s

Exchange Stabilization Fund (ESF) to support Fed programs and temporarily permitted the use of the ESF to guarantee

the money market fund industry. With respect to MMLF, the ESF provided $10 billion as credit protection to the Fed.

6

See analysis of AMLF utilization here.

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Public Information – Released November 9, 2020

to the Federal Reserve were around $166 million. 7 Initially MMLF was scheduled to stop providing new

loans after September 30, 2020, but was recently extended by three months through December 31, 2020.

See “Periodic Report: Update on Outstanding Lending Facilities Authorized by the Board under Section 13(3)

of the Federal Reserve Act,” October 7, 2020.

7

4