SEC Releases Primer on Money Market Funds and The Repo Market

The SEC’s Division of Investment Management’s Analytics Office recently published a primer (Primer) that discusses the use of repurchase agreements (repos) by money market funds (MMFs). Generally, in a repo one firm sells a security to another firm with a simultaneous promise to repurchase the security at a later date and at a specified price. Economically, repos are a form of collateralized lending whereby the loan is overcollateralized to reflect the risk that the underlying securities may decline in value. The counterparty that agrees to purchase the underlying securities and sell them back to the other party is engaging in a “reverse repo.” MMFs participate in the repo market by investing cash in repos alongside other firms.
Some of the key metrics cited in the Primer include:

• In March 2020, net assets of government MMFs increased by $838 billion to $3.6 trillion, or up 30% from the end of February 2020, when demand for government assets surged amidst the COVID-19 pandemic.

• MMFs’ total investments in repos reached an all-time high of approximately $1.6 trillion in March 2020. As of December 31, 2020, MMFs’ total investments in repos decreased to approximately $1.1 trillion.

• MMFs primarily conduct repos with securities dealers ($877 billion as of December 31, 2020, or 82% of total repos), but also with insurance companies, educational institutions, government-sponsored enterprises and the Federal Reserve.
MMFs’ participation in the Federal Reserve’s overnight reverse repo facility (intended to help the Federal Reserve control short-term interest rates) decreased in 2020 amid the increased issuance of Treasury bills, which MMFs view as a similar investment option.

The Primer is available at: Please Click Here