Fed Creates Liquidity Facility for Money Market Funds

As part of its policy response to the market turmoil triggered by the coronavirus pandemic, the Federal Reserve overnight announced a new Money Market Mutual Fund Liquidity Facility, or MMLF. Through the MMLF, the Federal Reserve Bank of Boston will lend to financial institutions secured by high-quality assets purchased by the the institution from MMFs. Any depository institution, U.S. bank holding company or U.S. branch or agency of a foreign bank is eligible to participate.

Eligible collateral will include Treasurys, agency securities and qualifying asset-backed or unsecured commercial paper from U.S. issuers. A term sheet specified that the banking agencies will “act to fully neutralize the impact of a depository institution holding company or depository institution’s participation in the facility for purposes of regulatory capital requirements” by fully exempting from risk-based capital and leverage requirements any assets pledged to the MMLF or purchased from an MMF starting March 18 and intended to be pledged to the MMLF.

The Fed’s move came as MMFs — usually viewed as a safe, cash-like investment vehicle — saw increasing demand for redemptions by households, businesses and other investors, causing strain in the MMF market, according to news reports. The Treasury Department said it will support the MMLF with $10 billion worth of credit protection from its Exchange Stabilization Fund.