What occurs when money market funds close?

A handful of cash managers, including Vanguard and Capital Group, are planning to shut some of their US money market funds or convert them to different structures instead of paying for upgrades to comply with new rules due later this year.

So, what happens to the short-dated debt held by these funds? Will it be scooped up by other buyers? Is there enough demand elsewhere?

The short answer appears to be: yes, probably. But it’s a situation we’ll be monitoring closely in the next few months.

Some context first. The Securities and Exchange Commission will implement regulations in early October targeting prime institutional money market funds. Unlike government funds, these can hold short-dated company and bank debt.

The new rules mean that a liquidity fee will be imposed on departures whenever net redemptions exceed 5 percent of a fund’s total net assets in a single day.

The idea, in essence, is that such charges will help protect investors by preventing large-scale exits from prime institutional vehicles like those seen at the start of the COVID crisis in 2020 when some managers had to sell assets at discounts to handle outflows.