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The Stability of Prime Money Market Mutual Funds: Sponsor Support from 2007 to 2011

The largest support instance noted relative to AUM was the $336.8 million, or 6.3% of AUM, support to the Russell Money Market Fund. This entire amount was due to the purchase of the Fund’s Lehman holdings, as noted in the following disclosure, “On September 14, 2009, the Lehman Securities were purchased by Frank Russell Company from the Fund at amortized cost of $402,764,934 plus accrued interest of $775,756.” While such a large exposure seems inconsistent with the 5% concentration limit of Rule 2a-7, it is important to note that such limits are only in effect at the time of purchase | FEDERAL RESERVE BANK OF BOSTON Working Paper RPA 12-3 August 13 2012 Risk and Policy Analysis Unit The Stability of Prime Money Market Mutual Funds Sponsor Support from 2007 to 2011 Steffanie A. Brady Ken E. Anadu Nathaniel R. Cooper Risk and Policy Analysis RPA Working Papers formerly known as Quantitative Analysis Unit QAU Working Papers present economic financial and policy related research conducted by staff in the Federal Reserve Bank of Boston s Risk and Policy Analysis Unit. RPA Working Papers can be downloaded without charge at http www.bostonfed.org bankinfo qau wp Risk and Policy Analysis Unit Working Paper Series Federal Reserve Bank of Boston The Stability of Prime Money Market Mutual Funds Sponsor Support from 2007 to 2011 Steffanie A. Brady Ken E. Anadu and Nathaniel R. Cooper August 13 2012 The authors would like to thank Patrick McCabe of the Federal Reserve Board of Governors and Patrick de Fontnouvelle Kimberly De Trask and Eric Rosengren of the Federal Reserve Bank of Boston for their input to this paper. They are also grateful to Maria Onaindia and Peter Jones for their contribution to the data gathering effort. The views expressed in this paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of Boston or the Federal Reserve System. Please address correspondence to Steffanie A. Brady at Steffanie.Brady@bosfrb.ors I. Overview It is commonly noted that in the history of the Money Market Mutual Fund MMMF industry only two MMMFs have broken the buck or had the net asset value per share NAV at which they transact fall below 1. While this statement is true it is useful to consider the role that non-contractual support has played in the maintenance of this strong track record. Such support which has served to obscure the credit risk taken by these funds has been a common occurrence over the history of MMMFs. This paper presents a detailed view of the non-contractual support provided to MMMFs by their .