3 Asset Backed Commercial Paper MMF Liquidity Facility AMLF Introduced on

3 asset backed commercial paper mmf liquidity

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3. Asset-Backed Commercial Paper MMF Liquidity Facility (AMLF) : Introduced on September 19, 2008, it offered non-recourse loans to the U.S depository institutions and bank holding companies at primary credit rates to bank holding companies for financing purchases of high-quality asset backed securities commercial paper from MMF. 4. Primary Dealer Credit Facility (PDCF) : Introduced in March 2008, it was an overnight loan facility that assisted the primary dealers by granting discount window loans.
These programs were successful in generating additional market liquidity, accessibility to credit and led to a slowdown in redemptions by the investors in the primary money market funds. Disadvantages : 1. Encourages risky investment behaviour or choices by the MMMF’s as government guarantee schemes have been introduced and losses when paying out to investors will be borne by them to an extent. 2. There is a high chance that the government runs into deficit due to the provision of liquidity to the market and this can have adverse long-term effects. 3. The government also incurs various costs like monitoring, administration etc in the process of rescuing the MMMF’s. Answer 7 : There have been many proposals suggested by academics, industry leaders, fund sponsors, government agencies etc and some of the most important are: 1. Floating NAV : The proposal involves the publishing of market-based NAV’s by the MMMF’s and permits the investors to redeem their shares at this floating NAV just like mutual funds. Pros : It reduces the chances of a panic-based run by diminishing the critical motive of runs. Cons : No big difference between the working of a floating NAV and stable NAV as the secondary market for Commercial Paper, Certificates of Deposit etc is highly illiquid. 2. Capital Buffers : Under this proposal, MMMF’s, like traditional banks, will be required to hold some loss-bearing, sub-ordinated capital. Pros : Discourages the incentive to take the excessive risk by MMMF’s and reduces the risk of runs. Cons : The imposition of cost on funds and the investors and therefore could be expensive. 3. Some other proposals: a. Redemption Gates and Liquidity Fees : This proposal involves the imposition of fees or restrictions on investor redemption during certain situations like a financial or economic crisis to avoid heavy redemptions and runs. Pros : Addresses the run risk and/or systematic contagion risk.
Cons : Rule 2a-7 already had a gating rule which proved to be ineffective and strict gating regulations can increase the incentives to withdraw early. b. An Increase in Transparency : Under this proposal, the MMMF’s will have to disclose information more often about its portfolio holdings and in greater details than is currently mandated under the Rule 2a-7.

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