Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The regulations that are being considered target some key characteristics of MMFs, mainly the stable net asset value (NAV) and the support o¤ered by sponsors to the funds. In the U.S., the SEC voted to impose redemption fees on investors in retail MMFs, and to force institutional MMFs to abandon the stable NAV in favor of a ‡oating NAV. Redemption fees will increase investors' costs of redeeming shares and, therefore, reduce their incentives to run on the MMFs. By adopting a ‡oating NAV, MMFs would not be subject to liquidation after breaking the buck. Alternatively, the European Commission proposed that stable NAV funds convert to variable NAV funds or hold a 3 percent capital bu¤er, and that sponsor support be prohibited unless approved by the appropriate regulator. These proposed regulations aim to make MMFs more similar to other …nancial intermediaries: more like regular mutual funds in the case of adopting a ‡oating NAV and more like banks in the case of a capital bu¤er. Terms of use: Documents in EconStor mayBefore one can start analyzing how to regulate MMFs it is important to understand the sources of fragility in the MMF industry. In this paper, I show that sponsor support, which is a characteristic particular to MMFs, can also be a source of fragility and make the MMF industry vulnerable to runs that are di¤erent from the canonical bank runs: these runs are not runs of investors on the intermediaries but of intermediaries on each other through the …re sales in the money market.One of the key features of the MMF industry in the US has been the stability of the NAV. MMFs aim to maintain a stable NAV, usually of 1 dollar. If the NAV goes below 1 dollar, which is known as "breakingthe-buck", the fund is eventually liquidated, generating costs both to investors and to the company that sponsors the fund. To prevent this costly liquidation, sponsors can o¤er support to their funds to keep the share value at 1 dollar. In fact, one of the main ways to achieve the stability of the NAV is through sponsor support.Since MMFs are very important as suppliers of liquidity in the money market, if the demand for money ECB Working Paper 1772, March 2015 2 market instruments by MMFs decreases, the price of these instruments will decrease and MMFs will be at risk of breaking-the-buck. If the sponsor of a MMF expects these asset prices, and thus the NAV, to be low, he will also expect a high cost of o¤ering support, and may choose not to keep the fund open, and sell...
We propose a theory to understand when there is fragmentation in asset markets. To do so we develop a model of market formation in which investors with heterogeneous valuations trade an asset strategically. Investors choose a dealer with whom to trade. After the market structure is decided, trade takes place sequentially. First, each dealer and his investors trade strategically in a local market. Second, dealers participate in a strategic inter-dealer market. Markets are fragmented when there are multiple active dealers. In
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