Money Market Funds Explained: How the 2023 SEC Reforms Reshaped Short-Term Cash Management

Money market funds sit at the quiet centre of short-term cash management, holding nearly $8 trillion in the US alone according to recent ICI data, a record high. Yet the industry has just been through one of its most significant regulatory overhauls in over a decade, and the result has reshaped which types of money market fund are actually attractive to hold. For treasury and finance professionals who use MMFs as a cash management tool, understanding what changed matters directly for where short-term corporate cash actually sits.

What a money market fund actually does

A money market fund is a type of mutual fund that invests in short-term, high-quality debt instruments, such as Treasury bills, commercial paper, repurchase agreements, and certificates of deposit, with the goal of preserving capital, providing daily liquidity, and paying a market-linked yield. Corporates, institutional investors, and increasingly retail investors use MMFs as a cash-equivalent, a place to park money that needs to stay liquid and safe while still earning a return, rather than sitting idle in a non-interest-bearing account.

The 2023 SEC reforms and why they mattered

In July 2023, the SEC adopted sweeping amendments targeting prime institutional money market funds, the category that invests in corporate and financial-sector debt rather than only government securities. The reforms introduced mandatory liquidity fees on prime institutional funds, triggered once net redemptions exceed 5% of fund assets on a given day, along with increased minimum liquidity requirements across the board. The mandatory fee mechanism, in particular, was designed to ensure that investors who redeem during a period of market stress bear the actual cost of that liquidity, rather than passing it on to investors who stay invested, addressing a structural vulnerability that had been exposed during both the 2008 financial crisis and the March 2020 market dislocation.

The industry impact has been dramatic

The consequences for prime institutional funds specifically have been severe. The number of prime institutional MMFs fell from 35 in June 2023 to just 14 by October 2024, a 60% decline, while net assets in that category fell from $631 billion to $322 billion, roughly a 49% reduction. Sponsor consolidation followed the same pattern, with the number of institutional prime fund sponsors dropping by more than half. Much of that money didn't leave the money market fund industry altogether; an estimated $309 billion migrated into government money market funds or other cash-management strategies instead, since government MMFs are not subject to the same mandatory liquidity fee mechanism.

What this means for treasury and cash management

For anyone responsible for a company's short-term cash, the practical takeaway is that the "which MMF" decision is no longer a simple choice between broadly similar options. Prime institutional funds, while still offering slightly higher yields in many cases, now come with the operational complexity of potential liquidity fees during stressed redemption periods, a factor that needs to be weighed against a company's own liquidity needs and risk tolerance. This decision connects directly to the broader liquidity management framework covered in our guide to the Liquidity Coverage Ratio, since both concepts are ultimately about ensuring an institution can meet its short-term obligations without being forced into a costly or disorderly sale of assets.

Why this belongs on a treasury professional's radar

Money market fund selection is a core skill within treasury management, not a peripheral one, and it's covered in more depth as part of our treasury management career guide, which looks at the skills and qualifications treasury professionals need as cash management has become more technical and more closely scrutinised by regulators. The tools used to actually manage and monitor that cash position day to day are covered in our guide to treasury management systems, since most modern TMS platforms now integrate MMF sweep and investment functionality directly rather than treating it as a separate manual process.

FAQ

Are money market funds still safe to use for corporate cash? They remain one of the most widely used cash-equivalent instruments, but the 2023 reforms mean prime institutional funds now carry a liquidity fee risk during stressed redemption periods that didn't exist before, which is worth factoring into a treasury policy.

What's the difference between a prime and a government money market fund? Prime funds invest in corporate and financial-sector debt such as commercial paper, while government funds invest almost entirely in Treasury and other government-backed securities; government funds are not subject to the SEC's mandatory liquidity fee requirement.

Why did so many prime institutional funds close after 2023? The combination of mandatory liquidity fees and higher liquidity requirements made prime institutional funds less commercially attractive to both sponsors and large investors, prompting a wave of consolidation and asset migration into government funds.

Money market funds remain a cornerstone of short-term cash management, but the 2023 reforms have meaningfully changed the risk and yield trade-off between fund types, making fund selection a more deliberate treasury decision than it was a decade ago.

Repurchase agreements are one of the core short-term instruments money market funds actually hold to generate yield while staying liquid. Our guide to repurchase agreements and the repo market covers how this roughly $12 trillion market actually works.

Money market funds often sit on the lending side of securities lending programmes too, using part of their holdings to generate incremental yield beyond the base return on their portfolio.

Money market funds are one of the specific vulnerabilities regulators track within the broader non-bank financial intermediation (NBFI) system, precisely because of the liquidity transformation involved in offering daily redemptions against less liquid holdings.

Money market funds are increasingly significant users of sponsored repo, which gives them access to a much deeper, centrally cleared pool of counterparties for placing short-term cash than bilateral dealer relationships alone.

Money market funds are among the largest institutional buyers of commercial paper, making the short-term credit quality and liquidity of the commercial paper market directly relevant to how these funds manage their own portfolios.