Money Market Fund Gates, Fees and Reform

Money market funds are supposed to be as safe as cash, but if enough investors ever doubt that and rush to redeem at once, the fund can be forced to sell assets into a falling market to meet withdrawals — hurting the investors who stayed behind. Gates and liquidity fees were introduced after the 2008 and 2020 crises to slow this kind of run.

A gate simply stops redemptions for a period (originally up to 10 business days under US rules) once a fund's weekly liquid assets fall below a threshold. A liquidity fee instead lets redemptions continue but imposes a cost on them — for example, 1-2% of the redemption amount — so that the investors who leave compensate the fund (and remaining investors) for the cost of raising cash quickly.

Worked example. A prime money market fund's weekly liquid assets drop to 8% of the portfolio during a stress event, below the regulatory trigger. Rather than gating outright, the fund's board imposes a 2% liquidity fee on new redemptions. An investor redeeming $1 million receives $980,000 immediately, with the $20,000 retained by the fund to offset the cost of selling assets to meet that redemption.

After 2023 SEC reforms following the March 2020 dash for cash, discretionary gates were largely removed for most funds and mandatory liquidity fees were made the primary tool instead, on the view that fees discourage runs without freezing investors' cash entirely.