Rule 2a-7 is a specific regulation under the U.S. Investment Company Act of 1940, governing money market funds, designed to maintain their stable net asset value (NAV) of $1.00 per share. Its purpose is to protect investors by imposing stringent requirements on the types and quality of assets these funds can hold.
Mechanism
This rule mandates strict limitations on the credit quality, maturity, and liquidity of securities held by money market funds. It restricts investments to high-quality, short-term debt instruments and requires daily pricing and stress testing to ensure the fund can meet redemptions.
Methodology
The methodology emphasizes investor protection and the stability of short-term funding markets. By imposing conservative investment criteria, it reduces the risk of money market funds “breaking the buck” and prevents potential systemic financial instability. This regulatory framework is critical for maintaining confidence in a key component of the financial system, influencing how traditional finance interacts with stablecoin offerings.
The use of non-traditional assets in tri-party repo requires MMFs to build a superior operational framework to manage heightened credit and liquidity risks under Rule 2a-7.
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