The U.S. Treasury's Office of Financial Research published its "2025 Annual Report to Congress" yesterday, which includes a section on Money Markets and Money Market Funds. The press release, "OFR Releases 2025 Annual Report to Congress," states, "Today the Office of Financial Research (OFR) published its 2025 Annual Report to Congress. As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, this report provides an analysis of any threats to the financial stability of the United States, the status of the efforts of the OFR in meeting its mission, and key findings from the research and analysis of the financial system. The report covers the fiscal year ending September 30, 2025." (Note: Register soon for our upcoming Money Fund University, which is Dec. 18-19 in Pittsburgh.)
The section on "Money Markets," explains, "Money markets offer savers and investors access to short-term debt instruments with features like cash. Holders use these debt instruments to store value, to support their ability to make payments, and as collateral. Issuers use these debt instruments to manage the ebbs and flows of cash and to fund investments in other assets. While many money market participants are financial sector entities, they also play a crucial role in economic activity. Without functioning money markets, real-economy investment and economic growth would be impaired."
It continues, "Money markets are liquid when lenders and borrowers can readily access and obtain funds. The primary vulnerability is associated with a sudden loss of confidence, which can lead to runs and asset fire sales, causing funding to become less available to money market borrowers. Money markets operated without signs of stress during 2025, much like in 2024. Repo and other money markets functioned without disruption in April 2025 despite substantial market volatility."
Discussing "Repurchase Agreements," the OFR writes, "A repo is a contract in which a market participant sells an asset with an agreement to buy it back. The price at which it is repurchased is typically higher than the selling price, providing the original buyer with the equivalent of an interest payment. This makes the original seller a cash borrower and the original buyer a cash lender. Repos are attractive to lenders because they are collateralized and short-term; they are attractive to borrowers because they provide debt-like financing at low interest rates. They also can be used to source securities."
They comment, "Repos are often issued with a one-day or overnight term and rolled over. Overnight repos backed by Treasuries are a common source of funding in financial markets. Most repo market participants are financial firms, but the benefits of repo financing flow through to nonfinancial firms and to economic growth. Repo market vulnerabilities are modest."
The OFR tells us, "U.S. repo markets are among the largest and most liquid short-term funding markets in the world, with $12.6 trillion average daily outstanding positions in Q3 2025. Total private (or non-Federal Reserve) repo volume excluding NCCBR [Non-centrally cleared bilateral repo] has risen since 2021.... Part of the increase in private repo is a result of declines in Federal Reserve Overnight Reverse Repo Facility (ON RRP) balances."
It explains, "Though the Federal Reserve primarily uses the ON RRP facility to implement monetary policy, the facility also helps to anchor rates in the repo market. This is because the Federal Reserve's ON RRP and Standing Repo facilities also serve as backstops for repos and reverse repos involving the most important types of repo collateral. Thus, the impact of any repo market disruptions on repo market borrowers and lenders would be limited. As ON RRP balances have declined, rates have increased and become more volatile."
The OFR report says, "A portion of repo volume is the basis for calculating the Secured Overnight Financing Rate (SOFR).... The repo market is comprised of four segments which are distinguished by whether they are settled via a third party (tri-party) and cleared by a clearinghouse or CCP.... Regulators previously collected data for three of the four segments to monitor vulnerabilities, and the OFR is now able to monitor the remaining segment through its permanent data collection of NCCBR trades, which began in December 2024. Dealers stand in the middle of repo markets. They are intermediaries for cash and collateral across the segments. They borrow cash secured by collateral from one counterparty in a reverse repo transaction and relend that cash for collateral to another counterparty in a repo transaction."
It states, "If large lenders suddenly decide not to roll over repo, borrowers, many of which are securities dealers, must quickly find other sources of financing or sell assets, which may transmit repo market stress to other markets. For example, many dealers lend to hedge funds using funds borrowed through repos with MMFs. Withdrawals from MMFs can quickly transmit to hedge funds via repo markets. Dealers and other market participants actively manage these risks."
A segment on "Commercial Paper" says, "Most commercial paper (CP) is issued by financial institutions and asset-backed structures and not by nonfinancial corporations.... CP provides nonfinancial firms with flexible, low-cost, short-term funding that aids management of the daily ebbs and flows of such firms’ cash flows, thereby improving business efficiency and economic growth. Asset-backed commercial paper (ABCP) funds invest in certain types of loans, such as auto loans and credit card receivables, that benefit from portfolio diversification and are more efficiently financed off the balance sheets of traditional financial institutions. Financial CP is a source of on-balance-sheet funding for financial institutions, typically foreign banks. Financial CP and ABCP improve the efficiency of the financial system and, thus, support economic activity and growth."
OFR states, "U.S. dollar-denominated CP outstanding was $1.3 trillion at the end of September 2025, according to the Federal Reserve, which was little changed from recent years. Because CP is short-term, investors usually hold the paper to maturity. CP vulnerabilities include those associated with runs and maturity transformation. These vulnerabilities are structural and do not change much over time."
They explain, "A primary cause of runs is a sudden change in views about CP issuer creditworthiness. The large decline in outstanding CP during the 2007-09 financial crisis was associated with a loss of confidence in some types of ABCP outstanding at the time. In 2025, most issuers of financial CP have backup sources of financing that increase confidence in their ability to repay CP, and ABCP vehicles largely finance more stable, well-understood assets, increasing market understanding and confidence in them."
Under "Money Market Funds," the OFR writes, "MMFs are open-end mutual funds that accept investments from households, businesses, and government entities. MMFs support the real economy by offering low-risk, liquid investment options for managing short-term cash balances. This enhances financial flexibility and resilience of their investors while indirectly providing issuers with support for their operations and growth. This support is through MMF purchases of short term paper, such as commercial paper, repos, and Treasury bills that help to maintain market liquidity and efficient capital allocation. Their vulnerabilities are smaller than in the past because of recent regulatory changes."
They comment, "Withdrawals from MMFs are usually settled the same day or overnight, and balances can be moved quickly to another investment, although regulations allow settlements to be delayed by as much as seven days. Investors in MMFs often use them as cash substitutes. MMF assets were about $7.8 trillion as of September 2025.... MMF vulnerabilities are driven by run risk. MMFs can experience runs if their investors become concerned that they may not be able to withdraw funds on demand at a net asset value (NAV) of $1 per share. One way to prevent run behavior is for MMFs to invest solely in money market instruments with a one-day maturity and issued by entities certain to repay on time. As a practical matter, a sizable share of MMF investments have maturity dates longer than one day, and prime MMFs' investments pose some credit risk."
The report says, "The SEC revised regulations in 2023 with the goal of improving the resiliency and transparency of MMFs. For example, prime MMFs must now hold a larger share of their assets in investments that mature within one day and within one week. This increases MMFs' ability to maintain market confidence by meeting large redemption requests without disruptions. But even if new regulations ensure that MMFs are able to satisfy large, sudden redemption requests, financial stability vulnerabilities associated with MMFs remain because if such redemptions occur, MMFs' sharply smaller assets would affect the provision of short term credit and, thus, would affect real activity and investment."
It also tells us, "Institutional and retail prime funds differ from U.S. government funds because they may invest a large share of portfolio assets in unsecured obligations of private-sector entities. Though such investments are relatively safe, they carry more credit risk than U.S. government obligations. Over the last 25 years, prime funds have experienced more runs than government funds. The most recent episode was in March 2020."
Finally, the OFR adds, "Several types of institutional MMFs are required to sell and redeem their shares at market-based NAVs, but some investors may be concerned that NAVs will fall well below the value at which they purchased shares and withdraw before that happens. In earlier periods of stress, MMF sponsors played a critical role in preventing NAVs from falling below $1, for example, by buying assets from their affiliated MMF at above market prices or by providing guarantees (a sponsor is typically the operator of a mutual fund complex but may also be a bank or other financial institution that is associated with an MMFs' brand). Sponsors have also mitigated potential spillovers to affiliate funds and short-term funding markets more broadly."
