In global markets, money market funds have been found to exacerbate market strains when rising investor demand for redemptions has forced funds to sell assets into declining markets to meet those demands — adding to liquidity strains in short-term funding markets and restricting the funds’ ability to provide financing for both governments and corporations.
Given the large and growing role of Canadian money market funds in wholesale funding markets, the researchers examined whether domestic markets face the same kinds of liquidity stresses as other major financial markets.
The paper found that the money market fund sector has grown substantially in Canada — since 2019, assets are up 180%. It also plays a significant role in certain market segments, as money market funds hold about 5% of government Treasury bills, and 11% of short-term paper.
However, it also found that the Canadian sector has performed differently during times of stress.
While global funds saw large outflows during recent periods of market stress, Canadian funds generated inflows — and so, haven’t been a source of added liquidity pressure, it noted.
For instance, during the onset of the pandemic in March 2020, Canadian money market funds saw approximately $4 billion in net inflows.
“An absence of investor withdrawals while short-term funding conditions deteriorated suggests that [money market] outflows did not amplify these stresses, unlike the case in some other jurisdictions,” it said.
The paper also suggested that “This relative stability may reflect the fact that, compared with other jurisdictions, Canada’s [money market] sector has a larger share of retail investors.” In 2024, it noted, institutional investors only accounted for 14% of assets in Canadian money markets, compared with 80% to 90% in other jurisdictions.
This matters, it said, as retail investors may be less likely to quickly liquidate their positions due to a sudden need for cash, whereas large asset managers are more likely to liquidate their holdings to meet margin calls, or to build up liquidity buffers to adhere to their risk limits.
“Our analysis aligns with earlier work done by the [Financial Stability Board (FSB)] in which Canada was not identified as a jurisdiction where [money market fund] vulnerabilities could raise significant financial stability concerns,” it said. It added that Bank of Canada staff will continue to periodically review the sector.