In the complex world of financial regulations, money market funds are held to stringent standards, particularly when it comes to credit quality, diversification, maturity, and liquidity. These criteria ensure the safety, stability, and reliability of money market funds. Let's delve into these key regulatory requirements using the US as an example.

And we start with credit quality money market funds are required to hold high quality securities. The primary objective is the preservation of capital. Hence, investments are often restricted to top tier credit rated instruments. This means only investing in securities that have received one of the two highest short-term credit ratings, or in the absence of short-term ratings. Securities have received comparable long-term ratings, limiting the percentage of the portfolio that can be invested in second tier securities and regularly reviewing credit ratings to ensure the fund's holdings meet these high quality standards.

Let's have a look at diversification next, which is a cornerstone of money market fund regulations. It's imperative that money market funds spread risk across a variety of investments to avoid undue concentration in any single issuer except for government securities. Key diversification rules include no more than 5% of the fund's total assets being invested in securities from a single issuer. This limit excludes government securities and repo agreements. Only up to 10% can be invested in demand features and guarantees from a single institution. A demand feature would be, for example, a reverse repo.

So the total exposure to a single counterparty stemming from repo transactions, for example, is capped at 10% of the funds total assets.

Let's cover the restrictions regarding the maturity of money market funds next. Here there are actually three main restrictions. The maximum time to maturity for each security in the money market fund is kept at 397 days. But of course, what matters to the overall portfolio risk is not the single security but the average of all holdings in the money market fund portfolio. To ensure that money market funds maintain short-term portfolios, regulators have placed restrictions on the maximum allowable weighted average maturity or WAM and weighted average life or WAL.

Let's talk about the weighted average maturity WAM. The WAM calculates the average time until the securities and the money market funds portfolio mature weighted by the dollar amount that is invested in each security.

So you basically multiply the number of days To maturity for each security by its proportion of the fund's total assets, and then sum these products. Essentially, it gives more weight to securities that make up a larger proportion of the portfolio. There is one caveat though, in the case of floating rate notes, the maturity considered in the WAM calculation is the time until the next interest rate resets. So if a fund owns a one year FRN, which is linked to software with a daily reset, the maturity to be used for the WAM calculation would be one day. Even though the floating rate note actually matures in one year, WAMs of money market funds cannot exceed 60 days. This ensures that the overall portfolio remains relatively short term and reduces exposure to interest rate volatility. Let's now have a look at the weighted average life WAL. The WAL is an average of the final maturities of all securities in the portfolio. So you perform a similar calculation as the WAM, but using the time to the final payment of each securities principle, this gives a clearer picture of the fund's exposure to long-term securities, which may have short-term interest payments, but return the principle much later. Coming back to our earlier FRN example, for one purposes we would use one day, but in the context of the WAL, we would use the one year time to maturity.

The weighted average life of a money market fund cannot exceed 120 days. This ensures the fund doesn't get overly exposed to risks associated with longer term securities. Last but not least, let's have a look at liquidity requirements for money market funds as ensuring sufficient liquidity is paramount to meet redemption requests. US regulatory requirements stipulate money market funds must hold at least 10% in daily liquid assets like cash direct obligations of the US government or securities that will mature or are subject to a demand feature that is exercisable and payable within a day. At least 30% in weekly liquid assets, similar to daily liquid assets, but maturing within a week and no more than 5% can be invested in illiquid securities. These are investments that a fund reasonably expects cannot be sold or disposed of in current market conditions, in seven calendar days or less without the sale or disposition. Significantly changing the market value of the investment.