Friday morning, Federated Investors hosted its 3rd quarter earnings call, which, as usual, discussed a number of issues of interest to money market fund providers and investors. Federated's J. Christopher Donahue, President and CEO, commented, "The third quarter saw a flurry of activity on the regulatory front. On August 22nd, the SEC Chairman issued a statement on money fund reform, indicating that a majority of the SEC commissioners would not support a proposal to reform the structure of money funds. This was followed by a statement from Commissioner Aguilar on the 23rd and a joint statement from Commissioner Gallagher and Paredes on the 28th. [W]e expect that SEC will and should retain this responsibility for overseeing markets and protecting investors, including money market regulations, and it is important to note that this agency, the SEC, has an unparalleled multi-decade record of success in the regulation of money fund and is far better equipped for this mission than the (FSOC)." (Note in other news on Friday: The ICI issued a statement, saying, "The Investment Company Institute's Money Market Working Group, made up of industry leaders, today made the following statement: "ICI and the fund industry are engaging directly with the Securities and Exchange Commission in a united effort to constructively build on the success of the 2010 reforms.")
Federated's Donahue continued, "Furthermore, the Commissioners concluded all of their statements by inviting constructive dialogue, which is obviously continuing, while noting that money funds are 'squarely within the expertise and regulatory jurisdiction as the SEC', and further 'we do not intend to abdicate our responsibility to regulate money market funds which would be unjustified and at the expense of our mission to oversee the securities market.' There have obviously been other events that have gone on here recently. We are well aware of the report that Treasury Secretary Geithner has written, and this has stimulated other activities [and] constructive dialog continues. Our position is very simple, that we will continue to champion those things that enhance the resiliency of money market funds."
He continued, "Money market mutual fund assets stand at about $246 billion.... On the institutional side, we are proceeding with the transition to begin managing the $9.5 billion Massachusetts Municipal Depository Trust mandate that we won during the third quarter. We expect to begin managing these assets early in 2013. We have had early success from the acquisition of our London-based Prime Rate Capital Management during the second quarter. The assets have increased from $4.2 billion ... to over $5 billion this month. We continued to look for alliances and acquisitions to advance our business in Europe and Asia, as well as here in the U.S. We closed in the third quarter, the previously announced transactions with Fifth Third for $4.4 billion in money market assets and Trustmark for $933 million in money market, equity and fixed income assets, and we remain active, as I said, in looking for additional consolidation opportunities."
Federated CFO Thomas R. Donahue commented on the call, "Taking a look at first at the money fund fee waivers, the impact of pre-tax income in Q3 was $16.3 million, down from $17.2 million in the prior quarters. The improvement was due mainly to higher rates for treasury and mortgage related securities. Based on the current assets and yield levels, we think the waivers could impact Q4 by about the same amount. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 40% and a 25 basis points increase would reduce the impact by about 70%. It's important to note that the variables impacting waivers can and do change frequently."
Deborah Cunningham added, "Just to give you an update from a rate perspective for the third quarter versus the second quarter, effectively we had an improvement in overnight rates, repo in particular, stayed very steady in the low to mid '20s for both treasury as well as agency and mortgage-backed repo. The rest of yield curve however declined and flattened. For instance, one month LIBOR ended the period around 21 basis points, down 3 basis points from where we stood in the second quarter, and further out the curve, three months, six months and 12 months LIBOR, all declined 14, 18 and then 18 basis points again respectively. Although, the front end of the curve on an overnight basis held very steady and actually improved the curve itself further out to the (12-month period) actually declined substantially in the double digit mode."
Later in the Q&A portion of the call, Donahue responded, "[Y]ou mentioned ... the paragraph in Secretary Geithner's letter which functions as an indication for alternative approaches [to money fund reform] and engaging stakeholders, and so that effort is going on apparently. And we think that sets the stage for allowing for other ideas to come into play, and you mentioned our favorite, which is the voluntary gating, ala the Putnam situation.... [T]his supplied us with the experience and the enthusiasm to recommend in the 2010 -- before the 2010 amendments -- that we empower the Boards to do this voluntary gating for the one week period. And that was not included in the 2010 amendments. So any of these other ideas that people come up with regarding liquidity and other kinds of gates, we think would be wise to combine it with giving the Boards the power to do this."
Donahue explained, "The reason for that is very simple. Based on the experience of Putnam, that Board made a wise choice ... to treat all shareholders the same. We think that kind of flexibility [is] important, if you are approaching some of these other liquidity triggers that others are looking at.... We really believe that the SEC ... has done a commendable job on money funds. There have only been two have [broken the buck] in all those years, and that the jurisdiction of the SEC is well recognized by Secretary Geithner, and obviously the SEC."