Money market funds are not the only cash investment vehicle feeling the pinch from regulators. Banks are under their own pressures, as detailed by the story on the front page of Monday's Wall Street Journal, "Banks Urge Clients to Take Cash Elsewhere." The story reads, "Banks are urging some of their largest customers in the U.S. to take their cash elsewhere or be slapped with fees, citing new regulations that make it onerous for them to hold certain deposits. The banks, including J.P. Morgan Chase & Co., Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America Corp., have spoken privately with clients in recent months to tell them that the new regulations are making some deposits less profitable, according to people familiar with the conversations. In some cases, the banks have told clients, which range from large companies to hedge funds, insurers and smaller banks, that they will begin charging fees on accounts that have been free for big customers, the people said. Bank officials are also working with these firms to find alternatives for some of their deposits, they said. The change upends one of the cornerstones of banking, in which deposits have been seen as one of the industry's most attractive forms of funding, said more than a dozen corporate officials, consultants and bank executives interviewed by The Wall Street Journal."
The article continues, "Some banks, including J.P. Morgan and Bank of New York Mellon Corp., have also started charging institutional clients fees to hold euro deposits, mainly driven by the European Central Bank's move to make firms pay to park their cash with the ECB. BNY Mellon recently started charging 0.2% on euro deposits. State Street Corp. said in its third-quarter earnings call in October that it planned to begin charging fees later this year on euro deposits. U.S. banking rules set to go into effect Jan. 1 compound the issue, especially for deposits that are viewed as less likely to stay at the bank through difficult times. The new U.S. rules, designed to make bank balance sheets more resistant to the types of shocks that contributed to the 2008 financial crisis, will likely have little effect on retail deposits, insured up to $250,000 by federal deposit insurance. But the rules do affect larger deposits that often come from big corporations, smaller banks and big financial firms such as hedge funds. Hundreds of companies and other bank customers with deposits that exceed the insurance limits could be affected by the banks' actions. Overall, about $4 trillion in deposits at banks in the U.S. were uninsured, covering more than 3.5 million accounts, according to Federal Deposit Insurance Corp. data."
Further, "The rule primarily responsible involves the liquidity coverage ratio, overseen by the Federal Reserve and other banking regulators. The new measure, finalized in September, as well as some other recent global regulations, are designed to make banks safer by helping them manage sudden outflows of deposits in a crisis.... Some corporate officials said the new rules could make it more expensive for them to keep money in the bank or push them into riskier savings instruments such as short-term bond funds or uninsured money-market funds." "
The piece quotes ICD's Tory Hazard, "You’re going to see a lot of corporations that have had much simpler portfolios that are going to move toward more sophisticated portfolios." It adds, "Some bankers said they are advising corporate clients to break up large deposits across several banks, including smaller ones not affected by all of the new rules. Others might be attracted to other products offered by banks or products being created by asset managers."
In other news, money market Strategists continue weighing in on and explaining the Fed's new Term Repo and RRP programs. Joseph Abate said the term repo program is likely to push overnight market rates to their highest levels in more than a year. "Early this week, the Fed released the calendar and sizes for this month's term RRP operations. The total $300bn offering will be split across four weekly operations -- two of $50bn and two of $100bn. The operations are scheduled for 9:30am each Monday morning beginning on December 8 and are for same-day settlement (in the October FOMC minutes the Committee seemed to lean toward forward settlement). Puzzlingly to us, given the potential for significant rate volatility, the Fed has decided to have all four term RRPs mature on the same day (January 5). We expect heavy participation at the first operation as investors gear up for year-end. With dealer balance sheet capacity likely to be more limited than it was at the end of September, our sense is that the demand for the Fed’s term repo could easily top $450bn and might even reach $500bn."
Andrew Hollenhorst with Citi Research added, "This week the Fed increased the rate paid on cash placed in its reverse repo facility (RRP) to 10bp, the highest level we have seen since the program's inception in October 2013. In theory, the facility rate provides a floor on ON Treasury repo rates since investors should demand any non-Fed counterparty to match or exceed the rate available from the Fed. This logic is complicated by a number of factors. First, overnight repo balances are often rolled day after day and MMF may be reluctant to pull cash from a dealer counterparty, even if dealer rates are at or below the RRP rate, since this could jeopardize the ability to place cash in repo with that dealer in the future. Second, while RRP is available to a broad set of MMF counterparties, some MMF are too small to participate and securities lenders, which have substantial quantities of cash to invest, are unable to participate. Finally, the program is now capped at $300bln in aggregate use. If the cap is exceeded, the available $300bln is distributed through a Dutch auction process."
He adds, "Recently, we have heard increasing concern from short-term investors regarding the Fed's plan to eventually "phase out" reverse repo. The current "operational exercise" ends in January at which point the Fed will very likely announce the continuation of the program as a tool in its exit process. In our view MMF would be encouraged to participate and the floor would be strengthened by the Fed announcing that RRP would be available for at least a substantial period of time. However, we think this is unlikely as the Fed will want to maintain maximum flexibility in deploying (or not) its various tools in the exit process."
In his last "Portfolio Commentary" column before retiring, Dave Sylvester, head of money funds at Wells Fargo Advantage Funds writes, "Since the Federal Reserve (Fed) began testing its Reverse Repurchase Agreement (RRP) facility in September 2013 until the beginning of November, the facility has undergone a number of changes, from varying the overnight rate within a range of 1 to 5 basis points (bps; 100 bps equals 1.00%) to increasing the per-counterparty limit from the initial $500 million to the current $30 billion. The changes in counterparty limits served to firm the floor under interest rates because more money placed in the RRP facility meant less money chasing a limited amount of investments below the Fed's desired target interest-rate level. During the first year of testing, the RRP program was viewed by investors as a rare bright spot, with expectations it would bring an unlimited supply of repo collateral/investment supply into a drought-stricken market."
He adds, "In particular, government fund managers were delighted with this development as Treasury bill (T-bill) supply continued to decline and regulations drove shrinkage in the dealer repo market. The promise of a bottomless pit of supply to meet the needs of the Mt. Everest of cash proved too good to be true when the Fed, motivated, at least in part, by fears the facility could be used as a safe haven in times of stress, and thus disintermediate the banking sector, announced on September 17, 2014, that it would be limiting the overall size of the overnight RRP facility to $300 billion."
