BlackRock hosted its first quarter earnings call yesterday, and President Rob Kapito discussed the company's recent money market fund lineup change announcement. (See our April 7 News, "BlackRock Announces Changes, Keeps Options Open; TempFund Floats.") Also, CEO Laurence Fink talked about the "dangerous imbalance" created by the low interest rate environment. In its latest earnings release, BlackRock reported assets under management of $4.774 trillion, an increase of 3% in the first quarter and 8% over the last 12 months. `Cash Management assets, which include money market funds, stood at $292.5 billion as of March 31, down 1% from Dec. 31, 2014, but up $29.0 billion over the last 12 months.
In the Q&A portion of the earnings call, Kapito was asked whether the conversion of prime to government funds will impact yields of T-bills, and accordingly, government money market funds. He said regulatory changes and the path of interest rates are going to "have a pretty big impact on where we're going to see flows in the money market arena. Right now, we're seeing more flows internationally than domestically, we're seeing more in prime than in government, and if rates [and regs] change, that will reverse."
Kapito continued, "We have gone out to our clients and are talking to them about the future regulations and preparing products for them that will make sense. Some of those [products] will be constant NAV government money market funds, without redemption gates or liquidity fees. We'll have the floating NAV institutional prime money market fund and we plan to maintain our largest prime fund, which has about $66.5 billion ... that's the TempFund. That will be our prime institutional fund. Then we have others that we're preparing -- a floating, short maturity institutional prime money market fund, constant NAV government funds, and short maturity national and state-specific muni funds. We're also prepared to do separate accounts."
He added, "Of course, the implementation date of all of these new products is around October of 2016. So, we're working together with our clients to make sure that we're prepared no matter where rates go."
Kapito commented, "Year-over-year, about $39B has been added into the cash funds and that's about 15% year-over-year growth. There's still a lot of demand for money market type products; it will just change some of the nuances to be able to comply with the regulatory issues. But this is a big business for us. We're also seeing some of the smaller money market groups approaching us, as well, because scale and size is going to be very important to be able to satisfy clients' needs."
Fink added, "Divergent economic conditions and central bank actions have sent currency markets into one of the most volatile periods on record, affecting both developed economics, such as Japan and the Eurozone, as well as the emerging markets. Historic low rates have been having a tremendous impact on how investors save for the future. The pool of funds in search in returns to meet future liabilities is growing larger every day. This mix of growing assets, of shrinking supply, of low rates, is creating a dangerous imbalance and the increasingly desperate search for yield is now the great single source of prudential risk in the financial system."
In other news, NY Federal Reserve Executive Vice President Simon Potter spoke Wednesday on "Money Markets and Monetary Policy Normalization." On the Fed's Overnight Reverse Repo Program (ON RRP), Potter said, "Extensive testing of ON RRPs and other supplementary tools have provided policymakers with confidence that they will be able to maintain control over interest rates -- that is, that rates will move up with increases in the IOER rate -- during the normalization process. An important determinant of the effectiveness of an ON RRP facility is whether a sufficiently wide set of nonbank counterparties has access to it. The New York Fed currently executes RRPs with 163 counterparties comprising many of the major cash lenders in secured and unsecured money markets -- including money market funds that manage about 70 percent of the total U.S. money market fund assets under management and account for more than a quarter of total tri-party repo lending against government collateral."
He explained, "This provides a high degree of confidence that we are transacting with an adequate set of counterparties to achieve our policy execution objectives. Throughout the testing regime, the Desk has varied the settings and design of the reverse repo operations, with operational results informing subsequent changes. We've operated at different times of the day, increased the maximum bid limit per counterparty, and introduced an aggregate cap of $300 billion and a single-price auction mechanism to allocate awards should the sum of submitted bids exceed the cap. We've also adjusted the offering rates and tested ON RRPs in conjunction with term RRPs at quarter-ends. These adjustments have allowed us to learn how ON RRPs might be used to support the monetary policy objectives of the FOMC."
Potter added, "Overall, observations from testing and reports from market participants suggest that ON RRP operations generally work the way we have expected, with market participants evaluating the attractiveness of ON RRP investments relative to other opportunities available to them in the market. Indeed, take-up in the operations generally increases as the spread between alternative market rates and the ON RRP offering rate narrows, and aggregated usage patterns differ across counterparty types."
He concluded, "Although the Federal Reserve will be removing its policy accommodation in a much-changed money market environment, the Desk is ready to implement policy firming when the FOMC determines that economic and financial conditions warrant it. The minutes of the March FOMC meeting outline the Federal Reserve's intended operational approach, and our testing program gives us confidence that we have the necessary tools to enable a smooth liftoff. The minutes highlight that policymakers will be particularly careful at the start because demonstrating appropriate control over the federal funds rate and other short-term rates is a priority. This may entail elevated aggregate capacity in an ON RRP facility at liftoff because we don't know how much support we are currently getting from the zero lower bound, which creates some uncertainty about the demand for ON RRPs. However, the ON RRP will be used only to the extent necessary for monetary policy control because it has some potential financial stability and footprint costs associated with it."
