The December interest rate hike has not only resulted in a jump in yields, but it has also been a "lifeline" for money fund managers who have been waiving fees for the better part of 7 years. Mutual fund publication Ignites, in the story, "Fed Hike a 'Lifeline' for Money Funds, Waivers Drop to $5.5B," writes on the drop in fee waivers in 2015. Beagan Wilcox Volz writes, "Happier days are here again for money market fund managers. After reaching a record-high $6.3 billion in 2014, fee waivers dropped to $5.5 billion in 2015. That's also down from $5.8 billion in fees forgone in 2013, but up from the $4.8 billion providers waived in 2012, according to Investment Company Institute and iMoneyNet data." In other news, Fitch Ratings published a report on money market fund reforms in China, entitled, "New Chinese Money Fund Rules Move Closer to International Standards."
The Ignites article explains, "The [December 16] Fed hike was a lifeline and huge windfall for money fund managers," writes Peter Crane, CEO of Crane Data, in an e-mail response to questions. The 25-basis-point federal funds rate increase will likely increase the amount of fees shops can collect from managers by 5 to 10 basis points, Crane says. That would boost annualized revenues by $1.3 billion, to $2.6 billion, he adds. Waivers will likely decrease to 2009 levels this year and could eventually drop to levels last seen in 2007 and 2008 if the central bank raises rates again this year, says Crane. Money funds waived $3.6 billion in fees in 2009, $1.8 billion in 2008 and $1.4 billion in 2007, ICI and iMoneyNet data show. Many firms began waiving portions of the fees for money funds in order to keep yields positive after December 2008, when the Federal Reserve lowered the interest rate to between 0% and 0.25%."
It continues, "Last month's rate increase pushed the average seven-day gross yield from 22 basis points at the end of November to 32 bps at the end of December for the 100 largest money funds, as measured by assets. The average seven-day gross yield for those funds stood at 17 bps at the end of 2014, slightly more than half of what it was last month, according to Crane Data. Expense ratios have also inched up. The 100 biggest money funds had an average total expense of 19 bps at the end of December, up from 17 bps a month earlier and 14 bps at the end of 2014, according to Crane Data."
The ignites article explains, "But the increase in gross yields has more than offset the expense ratio jumps, and the average seven-day net yield for the 100 largest money funds more than doubled -- from 5 bps at the end of November to 13 bps a month later. That's up from just 3 bps at the end of 2014, according to Crane Data." The piece adds, "Firms may deal differently with increased yields on their money funds, says Crane. "Some asset managers may have decided to wait to unwind their fee waivers. They may have said, 'A lot of people are watching because of the Fed hike; we'd like to wait and show [investors] some yields,'" says Crane."
Further, they write, "Schwab and Federated are among the firms most affected by waivers. Schwab waived $519 million in money fund fees through the third quarter of 2015, down from the $558 million the firm waived during the same period in 2014, according to regulatory filings. The firm announces fourth-quarter earnings today. Schwab managed $164 billion in money funds at the end of 2015, Crane Data reports. In 2014, Schwab waived a total of $751 million in fees, after waiving $674 million in 2013 and $587 million in 2012, as previously reported. Federated also saw waivers dip during the first nine months of last year. It waived $69.5 million in fees through the third quarter of 2015, versus $89.5 million for the same period the previous year. The firm will announce fourth-quarter earnings later this month.... Federated waived $119 million in money fund fees in 2014, $105 million in 2013 and $71 million in 2012, according to regulatory filings."
It concludes, "Industrywide, money market fund assets were $2.7 trillion at the end of last year, up by $26 billion at the end of 2014, the Investment Company Institute reports. It's the fourth consecutive year money fund assets have inched up, says Crane. Assets in the products have grown despite years of near-zero interest rates, massive regulatory changes finalized by the SEC in 2014 and related concerns that other products, including bank deposits, would siphon away assets, says Crane. "If that hasn't moved the money, chances are nothing will."
In other news, Fitch Ratings writes about MMF reform in China in a new report, "New Chinese Money Fund Rules Move Closer to International Standards." It explains, "New rules on money market funds published by the China Securities Regulatory Commission (CSRC) show some convergence with international standards, notably the introduction of liquidity requirements. In Fitch's view, the new regulations strengthen industry practices, foster greater investor protection and lower risk. Nonetheless, the regulations still permit Chinese money funds more latitude in taking investment risk than European or US money funds. The new money fund rules being implemented by the CSRC introduce liquidity requirements, broaden the investment scope, implement liquidity fees and gates, and specify the actions expected in the event the net asset value (NAV) deviates from predetermined limits. The new rules, announced in December 2015, will take effect in February 2016 with an implementation period of up to a year for certain rules."
Fitch continues, "Until now, the Chinese regulation had not set out specific liquidity requirements. The new rules require Chinese money market funds to hold a minimum of 5% of assets in cash, government bonds, central bank bills and policy bank bonds and a minimum of 10% in the above-mentioned assets plus assets maturing within five trading days. Furthermore, non-tradeable assets maturing in more than 10 business days should not exceed 30% of the portfolio. In comparison, money funds operating in the US are currently required to maintain 10% of their portfolios in assets that mature overnight and 25% [sic] in assets that mature weekly; similar practices are followed by constant NAV European money funds. CSRC has also reduced the funds' leverage ratio to 20% from 40%. Leverage is rarely used by money funds in developed markets -- it is not allowed in the US and limited to 10% under the European UCITS (Undertakings for Collective Investment in Transferable Securities) regulation."
On liquidity, they add, "Starting February 2016, Chinese money funds may invest in negotiable certificates of deposit (NCDs), which should provide the funds with greater issuer diversification and access to an instrument that is tradeable in the secondary market. The market is, however, relatively new, and the ability of funds to effectively trade these securities, notably during periods of market stress, remains untested.... Chinese money funds' ability to invest in NCDs also grants them access to a broader universe of issuers.... [T]he new regulations do allow money funds to invest in lower-quality corporate bonds: the minimum rating level for eligible corporate bonds has been reduced to 'AA+' (local rating) from 'AAA' (local rating)."
On fees and gates, Fitch's report says, "New rules require the asset managers to set up an internal liquidity risk management system and charge a 1% fee in case a single shareholder redeems more than 1% of the fund's assets when the five-day liquid assets (cash, government bonds, central bank bills, policy bank bonds and assets maturing within five trading days) on that day are below 5% of the fund and the NAV deviation is negative. Asset managers may partially meet or delay the redemption if a single shareholder redeems more than 10% of the fund on a single day. The liquidity fee and gates should be specified in the fund purchase contract."
On NAV deviation, it states, "Money fund portfolio managers using amortised cost valuation are required to mark-to-market (MtM) the fund's NAV. If the MtM NAV negative deviation expands beyond the predetermined limits, asset managers should take measures to bring the deviation back within the limit. If the MtM NAV negative deviation has been more than -0.5% for two consecutive trading days, the asset manager should use fair value to adjust the book value of the holdings or suspend the subscription and redemption and terminate the fund."
Finally, on maturity limits, Fitch writes, "CSRC shortened the maximum weighted average maturity (WAM) to 120 days from 180 days, and for the first time set a maximum limit on the weighted average life (WAL) of 240 days. In comparison, European and US money funds operate with maximum WAM and WAL of 60 days and 120 days, respectively. Concentration limits are updated as well. For example, aggregated time deposits should not exceed 30% of a fund."
