The IRS and the US Treasury Department issued a Final Rule on their proposal to simplify accounting and rules to accompany pending Money Fund Reforms. (See our July 30, 2014 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal.") The rule, "Method of Accounting for Gains and Losses on Shares in Money Market Funds," says, "This document contains final regulations that provide a simplified method of accounting for gains and losses on shares in money market funds (MMFs). The final regulations also provide guidance regarding information reporting requirements for shares in MMFs. The final regulations respond to [SEC] rules that change the amount for which certain MMF shares are distributed, redeemed, and repurchased. The final regulations affect MMFs and their shareholders." We discuss this last remaining piece of reforms below, and we also review the July issue of our flagship Money Fund Intelligence, which was sent to subscribers Friday morning.
The IRS/Treasury rule states, "This document contains amendments to 26 CFR part 1 (Income Tax Regulations) under sections 446 and 6045 of the Internal Revenue Code (Code). The regulations provide a method of accounting for gain or loss on shares in MMFs and are intended to simplify tax compliance for holders of shares in MMFs affected by SEC regulations that impose liquidity fees or change how certain MMF shares are priced. See Money Market Fund Reform; Amendments to Form PF ... (August 14, 2014) (SEC MMF Reform Rules)." (See also the IRS's new Revenue Procedure 206-39.)
It continues, "The Treasury Department and the IRS published a notice of proposed rulemaking and notice of public hearing (REG-107012-14) in the Federal Register on July 28, 2014 (79 FR 43694). The proposed regulations described a simplified method of accounting for gain or loss on shares in a floating-NAV MMF (the net asset value method, or NAV method). Under the NAV method, a taxpayer's gain or loss on shares in an MMF is based on the change in the aggregate value of the taxpayer's shares during a computation period selected by the taxpayer and on the net amount of the purchases and redemptions during the computation period. The proposed regulations also provided guidance regarding information reporting requirements for shares in MMFs."
Finally, the IRS rule adds, "After considering the comments, the Treasury Department and the IRS adopt the proposed regulations regarding the method of accounting as final regulations with the modifications described in this Treasury decision." (Note: Thanks to Stradley Ronon's Joan Swirsky and John Baker for pointing out the IRS notice.)
Our latest MFI newsletter features the articles: "Prime Outflows Turn Ugly: Totaling the Damage to Date," which charts the massive outflows from Prime funds YTD, and looks ahead to more; "BlackRock's Novick Keynotes Money Fund Symposium," which covers Barbara Novick's address at our recent Money Fund Symposium; and "Home-Stretch for Reforms; Gates & Outstanding Issues," which reviews a panel from Symposium on reform FAQs and operational obstacles. We have also updated our Money Fund Wisdom database query system with June 30, 2016, performance statistics, and sent out our MFI XLS spreadsheet Friday morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our June Money Fund Portfolio Holdings are scheduled to ship Tuesday, July 12, and our June Bond Fund Intelligence is scheduled to go out Friday, July 15.
MFI's lead "MMF Reform" article says, "The exodus from Prime and Tax Exempt money funds and flood into Govt MMFs picked up steam in June, as another $119.3 billion moved out of Prime and $14.7B moved out of Tax Exempt. Govt MMFs gained $120.3B, but overall assets were down $13.8B. Year-to-date, Prime funds are down by $259.3B, or -21.0%, and Tax Exempt MMFs are down by $60.0B, or -23.9%. Govt MMFs are up by $244.5B, or 20.5%. (See our June 30 News, "Prime Outflows, Spreads, and Liquidity Major Issues at MF Symposium.")
The article adds, "Over the past 12 months, Prime assets have fallen by a massive $378.2 billion, or 27.9%. Govt MMFs have increased by $509.1 billion during this same time while Tax Exempt MMFs have fallen by $47.3 billion. Government fund assets began surging in November 2015 as Fidelity Cash Reserves converted to Fidelity Govt Cash Reserves. Govt MMFs moved ahead of Prime assets in February 2016 for the first time ever, and haven't looked back. The shift has been fueled by over $300 billion in fund conversions, but we're now seeing the start of investor moves. (There have also been conversions of Prime into Ultra-Short Bond Funds and Tax-Exempt MMF liquidations.) We discuss this "Phase II" of asset movements below."
Our coverage of Novick's keynote at Symposium reads, "Crane's Money Fund Symposium, which took place last week in Philadelphia, attracted 575 attendees -- shattering our record of 505 set last year in Minneapolis. One of the highlights of the 3-day conference was the keynote speech by `BlackRock Vice Chair Barbara Novick, who discussed "The New Look of Money Market Funds" and focused on adapting to money market fund reforms. We excerpt from her speech below. Novick, who delivered the keynote at our last Philadelphia Money Fund Symposium in 2011, began by discussing the history and evolution of money fund reforms. She then turned her focus to the two major aspects of the 2014 reforms -- the floating NAV, and fees and gates. On the floating NAV requirement she said, "Based on historical data, we would expect the NAV to wiggle around the dollar. We're not talking about big changes where you see it go up and down, it will wiggle -- very tight bands around that dollar."
It continues, "On the fees and gates rule, Novick added, "That's probably the most controversial ... because it's unknown and untested." She explained, "We don't really know what that will look like, and history does compel us to say we want to make sure we have access to our capital at all points in time. I tend to think about these a little bit differently. First, by having these triggers, the portfolio manager is incented to manage that fund very conservatively, and I think that's good. If there's anything we’ve learned, people taking risks in money market fund portfolios isn't the best idea for any of us. Second, if we had some extreme environment ... wouldn't you want boards to have the best toolkit available industry-wide to deal with a stress event?"
The article on the "Home Stretch for Reforms" explains, " Our recent Money Fund Symposium in Philadelphia also featured the sessions, "Money Fund Reform: Outstanding Issues," and "Reform Issues: Credit Ratings, Operations." The former, moderated by Joan Swirsky of Stradley Ronon, included panelists `Jack Murphy of Dechert; Sarah ten Siethoff of the Securities & Exchange Commission; and Jane Heinrichs of the Investment Company Institute. The latter, moderated by Pete Crane of Crane Data, featured Charles Hawkins of BNY Mellon Asset Servicing on operational challenges; Jimmie Irby of JP Morgan on credit ratings; and Sharon Pichler of the SEC.
It continues, "In the Outstanding Issues session, the panel addressed several issues with fees and gates. Swirsky said, "There are only two triggers in the rule -- if weekly liquid assets (WLA) fall below 30% then the board can impose a discretionary fee or gate, and if the WLA falls even lower to less than 10% there will be a mandatory fee unless the board decides otherwise. But funds can consider other triggers besides the two in the rule."
In a sidebar, we discuss, "UBS Sweeps; Changes." This brief says, "UBS Asset Management liquidated its entire lineup of RMA Money Market Funds and launched a new RMA Government Money Market Fund to hold its brokerage sweep cash." It also recaps other fund liquidations and changes. We also do a sidebar on "European MMF Regs," which says, "On June 17, the European Council adopted a Dutch compromise proposal on Money Market Fund Regulations. This now enables the European Council, European Parliament, and European Commission to "commence trilogue negotiations to finalize the regulations." Finally, as we do every month, we review all the important "Money Fund News."
Our July MFI XLS, with June 30, 2016, data, shows total assets decreased $13.8 billion in June to $2.612 trillion after decreasing $9.7 billion in May, $42.0 billion in April, and $20.3 billion in March. Our broad Crane Money Fund Average 7-Day Yield moved up 2 basis points to 0.13% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) increased 2 basis points to 0.24% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA ticked up 2 basis points to 0.44% and the Crane 100 was also up 2 bps to 0.48%. Charged Expenses averaged 0.32% (unchanged) and 0.25% (down one bps) for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 32 days (down 1 day from last month) and for the Crane 100 was 34 days (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages. Note: We made some changes to our Crane 100 Money Fund Index to replace recently liquidated funds. See our MFI XLS for the latest components.)
