The Investment Company Institute released its "Trends in Mutual Fund Investing: August 2009" yesterday, which showed money market mutual fund assets declined by $53.7 billion, or 1.5% in August to $3.552 trillion. Assets have declined by another $73 billion month-to-date in September, according to ICI's weekly asset series. ICI's separate "Month-End Portfolio Holdings of Taxable Money Market Funds" shows that U.S. Government Agency Securities held by money funds declined by $44.37 billion, representing the vast majority of the declines in money market securities held by funds.
ICI's monthly asset report shows assets down by $280.5 billion year-to-date, or 7.3%, through Aug. 31. The release says, "Money market funds had an outflow of $53.79 billion in August, compared with an outflow of $48.33 billion in July. Funds offered primarily to institutions had an outflow of $30.60 billion. Funds offered primarily to individuals had an outflow of $23.19 billion." The number of money funds tracked by ICI's monthly report fell to 724 in August from 734 in July and from 796 in August 2008. The "Liquid Assets of Stock Mutual Funds," a measure of "cash" holdings, fell to 4.0% in August from 4.2% in July and from 4.5% a year ago.
The non-public "Portfolio Holdings" report shows U.S. Government Agency Securities remained the largest holding in taxable money funds, even after their decline, with $654.69 billion, or 21.0%. While Government holdings have plunged by $168.64 billion since peaking in January 2009, Agencies remain $177.59 billion above their level of a year ago. Certificates of Deposits, including Eurodollar CDs, remain the second largest component of money funds with $638.78 billion, or 20.5% of assets. Repurchase Agreements ranked third with $581.06 billion, or 18.7%.
Commercial Paper (including ABCP), which had been the largest holding in money market funds with 22.4% of assets a year ago and 29.9% of assets two years ago, now ranks fourth with $513.79 billion, or 16.5% of assets. CP fell by a mere $542 million in August, but has plummeted by $157.36 billion over the past year. U.S. Treasury Bills and Treasury Securities accounted for 14.0% of taxable money fund assets ($437.01 billion). Treasury holdings fell by $4.03 billion in August but have risen by $118.97 over the past 12 months.
Corporate Notes and Bank Notes represented 4.7% ($146.63 billion) and 1.9% ($58.94 billion), respectively, while Other, which we believe would include other money market funds as well as tax-exempt securities, represented 2.6% of assets. Note that Crane Data's Money Fund Intelligence XLS has recently added Portfolio Composition totals, but we're still in the process of establishing collections of this info from a number of funds.
We hesitated to cover the first articles saying the Federal Reserve was looking into doing reverse repurchase agreements (repos) with money market mutual funds due to the lack of official comment and details. But now that several publications have commented, we feel obligated to mention these. As Reuters summarized in its "Fed's exit strategy may use money market funds: report," "The U.S. Federal Reserve is studying the idea of borrowing from money market mutual funds as part of eventual steps to withdraw stimulus, the Financial Times reported on Thursday. The Fed would borrow from the funds via reverse repurchase agreements involving some of the huge portfolio of mortgage-backed securities and U.S. Treasuries that it acquired as it fought the financial crisis, the newspaper reported, without citing any sources."
A recent Bloomberg story ("Negative Bond Returns Converge With Mortgage Miracle") said, "Central banks are discussing using reverse repurchase agreements to drain reverses, according to people with knowledge of the talks. In the transactions, the Fed sells securities to the dealers for a specific period, temporarily decreasing the amount of money available in the banking system."
Bloomberg's initial piece, "Fed Said to Start Talks With Dealers on Using Reverse Repos,", said, "As the supply of Treasuries increases, which occurs when reverse repos take place, repurchase agreement rates are typically pushed higher. The rate on collateralized loans in the more than $5-trillion-a-day repurchase agreement market, where Treasuries are borrowed and lent, is already higher than the amount changed for unsecured borrowing of federal funds."
This week's "Short Term Market Outlook and Strategy" from JPMorgan's Alex Roever and Cie-Jai Brown explains, "Expanding repo books, even with the Fed as a counterparty, have capital implications that will effectively limit each dealer's interest at some level. For this reason, published news accounts indicate the Fed is considering doing term reverses with money funds. This introduces its own set of issues. For instance, would the Fed deal directly with the funds, or would it try to affect these trades via the existing primary dealers? It's hard to imagine the Fed quickly developing and deploying the complex procedures and systems needed to deal directly with the money funds.... Operationally it would be much easier to use the primary dealers, but capital considerations interfere here as well. One possible solution would be to immunize primary dealers against capital charges related to Fed reverse repos and money funds, similar to what was done for the banks that facilitated the AMLF."
JPM continues, "Also consider the administrative and approval processes the money funds would have to go through to approve the Fed reverses as an asset class. These are not necessarily trivial.... The funds will need lead time to approve the product, and they can't do that until all the details have been determined. All of this suggests it could be months before the money funds are able to do reverses. On top of this is the issue of how the new SEC money fund rules will view these trades. Under the current proposal, term repo is an illiquid asset, and as such would not be an eligible asset, unless the Fed managed to sidestep the rule by getting a no-action letter from the SEC or perhaps by giving the funds a put option back to the Fed. Ultimately, while we don't doubt there is a market for Fed reverses in the money funds, we do doubt the proposition that it will develop quickly."
Earlier this month, Fidelity Investments, the largest manager of money market mutual funds with over $500 billion, posted a Q&A piece entitled, "A Discussion of the Expiration of the U.S. Treasury Temporary Guarantee Program for Money Market Funds," which discussed the ending of the Treasury Guarantee, recent market conditions, and expenses associated with the program. We excerpt from the article below.
The Fidelity Q&A first asks, "Q: What has happened to the U.S. Treasury Temporary Guarantee Program for Money Market Funds?" It says, "A. As planned, the program expired on September 18, 2009. Fidelity's general purpose and tax-exempt money market funds had participated in the program since its inception in September 2008. However, Fidelity's money market funds that invest primarily in U.S. Government and Treasury securities had not participated in the program since April 30, 2009. Under the temporary program, the U.S. Treasury guaranteed the share price of any publicly offered eligible money market mutual fund that applied for and paid a fee to participate in the program. Throughout its duration, the coverage applied only to investments held in participating money market funds as of the close of business on September 19, 2008."
The brief then asks, "Q. Have short-term credit market conditions improved over the past year? If so, what does that mean for Fidelity's money market funds?" It answers, "A. Overall market conditions for money market investing have improved since the Treasury program began last fall. Even though it was highly unlikely that the coverage would have been needed for any of our funds, we understood that the program reassured some of our investors. Fidelity money market funds continue to invest in high-quality securities, and our customers continue to have full access to their investments any time they wish. Most importantly, we have been proactive in keeping our money market funds safe and in protecting the $1.00 net asset value, which has always been our #1 objective in managing these funds."
It continues, "Q. Why did Fidelity participate in the Treasury program to insure money market funds? A. At the time the temporary program began, Fidelity and the Board of Trustees for the money market funds believed it was in the interests of our fund shareholders to participate in the temporary program. Again, though we believed it was highly unlikely that the insurance would be needed for any of our funds, we wanted to reassure our investors that their money market funds would continue to provide safety and liquidity for their cash investments. Q. How much did Fidelity's funds pay to participate in the program? A. Each of Fidelity's funds paid 0.04 percent, or four basis points, to participate in the program over the insured period."
Next, the Q&A asks, "Q. How will my fund's expenses be affected now that the Guarantee Program has expired?" It answers, "A. Now that the Guarantee Program has expired, each money market fund will no longer charge fees to be covered under the insurance program. Each fund will charge expenses as it did before the Guarantee Program, as detailed in the fund's prospectus." It also asks, "Q. Is the program expiring for all money market funds or are there money funds that will still carry the insurance?" It answers, "A. As of September 18, 2009, the program has expired for all money market funds. Again, the program was temporary in nature and the coverage applied only to investments held in participating money market funds as of the close of business on September 19, 2008."
Finally, it asks, "Q. Should an investor take action now that the insurance has expired?" It responds, "A. Your investment decisions should be based on your own personal investment goals. If your question is about the safety of your money market investments, we can tell you that our funds continue to invest in money market securities of high quality, and our customers continue to have full access to their investments any time they wish. Most importantly, we have been proactive in keeping our money market funds safe and in protecting the $1.00 net asset value, which has always been our #1 objective and will continue to be our main priority in managing these funds."
Money market mutual fund asset rose fractionally in the week ended Wednesday, according to the ICI's weekly data series, and Crane Data's Money Fund Intelligence Daily shows assets increasing by over $10 billion -- $7 billion Tuesday, $6 billion Wednesday, and $1 billion Thursday -- since the end of the Treasury Guarantee Program last Friday. In other news, Investment Company Institute President & CEO Paul Schott Stevens spoke at the ICI Capital Markets Conference in New York, and discussed money funds at several points.
Stevens said, "As the events that unfolded last September showed, sometimes only government has the firepower needed to stop a crisis. We saw this firsthand, when the bankruptcy of Lehman Brothers caused a money market fund to write down its net asset value below the $1.00-per-share that such funds try to maintain. After this fund broke the dollar, many other money market funds faced severe redemption pressure, even as the markets in commercial paper and municipal debt faced serious strains. As you all know, the Treasury Department and the Federal Reserve stepped up, constructed a series of fire lines, and helped restore liquidity in these markets and confidence in money market funds. This was effective crisis management."
He continued, "It's important, however, that programs created to halt a crisis don't take on a life of their own and outlast the need. That's why we are glad that the Treasury Guaranty Program for Money Market Funds had a strict one-year time limit, and expired without incident last week. No claims were filed or paid under the Guaranty Program, and Treasury collected a tidy $1.2 billion in premiums along the way. The Fed's credit facilities for the money markets will also roll off in due course."
Later in the speech, Stevens added, "As the immediate crisis of last fall eased, the leadership of ICI recognized that new rules would be needed to make money market funds even more resilient. So we took the lead, creating a Money Market Working Group to identify a comprehensive set of regulatory changes. The Group recommended, among many other things, tough new standards on liquidity, to improve money market funds' ability to respond to heavy demand for redemptions. Members of the Working Group pledged to abide by these new standards even before the SEC adopts final rules in this area. I'm pleased to note that the rules the SEC has proposed reflect many of our Working Group's recommendations. As a result of all this effort, perhaps more progress has been made on strengthening money market funds than on any other issue raised by the financial crisis."
Finally, he said, "We have just been through the worst financial crisis since the Great Depression. Mutual funds experienced significant declines in asset values, but otherwise fared reasonably well -- thanks to a regulatory foundation laid decades ago, in 1940. But building that foundation after the Great Crash took several years and a great deal of deliberation by the SEC, Congress, and the fund industry. The results of their work -- the Investment Company Act and Investment Advisers Act -- have stood the test of time.... So, one more lesson learned from the financial crisis is this: Sometimes, speed is of the essence; sometimes, deliberateness is a virtue. Wisdom lies in recognizing the difference. Let us hope our response to this financial crisis will prove as wise."
Columbia Management recently posted a notice on its website entitled, "Money Market Update: Columbia Money Market Reserves and Columbia Cash Reserves Update," which appears to indicate that some of the last of its troubled structured investment vehicle-related and supported securities have been removed from the $34 billion Columbia Cash Reserves and the $14.5 billion Columbia Money Market Reserves. While there has been no official word yet about the fate of the 10th largest manager of money market mutual funds, rumors continue to circulate about a pending sale of the $110 billion (money fund) unit.
The statement says, "As of September 8, 2009, the following securities are no longer holdings in Columbia Money Market Reserves and Columbia Cash Reserves. These securities were purchased from the funds by an affiliate of Bank of America at prices equal to the amortized cost value, plus accrued interest, if any. Both Columbia Money Market Reserves and Columbia Cash Reserves are well positioned to focus on their investment objective of current income consistent with capital preservation and maintenance of a high degree of liquidity. Columbia Management's money market mutual funds have always transacted at $1.00 per share and continue to do so. In addition, Columbia Cash Reserves continues to benefit from a capital support agreement provided by an affiliate of Bank of America."
The statement says Columbia Cash Reserves removed Axon Financial Funding LLC, Issuer Entity (formerly, Ottimo), Wickersham Issuer Entity (formerly, Thornburg), and Victoria Finance, while Columbia Money Market Reserves removed Axon Financial Funding LLC. Columbia Cash Reserves' holdings as of 9/9/2009 may be seen here, while Columbia Money Market Reserves' holdings as of 9/9/2009 may be seen here. (See the SEC's website for the company's previous "no-action" letters.)
The company also recently issued a press release "Columbia Management to Curtail Securities Lending," which says, "Columbia Management Advisors, LLC, investment advisor to the Columbia Funds, today announced that the Columbia Funds will stop lending their equity and corporate debt securities in light of recent market volatility. Securities lending is generally employed to generate incremental revenue from the funds' holdings."
Colin Moore, chief investment officer, says, "Columbia Management believes that it is in the best interests of the Columbia Funds' shareholders not to lend out certain securities given the downward pressure that some borrowers of the securities are placing on the market. We believe under more stable market conditions that the income received from securities lending is a benefit to the Columbia Funds' shareholders. Given the current market environment, however, we believe that this practice has the potential to be more detrimental than helpful."
Finally, see our recent People News, "Peacher Leaves Columbia for Sun Life", which says, "Investment News reports that Sun Life Financial Inc. has hired Stephen C. Peacher as chief investment officer. Peacher was previously managing director at Columbia Management, overseeing liquidity strategies and fixed income."
The Federal Reserve recently released its Quarterly Z.1 "Flow of Funds" Report, which contains a wealth of statistics on money market mutual funds. The Fed's numbers show money fund assets declining by $155 billion in the second quarter, led by a $78 billion drop in holdings of "Funding corporations", a category dominated by securities lenders. The Household Sector experienced the second largest drop, a decline of $67 billion, in the quarter ended June 30, 2009.
According to the Fed's Z.1 table L.206 "Money Market Mutual Fund Shares," the Household sector still accounted for the largest segment of money fund shares, with $1,495.7 billion, or 41.7%, of the $3.584 trillion in money funds. Funding corporations held 21.6% of money fund assets with $775 billion, while Nonfinancial corporate businesses held $688 billion, or 19.2% of assets.
Other investors segments included: Life insurance companies ($261 billion, or 7.3%), Nonfarm corporate businesses ($100 billion, or 2.8%), Private pension funds ($96 billion, or 2.7%), State and local governments ($85 billion, or 2.4%), Rest of the world ($65 billion, or 1.8%), and State and local government retirement funds ($19 billion, or 0.5%).
Over the past year (through Q2'09), money fund assets have still increased by $266 billion. Funding corporations (up $105 billion) and the Household sector (up $102 billion) have shown the largest increases. Nonfinancial businesses added $36 billion on the year but subtracted $10 billion in the latest quarter.
The Fed's "Flow of Funds" Table L.121 "Money Market Mutual Funds" for Q2 shows Agency- and GSE-backed securities as the largest holding of money market funds with $733 billion (20.5%), followed by Time and savings deposits with $541.1 billion (15.1%), Open market paper with $522.1 billion (14.6%), Treasury securities with $489.1 billion (13.6%), Security RPs with $481.6 billion (13.4%), Municipal securities with $455.8 billion (12.7%), Corporate and foreign bonds with $217.9 billion (6.1%), Foreign deposits with $93.1 billion (2.6%), and Miscellaneous assets with $56.5 billion (1.6%).
In other news, money market mutual fund assets increased yesterday by $7.42 billion according to our Money Fund Intelligence Daily. This puts money market mutual fund asset totals above their level at the end of last week, the last day that many funds were covered under the Treasury's Temporary Guarantee Program.
Money market mutual fund assets declined by a mere $1.52 billion yesterday (Monday), September 21, the first day in over a year with no federal $1.00 NAV guarantee. Assets had fallen by just $6.57 billion on Friday, the final day of the U.S. Treasury's Temporary Money Market Fund Guarantee. It's looking increasingly likely that the expiration of the Treasury insurance will be a non-event. (Crane Data publishes the prior day's money fund assets, yields, dividends and maturities in our Money Fund Intelligence Daily product, which tracks 939 funds with $3.330 trillion in assets -- over 95% of total money fund assets.)
As we said, today's MFI Daily, shows that assets were virtually flat (down $1.52 billion) yesterday. Friday's numbers showed assets falling $6.57 billion, following a decline of $3.55 billion Thursday, but we show steeper drops of $20.86 billion Wednesday and $35.12 billion Tuesday, a quarterly corporate tax payment date. For the week ended Monday, money fund assets declined by $67.60 billion.
Contrary to recent trends, institutional assets represented the bulk of declines last week. Institutional money funds declined by $5.576 billion Friday (to $1.936 trillion) and declined by $51.51 billion on the week. Retail assets rose by $341 million Friday, but declined $5.28 billion on the week. There was no significant shift into Treasury and/or Government money funds either, nor was there any noticeable shift among money fund complexes.
On Friday, Treasury Institutional funds increased by $178 million to $337.54 billion (10.1% of taxable assets), Government Institutional funds decreased by $4.32 billion to $544.44 billion (16.3% of taxable assets), while Prime Institutional assets fell by $1.43 billion to $1.054 trillion (31.6% of taxable assets).
Treasury Retail assets decreased by $26 million to $91.04 billion (2.7% of taxable assets), Government Retail assets increased by $266 million to $127.41 billion (3.8% of taxable assets), while Prime Retail assets increased by $101 million to $758.89 billion (22.8% of taxable assets).
Money fund yields remain at record lows. Our Crane Money Fund Average, a simple average of 643 taxable money funds, remains at 0.07% (7-day annualized yield), while our Crane 100 Money Fund Index, which tracks the 100 largest taxable funds, remains at 0.11%. The Crane Tax Exempt Money Fund Index was flat at 0.08%.
Note: Asset outflows subsided following last week's tax payment-related drop. Money fund assets declined $35 billion last Tuesday and $20 billion last Wednesday, but fell just $4 billion on Thursday. Early indications are that outflows related to the expiration of the Treasury Guarantee Program were minimal Friday. (See Money Fund Intelligence Daily for our updated daily asset flow data.)
On Friday, the SEC issued the temporary rule "Disclosure of Certain Money Market Fund Portfolio Holdings", which takes over some NAV (net asset value) and portfolio holdings monitoring functions that had been mandated by the Treasury under its Temporary Guarantee Program for Money Market Funds. The "interim final temporary rule" says, "The Securities and Exchange Commission is adopting an interim final temporary rule under the Investment Company Act of 1940 to require a money market fund to report its portfolio holdings and valuation information to the Commission under certain circumstances."
The summary says, "The new reporting requirement is designed to provide information substantially similar to that submitted by certain money market funds under the Temporary Guarantee Program for Money Market Funds established by the Department of the Treasury, which will expire on September 18, 2009." The rule's effective date is September 18, 2009 through September 17, 2010, and comments should be received on or before October 26, 2009.
On Background, the release says, "Money market funds are open-end management investment companies that invest in short-term obligations and have a principal investment objective of maintaining a net asset value of $1.00 per share. Since October 2008, most money market funds have participated in the `Treasury Department's Temporary Guarantee Program for Money Market Funds.... Money market funds participating in the Guarantee Program have been required, in certain circumstances [if their market-based net asset value per share was below $.9975], to submit their portfolio schedules and related information each week to the Treasury Department and the Commission."
The SEC added, "In June 2009, the Commission proposed new rules and rule amendments to reform the regulation of money market funds. The proposal included a new rule and a new form N-MFP, on which money market funds would report to the Commission detailed information about their portfolio holdings, which we would use to monitor the funds. We proposed to require that all money market funds submit more detailed information than we currently receive under the Guarantee Program, and we proposed that the information be filed in a format that would permit us to create a searchable database of money market fund information. The proposed requirement that money market funds report detailed portfolio information to the Commission was designed to improve our ability to oversee those funds."
In other news, several articles speculated about the "Liquidity Exchange Bank," a private or public entity that could provide liquidity to money market funds. See Bloomberg's "Fidelity, Vanguard Said to Plan Emergency Bank for Money Market", Dow Jones' "Industry-Sponsored Money Fund Liquidity Pool Eyed", and Reuters' "Fidelity, Vanguard discuss money fund backstop: report". (See also, Crane Data's August 27 piece "Money Fund Reform: Third Way Proposed by Wells' Dave Sylvester".)
Federated Investors recently released a market update entitled, "Money Market Memo: A year after Lehman collapse, reforms loom, which says, "In the wake of the bankruptcy of Lehman Brothers that sent ripples through the money market industry a year ago, the Securities and Exchange Commission and the White House continue to work on ways to enhance investor confidence in money market funds. Deborah Cunningham, who oversees Federated's taxable money market business, shares her thoughts on what's expected and on the current state of the money market industry."
The piece asks, "What are the most significant potential changes under discussion? Cunningham says, "We would oppose two ideas that are being discussed -- replacing the stable $1 Net Asset Value (NAV) with a floating rate, and the treatment of money market funds as special-purpose banks. The money market industry is a $4 trillion business -- a critical source of short-term funding for U.S. businesses and industry. And it is built around the concept of $1 NAV, which is easy to use for record-keeping, accounting and valuation purposes. If we were to go to a floating rate, that would eliminate the simplicity and effectively create ultrashort bond funds."
Cunningham is also asked, "If the three proposals are made and eventually adopted, how would it impact the way Federated manages its money market operations? She responds, "First, we believe it's far from certain these potential solutions to illiquidity issues will come into being. But we already are operating in line with recommended changes put forth in March by the Investment Company Institute, our industry's trade group, many of which have been incorporated into the ideas being discussed by the White House and the SEC -- with one exception. We still favor allowing the potential ownership of so-called second-tier securities -- a notch below the top investment grade securities -- in up to five percent of our non-AAA taxable money funds."
She continues, "But whatever the outcome, we at Federated don't anticipate straying from our time-tested principle of operating our money market funds to preserve capital, maintain daily liquidity at par and maximize yields, using a disciplined approach that eschews speculative strategies and esoteric financial instruments. We have and always will continue to emphasize stringent credit research and experienced portfolio management, using the SEC's Rule 2a-7 standards as a starting point, not a finishing point.... We believe the credit market crisis of the past year -- really, the past two years -- has made clear that far from being plain-vanilla investments, money market funds are complex, short-term instruments that are interconnected with and crucial to the operation of other parts of the capital markets."
Finally, she is asked, "Now that the money markets have returned to normalcy, even if at low-rate levels, how do you think it will react to this week's expiration of Treasury's money market insurance program?" Cunningham responds, "We haven't really heard much discussion about the insurance program. Some customers have wanted to talk about it, but there's no indication they will be moving their money anywhere else. I think it helps that the Federal Reserve has kept in place until February two money market funding facilities -- the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) and the Commercial Paper Funding Facility (CPFF) --that have helped calm nerves and supplement activity in the commercial paper markets, where money market funds do the bulk of their trading. But even these facilities are winding down -- AMLF is now at $7 billion from a peak of $150 billion, and the CPFF is at $40 billion from a peak of $300 billion. This indicates that the pressures that were so prevalent last fall and early into this year have greatly subsided."
This morning, Federated also released the statement, "The Treasury's Temporary Guarantee Program (TGP) for money market mutual funds will expire as expected at the close of business on September 18, 2009. The TGP was established by the Treasury as a temporary measure in September 2008 to promote stability in money market funds. Over the past year the U.S. Treasury Department and the Federal Reserve (the Fed) have made extraordinary efforts designed to stabilize the economy and restore investor confidence. As conditions in the markets have improved, investors have continued to look to money market mutual funds as an important product for cash management purposes."
It continues, "While the TGP is ending as anticipated, regulatory changes designed to increase the resiliency of money market funds are on the horizon. The Securities and Exchange Commission has proposed a series of recommended changes to the regulations that govern money market fund management. This includes proposed amendments to SEC Rule 2a-7, some form of which are highly anticipated to be adopted. The Administration is expected to comment on money fund regulation before the end of 2009. These efforts, combined with the Fed's earlier announcement regarding the extension of the AMLF (Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility) and CPFF (Commercial Paper Funding Facility) programs through February 1, 2010, seek to further stabilize the financial markets and promote safety and liquidity for money market fund shareholders."
Up until the last week or two, it seemed like the expiration of the U.S. Treasury's Temporary Guarantee Program for Money Market Mutual Funds would expire without anyone noticing. Though investors appear to be sanguine, a number of reporters have shown interest in the topic of late. Below, we review our coverage of the launch of the program one year ago, we quote another recent news story, and we offer some additional current thoughts.
On the program launch, Crane Data wrote: "In the Nick of Time: Treasury Announces Rescue Plan for Money Funds" (Sept. 19, 2008), "Treasury Guaranty To Cover Tax-Exempts, Help Frozen Redemptions" (Sept. 22, 2008), "FAQs on Treasury's Guaranty Plan for Money Market Mutual Funds (ICI)" (Sept. 28, 2008), "Treasury Guarantee Program for Money Funds Live, Fee Is One Bps", and "Funds Flocking to Treasury's Money Market Fund Guarantee Program" (Sept. 30, 2008). These News pieces described the launch, evolution, the elements of the program, and its rapid adoption.
Our first story wrote, "In the nick of time, the U.S. Government has thrown a lifeline to the reeling money market mutual fund business. The press release, available at: http://www.treas.gov/press/releases/hp1147.htm, says, The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund -- both retail and institutional -- that pays a fee to participate in the program." The last News article linked above said, "BlackRock, Dreyfus, Evergreen, Federated, First American, Invesco AIM, Morgan Stanley, TCW, and Legg Mason's Western Asset Management have all signed up, or are in the process of signing up, for the U.S. Treasury's new money fund insurance program, which went live yesterday."
Among the recent coverage, U.S. News & World Report wrote, "Money Market Insurance Program Set to Expire", which says, "Some anniversaries just aren't meant to be celebrated. A year after the Reserve Primary Fund broke the buck and ignited industrywide panic, the federal government's profitable insurance plan for money market funds is set to come to an unceremonious end on Friday."
It quotes S&P's Peter Rizzo, "I don't think it expiring will have any material impact on the industry." The piece also says, "Beyond solid performance, though, further regulation is also a piece of the renewed confidence. Crane estimates that apart from the insurance, 80 percent of the assets that taxable money market funds buy still have some type of recently instituted federal support behind them." "Though the belt is going away, there are still plenty of suspenders," he says.
Crane Data points out that, though the $1.00 NAVs of funds will no longer be guaranteed after Friday, almost every major segment of the money market will continue to enjoy some type of government support into 2010 Taxable money funds hold over half of their assets (54.3%) in Treasuries (14.0%), Government Agency Securities (22.10%), and Repurchase Agreements (18.3%, almost all of which are now backed by Treasuries or Agencies). Commercial Paper (16.3%) and Asset-backed CP (included in CP) continue to have access to the Federal Reserve's AMLF and continue to be indirectly supported by the CPFF, which both have been extended through Feb. 1, 2010. Also, Certificates of Deposits and Eurodollar CDs (20.1% of money fund assets) continue to have access to a myriad of U.S. and European government guarantee and support programs for substantial portions of their debt.
Money funds will no doubt continue to see outflows, and funds did see a jump in redemptions Tuesday -- assets declined by $35.12 billion -- but note that this date was a quarterly tax payment date. (Today's Money Fund Intelligence Daily just came out showing that money funds declined by another $20.86 billion on Wednesday.) Like the rest of the industry, we'll be watching closely, but we expect the transition away from the guarantee to occur without too much disruption.
Today, we continue our look back at the earth-shattering events of one year ago. Late on Sept. 16, 2008, The Reserve Primary Fund became just the second money fund in history, and the first to impact a wide swatch of investors, to "break the buck". While The Reserve Fund saga is just now nearing its final conclusion and distribution (see our August 26 Link of the Day, "Reserve Fund May Pay $0.99"), the events of last September 16 continue to reverberate throughout the money fund industry. We reprint portions of our year-ago story, Reserve Primary Fund "Breaks the Buck" Following Run on Assets, below.
Describing last year's events, Crane Data wrote, "In just the second case of a money market mutual fund 'breaking the buck,' or dropping below the $1.00 a share level, in history, The Reserve's Primary Fund cuts its NAV to $0.97 cents on Tuesday. The top-ranked fund, which held $785 million in Lehman Brothers CP and MTNs, was besieged by redemptions over the past two days. Assets of the total portfolio, which is largely institutional but which includes some retail assets, declined a massive $27.3 billion Monday and Tuesday to $35.3 billion." (Note that we were unaware at the time that many of these redemptions were halted.)
Reserve said in its statement, "The Board of Trustees of The Reserve Fund, after reviewing the unprecedented market events of the past several days and their impact on The Primary Fund ... approved the following actions with respect to The Primary Fund only: The value of the debt securities issued by Lehman Brothers Holdings, Inc. (face value $785 million) and held by the Primary Fund has been valued at zero effective as of 4:00PM New York time today. As a result, the NAV of the Primary Fund ... is $0.97 per share. All redemption requests received prior to 3:00PM today will be redeemed at a net asset value of $1.00 per share."
Crane Data's year-ago story continued, "As we wrote Monday, several other firms have protected their investors from fallout from the Lehman Brothers bankruptcy. (The latest disclosure is from AmeriPrise's RiverSource funds, which filed an 8-K yesterday, announcing a $50 million purchase of Lehman CP.) A total of 21 money funds to date have taken action to protect shareholders, but the privately-held Reserve was unable to arrange credit supports in time to prevent a run."
We added, "Though money fund investors will undoubtedly be shocked and nervous over yesterday's events, we believe Reserve will be an anomaly. The combination of high yields, hot money and a lack of deep pockets likely will prove fatal to the oldest money market mutual fund. As happened in 1994 with the liquidation of Community Bankers U.S. Government Money Market Fund at $0.96 a share, we expect money market funds to soldier on with just a single case of a fund 'breaking the buck'."
One year ago today, the money market mutual fund industry and the world economy were irrevocably changed as the bankruptcy of Lehman Brothers and the ensuing "breaking of the buck" by Reserve Primary Fund triggered a near panic in the money markets and an unprecedented level of government intervention and support. Money funds and investors have recovered somewhat from the chaos and fear of a year ago, though scars and concerns will undoubtedly linger for years. Below, we excerpt a number of quotes from Crane Data's September 2008 News Archives, which includes the week which will live in infamy, September 15 through Sept. 19.
Last Sept. 15 as the unexpected Lehman bankruptcy news hit, we expected to see yet another cluster of routine support actions from money fund advisors. Crane Data wrote early Monday, in "Fed Moves, Limited Exposure Should Shield Money Mkts From," "The bankruptcy filing of Lehman Brothers has led to a downgrade of the company's short-term debt by Moody's from P-1 to Not Prime. The impact to money market fund is likely to be contained, however, since Lehman had been a minor issuer in the commercial paper (CP) and medium-term note (MTN) marketplace, with about $3 billion in CP outstanding. There also likely will be repercussions from the company's repurchase agreement and other short-term financings and supports. These issues, though, should be alleviated by the other news of the weekend -- the Fed's move to expand its liquidity facilities, and the takeover of Merrill Lynch by Bank of America."
Later that day (Monday), we wrote, "Evergreen Issues Statement Supporting Lehman Holdings in Funds," "A number of money market mutual funds are in the process of issuing statements either saying that they have no exposure to Lehman Brothers, which was downgraded to 'Not Prime' from P-1 ('First Tier') earlier today, or saying that they are taking steps to support their funds (or that their holdings are not large enough to impact the $1.00 NAV). Evergreen Investments was the first to issue a statement today saying that they've taken action to support their money funds. Though Lehman CP and MTN holdings are not widespread in money funds, other announcements are expected to follow."
The year-ago article continued, "Evergreen's web posting says, 'Wachovia Corporation has entered into support agreements with Evergreen Money Market Fund, Evergreen Institutional Money Market Fund, and Evergreen Prime Cash Management Fund in which Wachovia will support the value of Lehman credit held in the Funds." Crane Data's News added, "Companies issuing statements to shareholders saying that they have NO exposure to Lehman Brothers (some also cite no exposure to AIG and Washington Mutual) include: AIM, American Beacon, BlackRock, DB Advisors, Federated Investors, Morgan Stanley, UBS and Western Asset Management."
On Tuesday, September 16, Crane wrote, "Lehman Support Actions Push Money Fund Bailouts to 20 Total, which said, "We wrote yesterday about money funds' limited exposure to Lehman Brothers and about the support actions taken by investment advisors so far. Evergreen and Russell have disclosed support agreement for their funds, while some other funds have disclosed Lehman holdings and pledged to maintain their $1.00 NAVs. The vast majority of money funds appear to have no direct exposure to Lehman, though they're now answering questions on AIG, which was downgraded to A-2 but is still P-1 (short-term ratings), and WaMu."
It continued, "The latest crisis should bring Crane Data's tally of the number of advisors supporting their money funds over the past 13 months to 20. Besides Evergreen, money funds disclosing or showing holdings of Lehman in recent public filings include: Columbia Cash Reserves, which held $400 million, or 0.73% of its assets; Reserve Primary; and Russell Money Market Fund. All are expected to protect their funds from any threat to the $1.00 a share NAV should it become necessary.... [A] Dow Jones story also says, [S]everal money funds reported holdings in Lehman paper in their most recent filings.... One example is the Primary Fund managed by New York money manager The Reserve. As of May 31, the $64.85 billion Primary Fund had some $785 million in Lehman commercial paper and medium-term notes.' It added, 'The Reserve has historically protected the NAV of its money funds as needed.'"
At least 135 letters have now been posted commenting on the SEC's Money Market Reform Proposals. Given the volume of feedback (we'll be reading these for the next several weeks), we would expect any Final Rules on Money Market Fund Reform to appear around year-end, at the earliest. Many of the letters argue for extended implementation periods, as well, so don't expect any action anytime soon.
We believe the road to consensus and compromise is now relatively clear, though there are a number of minor issues that the SEC could have a tough time with. Every single letter has lambasted the idea of a floating rate NAV, save for perhaps one or two from fringe (or anonymous) individuals, so we'd be shocked if this strange "concept" wasn't excluded from the final rules and from any serious future discussions. The WAM reduction should be modified (to 75 days), the illiquid bucket should be reduced but not eliminated (to 5%), and the retail and institutional liquidity buckets, which also were trashed heartily in letters, should be eliminated in favor of the ICI's 5%/20% daily/weekly standard bucket. A couple question marks, like the fate of "Second Tier" securities, remain. Below, we excerpt from another of the recent posts.
Invesco AIM's letter, from Head of Global Cash Management Lyman Missimer, says, "We believe that some modifications to the proposals are necessary, however, in order for cash managers to retain the necessary flexibility to satisfy their fiduciary obligation to manage the safety, liquidity and yield of their portfolios under ever changing market conditions, and to otherwise preserve the orderly functioning of short term credit markets. In some instances, we believe that a pragmatic extension of the compliance date of the proposed rules may be necessary to address significant technical and systems challenges required of fund companies for full implementation of this proposal."
AIM also comments, "We also disagree that funds should disclose the market-based pricing of held securities as we believe this could likely destabilize money market funds and short-term credit markets.... Lastly, we do not believe that obligating money market funds to disclose client concentration levels to the Commission on any regular basis would produce standardized cross industry data that can be utilized in any meaningful manner ... given the variability in how fund complexes classify clients or client relationships.... We believe the Commission has significantly underestimated the time and cost it would take to transition existing transfer agency and other ancillary information technology systems ... that support money market funds to systematically support a redemption request at an NAV of something other than $1.00."
Finally, they say, "Invesco Aim Cash Management absolutely opposes the notion of floating the NAV for money market funds.... We do not believe the speculative benefits of requiring money market funds to float their NAVs outweighs the risks to the short-term credit markets outlined above."
Note: Crane Data's Peter Crane will be attending Schwab IMPACT, a gathering of thousands of independent financial advisors, in San Diego this week. Crane will participate on a panel Tuesday entitled, "Perspectives on the Future of Money Funds", Tuesday at 12:30pm (PDT), which will also feature Schwab's Randy Merck, ICI's Paul Schott Stevens, Invesco's Martin Flanagan.
The mutual fund industry's trade group, the Investment Company Institute (ICI), has issued a press release and posted its comment letter to the SEC's Money Market Reform Proposals, and "is pleased to express its overall strong support for the Securities and Exchange Commission's proposed amendments to Rule 2a-7 and other rules that affect money market funds under the Investment Company Act of 1940. The amendments, which are similar to those recommended last March by the Institute's Money Market Working Group are designed to better enable money market funds to withstand certain short-term market risks, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share."
The ICI letter says, "The SEC and the industry have invested substantial time and resources in efforts to ensure the continued success of money market funds, products that are valued by investors and crucial to our economy. Pressures on money market funds have eased substantially since late 2008, reflecting the unprecedented steps taken by the federal government to buffer the money markets and strengthen financial institutions. Money market funds nevertheless continue to face considerable challenges."
It continues, "Owing to the monetary policy that the Federal Reserve is pursuing in order to bolster the economy, short-term interest rates, and thus yields on money market funds, remain very low. Indeed, yields remain so low that many advisers to these funds have had to offer significant fee waivers in order to ensure that yields on their funds do not fall below zero. In addition, demand for money market funds has weakened as investors, especially retail investors, have migrated to higher yielding alternatives, such as bank deposits. As a result, advisers are currently bearing a significant share of the costs of operating money market funds. Changes to money market fund regulation must take into account these continued challenges."
"We are therefore especially pleased that, for the most part, the proposed enhancements to money market fund regulation are well balanced and not an overreaction to 'tail events.' Indeed, we believe that, in general, the SEC's proposal should work well in prosperous times, as well as during periods of severe market instability or economic pressures. The SEC's proposed amendments, like the Working Group's recommendations, are designed to further strengthen an already resilient product. Specifically, the proposal would make improvements to money market fund regulation through explicit liquidity standards, stress testing, 'know your customer' procedures, shorter portfolio maturities, improved credit quality, and more disclosure," ICI says.
They add, "We thus offer our overall strong support for the proposal. We do, however, have a number of comments -- including those opposing certain aspects of the SEC's proposal. We also comment on certain ideas not proposed, but raised for comment, that would make more fundamental changes in the SEC's regulation of money market funds that, if implemented, would not only undermine the improvements noted above but create new and potentially far greater risks than those the SEC is seeking to avoid."
The ICI's 48-page letter also, "strongly oppose[s] different regulatory thresholds for money market funds depending on whether their investors are considered retail or institutional," opposes the illiquid securities change, supports the ban of second tier securities, and opposes the WAM limit of 60 days (and prefers 75 days). It adds, "We are particularly pleased that the SEC's proposal would not require money market funds to publicly disclose their shadow prices and the market-based prices of their portfolio securities. We believe that this information would not be helpful or informative to investors and could increase systemic risks.... We strongly oppose eliminating the ability of money market funds to use the amortized cost method of valuation because the stable net asset value provides far more benefits to money market fund investors than a floating net asset value; the floating net asset value could lead to substantial and far reaching negative consequences for the money market fund industry; and a floating net asset value is unlikely to reduce systemic risk."
A number of additional comment letters have been posted on the SEC's website, so look for more excerpts in coming days.
Early yesterday, Crane Data sent out the September 2009 issue of our flagship Money Fund Intelligence newsletter, along with monthly performance data for the period ended August 31. The latest MFI features the articles "State of the MF Industry Not That Bad," "Highlights From Crane's Money Fund Symposium," and "SEC Comment Letters Find Common Ground." Every issue of MF Intelligence also includes Money Fund News, Crane Money Fund Indexes, Rankings, "People," "Calendar," and more.
Since publication, however, we learned from Bloomberg that the President's Working Group will delay publication of its report until December 1. (It had been expected by Sept. 15.) There have also been a number of additional comment letters added to the SEC's website. (Look for many more to be posted in the coming days as the deadline for submitting comments is today.)
New additions to the growing list of comments on the SEC's Proposed Money Market Fund Reforms include letters from Schwab and BlackRock. Schwab's letter says, "CSIM strongly supports many aspects of the Proposed Amendments.... We are particularly pleased ... that the Commission did not propose to eliminate stable net asset value pricing in favor of floating net asset value pricing. In our opinion, floating net asset value pricing would fundamentally alter the manner and extent to which these important products are used by investors and eliminate the benefits that money funds provide to investors."
Schwab also says, "CSIM supports reducing WAM from its current 90 day limit, but believes 75 days is more appropriate.... CSIM ... opposes an absolute prohibition on the fund's ability to acquire securities unless they are liquid at the time of purchase.... We are somewhat troubled, however, by the Board's obligation to determine whether a fund is an institutional money market fund for purposes of meeting the liquidity requirements."
BlackRock's letter says, "We are in strong agreement with many of the proposals and, perhaps more importantly, we are in full agreement with the overarching principle that is guiding all of these proposals and inquiries; strengthening the credit quality standards and liquidity requirements of money market funds for the benefit and protection of fund shareholders. Similarly, we and our clients are immensely grateful for the work of the Commission and many other Government agencies throughout the financial crisis. The swift and decisive actions taken by multiple agencies in concert was essential in restoring confidence and order to the markets in an environment that had moved beyond reason and into a level of panic not seen in the lifetime of most who now work in this industry."
They add, "BlackRock does not support shortening the maximum weighted average maturity (WAM) for money market funds to 60 days. We do support the ICI's Money Market Working Group recommendation to shorten maximum WAM to 75 days.... BlackRock strongly opposed eliminating amortized cost accounting or the use of a stable net asset value (NAV) for money market funds." Look for more letters and excerpts in coming days!
A host of new comment letters on the SEC's Proposed Money Market Fund Reforms appeared ahead of the long weekend and ahead of the looming September 8 deadline. The SEC's change proposals for its regulations governing money market funds would, "Tighten the risk-limiting conditions of rule 2a-7 by ... requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the weighted average maturity of portfolio holdings, and limiting funds to investing in the highest quality portfolio securities; require money market funds to report their portfolio holdings monthly to the Commission; and permit a money market fund that has 'broken the buck' ... to suspend redemptions to allow for the orderly liquidation of fund assets." The SEC is expected to receive an unprecedented number of comment letters (55 have already been posted through Friday), and is expected to digest the comments then release the final 2a-7 amendments late this year.
While it hasn't been surprising to see the vehement and almost unanimous opposition to the possibility of a floating NAV, we've been surprised by the number and breadth of commenters speaking out in opposition to the proposed ban of "Second Tier" securities. Some of the largest money fund managers, including No. 1-ranked Fidelity Investments, have already written opposing the change. But a recent comment letter was posted by the U.S. Chamber of Commerce and signed by representatives of Aetna, Alcoa, Avon Products, Clorox, Comcast, Consolidated Edison, CVS Caremark, Devon Energy, Dominion Resources, Duke Energy, Hubbell, Marriott International, Nissan Motor Acceptance, PG&E, ServiceMaster, Walt Disney, Time Warner, and XTO Energy also argues strongly against the change. (Another letter from the American Securitization Forum, or ASF, is pending.)
The Chamber of Commerce letter says, "The undersigned companies and organizations represent a diverse range of industries that rely on a well-functioning and liquid money market to support their financing needs.... While we support the majority of changes set forth in the Proposal, we oppose the proposed amendments to prohibit money market funds from investing in securities that carry the second highest credit rating. As set forth below, we believe this action would have a negative and unintended impact on capital formation that far outweighs any speculative increase in investor protection."
It explains, "We urge the SEC to preserve the ability of 2a-7 funds to invest up to 5% of total assets in A2-P2 Securities for several reasons: I. Issuers of A2-P2 Securities represent a major part of our capital markets and are significant contributors to our nation's economy. II. A2-P2 Issuers are high quality credits with investment-grade long-term debt ratings. The historic default risk of A2-P2 Securities is very similar to that of A1-P1 Securities. A2-P2 Issuers are required to hold 100% backstop facilities to offset this risk. III. The Proposed Prohibition would not have prevented the recent strains on money market funds.... IV. The Proposed Prohibition could indirectly discourage non-2a-7 investment in A2-P2 Securities which would severely constrict the market for A2-P2 commercial paper.... V. The Proposed Prohibition could decrease borrowing flexibility and elevate borrowing costs for A2-P2 Issuers, thereby restricting their ability to meet their short-term cash needs, increasing their cost of capital, and driving up consumer costs."
Other recent comments include letters from: J.P. Morgan Investor Services Co., who argues that the second business day filing deadline [for portfolio holdings] may pose a significant logistical challenge; Fannie Mae, who worries that "preserving the interest rate reset maturity shortening provisions for government securities that have a maturity of 731 days or less will both minimize market disruption and enable issuers of government securities to continue to meet critical internal funding needs"; the Independent Community Bankers of America, who say they are "concerned that these amendments to Rule 2a-7 may unnecessarily restrict MMF investments in FDIC-insured certificates of deposit (CDs) (CDARS and similar programs are considered "illiquid," ICBA explains); and, Nuveen Investments, who objects that the, "requirement that the underlying bond be rated in the highest short-term or long-term rating category represents a change from the current rule, which requires a rating 'within the NRSROs' two highest short-term or long-term rating categories.'" (Nuveen says, "Such a change would greatly reduce the amount of tender option bonds that could be acquired by tax-exempt money market funds.")
Look for more comment letters to be posted throughout next week, and look for a more-detailed analysis and discussion in the September issue of our Money Fund Intelligence newsletter ($500 a year), which will be e-mailed to subscribers on Tuesday morning.
RBC Global Asset Management announced Wednesday that, "[I]t's Institutional Prime (TPNXX), U.S. Government (TUGXX) and Tax-Free (TTEXX) U.S. money market funds have been added to Institutional Cash Distributors (ICD) $48 billion money funds portal. The funds are advised by RBC's U.S. subsidiary, Voyageur Asset Management, Inc. (Voyageur).
Janet Quarberg, head of portal relationships at Voyageur, comments, "We are pleased that our funds have been added to the ICD portal. The combination of our funds and ICD's efficient technology, independence and transparency provides clients with an excellent alternative for their money market assets."
ICD Co-Founder Ed Baldry says, "RBC's money market funds are a welcome addition to the portal as they provide our clients with greater choice at a time when investors are focused on diversifying across a range of high-quality funds from healthy global banking organizations." The press release says, "ICD is an internet-based institutional money fund portal that offers clients the ability to invest in a number of institutional money market funds through a one-stop process; one application, one wire, one statement."
It adds, "RBC's institutional money market funds were launched in February 2009 and have realized asset growth of close to $5 billion since their inception." Erik Preus, head of strategic relationships at Voyageur, says, "We've had excellent success raising assets in our institutional money market funds. We have a strong team, a compelling track record, and are well positioned to continue our success during this period in which significant assets are in motion."
Crane Data ranks ICD as the 4th largest online money market fund trading "portal" out of 21 total. Our August Money Fund Intelligence estimates that portals held a total of $473 billion in money market mutual fund balances as of July, or 19.6% of the $2.416 in institutional funds. (See our "Resources" page for links to different portal websites.)
Though it has yet to be posted, we received a copy of Deutsche Investment Management Americas comment letter regarding the SEC's Money Market Fund Reform, which takes a novel tack on the recently proposed amendments to Rule 2a-7. Their response says, "We have chosen to focus on the Commission's request for comment on whether money market funds should, like other types of mutual funds, effect shareholder transactions at the market-based net asset value and have a floating NAV." (See yesterday's Link of the Day, "ignites writes DWS Bucks Trend With Pending Floating NAV Fund".)
The Deutsche letter proposes, "In our view the question to ask is whether the Commission should consider and enable mutual fund companies to offer both Stable NAV and Floating NAV money funds. We believe the Commission should do so, and, therefore, propose that Rule 2a-7 be amended to permit registrants to operate a money market fund under either or both structures. Investors and cash markets would benefit, in our judgment, if Rule 2a-7 were amended to permit both Stable NAV funds, which would operate pursuant to the amendments proposed by the Commission, and Floating NAV funds, which would operate pursuant to the existing terms of Rule 2a-7 other than the provisions contemplating a money fund maintaining a stable $1 net asset value."
Author Joe Benevento continues, "In our view, the current provisions of Rule 2a-7 pertaining to quality, maturity and diversification are sufficient to safeguard the interests of investors in a money market fund that would calculate its NAV by reference to market quotations, or a Floating NAV. Therefore, we believe that the proposed amendments should not be applicable to such a money market fund. We note that, as currently structured, Rule 2a-7 permits money funds to stabilize their price per share using amortized cost valuation and/or penny rounding, and it permits a fund that does not do so to hold itself out as a money market fund, provided such a fund complies with the quality, maturity and diversification requirements of the rule."
The letter explains, "DIMA continues to support the need for and existence of money market funds that maintain a Stable NAV. We do not, in any way, suggest that Floating NAV funds replace Stable NAV funds that use the amortized cost and/or penny rounding valuation method. That said, primarily due to the events that occurred during and beyond September 2008 ... DIMA believes registrants should be allowed to offer Floating NAV funds, which would be based on daily mark-to-market pricing and a starting price of $10 per share.... By introducing an alternative solution, we would offer a choice between both stable and floating net asset value money market funds allowing investors to decide which type of money market fund to invest based upon their investment objectives."
Finally, the Deutsche letter also comments in an appendix on minimum liquidity requirements, maximum maturity requirements and illiquid securities. They say, "While we are generally in favor of minimum liquidity requirements to fund redemptions, we oppose different thresholds for moeny funds based on whether their investors are considered retail or institutional.... The Commission has requested comment on whether it should reduce the maximum maturity for individual non-Government securities ... from 397 days to ... 270 days. We do not believe that such a change is necessary.... We believe that a money fund should retain the ability to invest up to 10% of its assets in illiquid securities."
John von Seggern, President and CEO of the Council of Federal Home Loan Banks is the latest (besides our own Pete Crane; see yesterday's story below) to post comments on the SEC's Money Market Fund Reform Proposals. In the first comment letter posted by an issuer of money market securities, the FHLBs urge the SEC to allow short-term Federal Home Loan Bank discount notes to count towards the SEC's proposed liquidity buckets. (Click here to see the full list of "Comments on Proposed Rule: Money Market Fund Reform [Release No. IC-28807; File No. S7-11-09]".)
The FHLB letter says, "I am writing on behalf of the Council of Federal Home Loan Banks (Council), a trade association which includes all twelve Federal Home Loan Banks. The Council appreciates the opportunity to comment on the above-referenced amendments to Rule 2a-7. The Council recommends that the definitions of 'daily liquid assets' as defined in II.C.2.a. and 'weekly liquid assets' as defined in II.C.2.b. be expanded to include Federal Home Loan Bank ('FHLBank') discount notes with a remaining maturity of 44 days or less. In addition, we recommend that remaining maturity of discount notes be the standard for determining maturity, as opposed to original maturity as recommended by Investment Company Institute, since discount notes of one maturity carry the same CUSIP and are indistinguishable based on issue date. As proposed, these definitions would unnecessarily limit money market fund investment options."
It explains, "FHLBank discount notes are sufficiently liquid to be included in these definitions. During the stressful market conditions of August and September of 2008, the Office of Finance of the Federal Home Loan Banks (Office of Finance) was capable of continuous issuance of significant volumes demonstrating a liquid market. Market conditions deteriorated in September 2008 with extreme stress occurring in the days immediately prior to September 19, 2008. On that date, the Federal Reserve announced the purchase of FHLBank, Fannie Mae and Freddie Mac discount notes for the System Open Market Account (SOMA). Immediately before that date, the FHLBanks continued to successfully issue substantial volumes of discount notes with maturities from 1 to 44 days."
The FHLBs add, "In a separate comment, the Office of Finance is providing market data on daily sales of FHLBank window discount notes in all maturities for the period August 2008 through October 2008. Sales through the window program are investor driven. In contrast, the auction program is indicative of dealer underwriting demand. The Office of Finance data also includes auction volumes for the same period. We would note that, in spite of the dramatic decline in dealer underwriting capacity as evidenced by the depressed auction volumes, investor demand as evidenced by the window program was strong throughout this time period. Ongoing investor demand for FHLBank debt sustained low yields for discount notes. The data indicates that although yields were volatile during the time period, overall, the one-month yield declined as a result of flight-to-quality flows."
Finally, the Council's letter says, "The Council believes that the Commission should carefully review and reconsider the definitions of 'daily liquid assets' and 'weekly liquid assets' in the proposed Rule. As proposed, these definitions would unnecessarily restrict the investment alternatives for money market funds."
Look for more comment letters to be posted soon. JPMorgan Asset Management's feedback should be immiment, since a meeting took place last week with the SEC. See the post, "Memorandum: Meeting with J.P. Morgan Asset Management." It says, "On August 26, 2009, George Gatch, Seth Bernstein, Robert Deutsch and Frank Nasta of JPM met with the following SEC staff from the Division of Investment Management: Andrew J. Donohue, Director; Robert E. Plaze, Associate Director; Penelope W. Saltzman, Assistant Director and Sarah G. ten Siethoff, Senior Counsel. The JPM representatives discussed the proposals regarding money market fund reform contained in SEC Release No. IC-28807. In particular, the JPM representatives discussed the proposed liquidity requirements for institutional and retail money market funds and disclosure of investor concentration characteristics and policies in money market funds."
Crane Data President & Publisher Peter Crane sent in his comments on the Securities & Exchange Commission's late Monday. We reprint much of the letter below. (The full letter is now available on the SEC's website.) Crane's letter joins substantial comment letters from Vanguard, Fidelity, and a number brief postings. Though the majority of money funds have yet to be heard from, we expect a host of additional comment letters to appear in coming days. Interested parties have until September 9 to submit their comments, so we encourage serious parties to make their voices heard.
Crane writes, "I appreciate the chance to comment on the SEC's Money Market Reform Proposals and would like to thank the Commission for their tireless efforts in this arena. As background, I have written about and analyzed the money market mutual fund space for 15 years, most recently as President & Publisher of Crane Data LLC. My company publishes the monthly newsletter Money Fund Intelligence and writes daily news on the cash industry via the website http://www.cranedata.com. Our clients, subscribers and visitors consist of practically every money market mutual fund manager, a number of money market securities issuers and dealers, money fund raters, distributors and service providers, and money fund investors, both institutional and retail."
The letter continues, "Crane Data recently surveyed its Money Fund Intelligence and website readership about the SEC's recent Money Market Fund Reform Proposals and about issues facing money funds. We also conducted numerous informal interviews and held a number of discussions with industry participants on the proposals, and we hosted a series of sessions at a recent industry conference, Crane's Money Fund Symposium. We share these results and our thoughts below."
"The overwhelming consensus is that both money fund providers and investors rate the overall SEC proposals quite favorably. All share the SEC's overall goal of making money funds more resilient. But many feel that some changes are needed to reduce the overall burden of the new regulations and to reduce the possibility that the proposed changes may actually increase overall systematic risk by concentrating funds and securities into a shorter and smaller space," writes Crane.
It says, "Of particular concern to money funds are the reduction of WAM to 60 days and the 30% weekly liquidity buckets for institutional money funds. We'd urge the SEC to consider limiting WAM to 75 days instead of 60 days, which would offer more flexibility to smaller fund complexes and to retail money funds, especially during the current ultra-low yield environment. We'd also suggest eliminating the institutional liquidity bucket distinction (and just mandating a 5% daily and 15% weekly bucket for all), or, alternatively, we'd suggest broadening the liquidity bucket to include government agency securities. These changes would substantially ease the burden on smaller funds, and lessen the chances of unintended consequences resulting from a significantly heavier concentration of shorter assets in funds."
The letter, which includes our recent Money Fund Intelligence survey results, adds, "[W]e'd also like to mention a couple more points. First, we believe the events of the past two years were unprecedented and are unlikely to be repeated. While funds must consider the possibility of a system-wide panic and run, money funds fared much better than most. All asset classes were in effect at the mercy of government support to quell the panic. Money funds should not be singled out. It can be argued that they required much less support, and certainly less costly support, than that required by bank savings."
"Next, don't forget that both investors and advisors have reacted to these events by scaling back their risk-taking and exposure. Severe actions at this point are akin to 'closing the barn door after the horses left the barn.' The risk of overregulation is high in this scenario, so we urge caution and incremental change, especially given the money markets' still fragile state. Finally, we think the floating NAV and disclosure of any actual mark-to-market pricing is a very bad idea."