The latest monthly "Trends in Mutual Fund Investing: October 2010" published by the Investment Company Institute show money market mutual fund assets inched lower in October while bond funds continued gaining. Bond fund assets, which have risen by $461.4 billion year-to-date, now total $2.668 trillion, just over $100 billion below money fund assets' $2.788 trillion. Money fund assets represent 24.2% of mutual funds' total $11.5 trillion, while bond funds represent 23.2%.
ICI's monthly report says, "Money market funds had an outflow of $11.16 billion in October, compared with an outflow of $32.33 billion in September. Funds offered primarily to institutions had an inflow of $64.1 million. Funds offered primarily to individuals had an outflow of $11.22 billion." (Note that money fund assets rose by $15.4 billion to $2.813 trillion according to ICI's latest weekly stats while bond funds lost $4.3 billion, the first weekly decline in bond assets in many months.)
A separate report, "ICI's Month-End Portfolio Holdings of Taxable Money Market Funds," shows that Certificates of Deposit (CDs) remain the largest position in money funds at 22.8%, or $562.6 billion, but Repurchase Agreements (Repos) ranked a close second with 22.3%, or $548.9. Repo holdings surged in October, rising $45.6 billion, or 9.1%, while almost every other category of holding showed declines.
U.S. Government Agency Securities remained the third largest holding of taxable money funds with 16.6%, or $410.0 billion, while Commercial Paper (CP) remained the fourth largest position at 15.7%, or $387.6 billion. `U.S. Treasury Bills and Other Treasury Securities accounted for 12.4% of holdings, or $306.5 billion. Notes, both Bank and Corporate, represented 6.4% of holdings, or $157.9 billion, while Other holdings represented 3.4%, or $83.2 billion.
The private ICI report also showed the Number of Funds remained unchanged at 450, while the Average Maturity of portfolios jumped to 48 days from 44 days the previous month. The Number of Accounts Outstanding fell to 27.89 million from 28.32 million.
The Investment Company Institute recently published its "2010 Annual Report to Members," which contains a "Case Study" (pages 16-19) section on "Making Money Market Funds Even Stronger." It says, "The year 2010 brought great progress in achieving one of the top mutual fund priorities to emerge from the financial crisis: the quest to make money market funds more resilient in the face of extreme market conditions. A combination of initiatives by sponsors of money market funds and decisive action by regulators led to swift adoption of crucial and wide-ranging reforms. The Institute continued to build upon the leadership of its Money Market Working Group to advance creative ideas to strengthen these funds, while resisting proposals that would change their fundamental nature and undermine their value to investors."
The section continues, "The liquidity and credit crisis that threatened global financial markets in September 2008 battered virtually every part of the financial system. But the failure of Reserve Primary Fund to maintain its $1.00 net asset value (NAV) focused attention on money market funds. In response, ICI formed the Money Market Working Group, which in March 2009 proposed an array of measures to make money market funds more secure."
ICI says, "The Working Group's proposals anticipated a comprehensive set of reforms to Rule 2a-7 adopted by the Securities and Exchange Commission in January 2010. The rules further limit risks to money market funds' portfolios by raising the standards for credit quality and shortening funds' maturities. Significantly, the amendments require for the first time that money market funds maintain specified levels of liquid assets to ensure daily and weekly liquidity levels sufficient to meet redemption demands during times of market stress."
It adds, "The SEC also gave money market fund boards the necessary tools to cope with extraordinary levels of redemptions by allowing an orderly liquidation of a troubled fund. ICI strongly supported the new rules. 'These and other changes will provide significant additional protections and will benefit money market fund investors,' said ICI President and CEO Paul Stevens. 'ICI will remain in close dialogue with the SEC and other regulators while they consider further changes to money market fund regulation.'"
The Case Study also says, "ICI continues to pursue efforts to make these funds even stronger for their investors. After the issuance of its report and recommendations, the Money Market Working Group began to explore additional ideas for providing liquidity for prime money market funds when liquidity is scarce. At the Mutual Funds and Investment Management Conference in March 2010, Stevens described the outlines of a possible industry-supported facility dedicated to providing additional liquidity to prime money market funds in the event of severe market conditions."
ICI's annual report continues, "While supporting necessary changes to strengthen money market funds and the functioning of the money markets, ICI has continued to resist proposals advanced by regulators and others that would force money market funds to abandon the stable $1.00 NAV in favor of a floating NAV. In a number of speeches and comments, the Institute has pointed out the benefits of a stable NAV to shareholders regarding tax, accounting, and recordkeeping convenience, and stressed the potential damage that proposed changes could cause. 'Make no mistake: forcing these funds to 'float' their NAV will destroy money market funds as we know them,' Stevens told the March conference. 'It will penalize individual investors and exact a high price in the American economy. But it will not -- repeat, not -- reduce risks to the financial system. By any measure, it is a bad idea.'"
The section explains, "Users of money market funds and issuers in the money markets have voiced identical concerns. Groups representing state and local financial officials -- who count on money market funds to purchase almost two-thirds of their short-term debt -- have also been vocal: the Government Finance Officers Association adopted a policy statement pledging to oppose efforts to force money market funds to abandon their stable NAV, and the National Association of State Treasurers and the National Association of State Auditors, Comptrollers, and Treasurers both sent letters to Treasury Secretary Timothy F. Geithner supporting the stable NAV. Corporate users and issuers have written similar letters, led by the U.S. Chamber of Commerce, the National Association of Corporate Treasurers, Financial Executives International, and the Association for Financial Professionals. More than 40 individual companies have registered their support for a stable NAV."
Finally, ICI writes, "The issue will continue to be debated as regulators consider the report on money market funds issued by the President's Working Group on Financial Markets. While regulators and the fund industry made great progress in strengthening the resilience of money market funds in 2010, there is a consensus that more can and should be done. ICI will continue to work with regulators and members to strengthen money market funds and uphold their long-standing position as a preferred vehicle of cash management for individuals, businesses, nonprofit organizations, and government agencies. For more information about ICI's activities on money market funds, please visit www.ici.org/mmfs."
Global Treasury news website and AFP company GTNews features several money market mutual fund related stories in its latest weekly edition. The pieces include: "The Future of MMFs: Preparing for the Second Wave of Regulation by Crane Data's Peter Crane, which "discusses the current state of money market funds (MMFs) and weighs up the odds of the various possible future changes; "Potential Regulation and the Effect on Short-term Fixed Income Markets" by Invesco's Karen Dunn Kelley, which asks, "How will the Basel III proposals on large global banking institutions and the President's working group report on increasing the regulation of US 2a-7 money market funds (MMFs) affect the short-term funding markets?"; and "Post-credit Crisis Recovery: Leveraging Tools to Help Obtain Security, Liquidity and Yield" by SunGard's Vince Tolve, which says, "As a result of the credit crisis, the money market fund (MMF) industry made some significant changes over the past several year."
Crane's article says, "Last month, the US Treasury released a document entitled Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options, which laid out 'a number of options for reforms related to money market funds' intended to 'address the vulnerabilities of money market funds that contributed to the financial crisis in 2008'. Though the report doesn't strongly endorse any option and most of the more radical changes discussed remain long-shots, it is clear that further regulatory action is in store for US money market funds (MMFs), and probably for European and 'offshore' funds too."
He continues, "Of course, regulatory uncertainty isn’t the only issue MMFs are faced with. Ultra-low yields, fee waivers, consolidation, lack of supply and continued concerns over credits all have buffeted money funds and cash investors over the past year, and none of these appear to be going away any time soon. Nonetheless, MMFs in the US continue to hold US$2.8 trillion in assets, and worldwide money funds total almost US$4.9 trillion. While this is down over US$1 trillion over the past 22 months, it is still an astounding total given the near-zero yields."
Finally, Crane comments, "Almost all of the other options all also appear to have more drawbacks than benefits, according to the PWG report (and according to industry and investor feedback to date). MMF insurance, or a shift to a banking regulatory regime, involves massive change. A dual system of stable and floating MMFs also would likely invite confusion and the risk of cross-contamination. Thus, the idea of a 'private liquidity facility' or 'liquidity exchange bank' appears to have the highest odds of implementation, given its support by the mutual fund industry.... This option has issues too. But for now it's clearly the most palatable to fund groups and it's likely the least disruptive option to the broader economy.... [T]he betting is on a private liquidity backup facility being implemented to help prevent future runs on MMFs."
Dunn Kelly comments in her GT News piece, "As a result of the recent financial crises, financial regulators are seeking to design additional regulation to prevent excessive risk taking and illiquidity of the global financial system. Included in these efforts have been the Basel III proposals focusing on large global banking institutions.... The latest credit crisis has highlighted the interconnectivity between central governments and their financial institutions and while the bond market's apprehension of the European sovereign debt crisis has diminished, it certainly is not over."
GTNews also includes "Yield in the Post-crisis World" by Jim Fuell of J.P. Morgan and "The Chase for Yield" by Douglas McPhail of SWIP. The former says, "Corporate treasurers are slowly regaining the appetite for yield. But how can treasurers combine their desire for yield with their focus on liquidity and security? And where should they look for returns in this low-rate environment without significantly increasing risk?" The latter article asks, "How have money market funds (MMFs) changed in the wake of the financial crisis? And how can investors make the most of them?"
Standard & Poor's released a "Credit FAQ" entitled, "Shedding Light On The 'Shadow' Net Asset Value Of Money Market Funds." The piece, written by Analysts Ruth Shaw and Jaime Gitler, says, "Many investors believe that a money market fund's net asset value (NAV) never deviates from $1.00 per share. They perhaps come to this conclusion because in the money fund industry's 40-year history, with two exceptions, shareholders have redeemed their shares at exactly $1.00. Also, when investors view the $1.00 price per share on their statements, it reinforces the misconception about a fund's NAV."
It continues, "The reality, however, is that a fund's marked-to-market NAV changes constantly, every day, and ranges from $0.9950 to $1.0050. This tight band of variation, when rounded either up or down to two decimals, equals $1.00. It's important to remember that many elements influence a fund's NAV and cause its fluctuation, such as shifts in interest rates, credit spreads, and shareholder activity."
S&P explains, "Given the volatility in the money market industry over the past two years, the Securities and Exchange Commission (SEC) recently revised its guidelines for registered U.S. money market funds. On Feb. 23, 2010, the SEC released final amendments to Rule 2a-7, which governs registered money market funds under the Investment Company Act of 1940. In this release, the SEC focused on three key areas in its regulation of funds: liquidity, credit quality, and operational procedures. Their goal is to reduce investment risk of registered money market funds."
They say, "The SEC is now requiring fund companies to post their portfolio holdings as well as a variety of statistics on their own Web site each month. Also, they must submit detailed monthly holding reports and fund-level statistics to the SEC through Form N-MFP, which will then appear on the commission's Web site. In addition to statistics such as a fund's weighted average maturity, individual security information, maturity dates, CUSIPs, and security types, funds must now also disclose the "shadow" NAV -- the true (nonrounded) marked-to-market NAV per share out to four decimals. Unless the fund is invested 100% in securities that mature overnight where the reported NAV will be exactly $1.0000, in the vast majority of instances, these funds will report a number between $0.9950 and $1.0050. Fund companies will first have to submit these new disclosure requirements to the SEC on Dec. 7, 2010, and then the postings will be available on the SEC's Web site with a 60–day delay."
Shaw and Gitler write, "Fund managers are concerned about shareholder reaction to viewing the marked-to-marked NAV on the SEC's Web site. Will shareholders withdraw their investment if the fund is priced at less than $1.0000? Will they invest more money into a money market fund with an NAV that's higher than $1.0000 to try to make small gains? Despite the concern in the market, Standard & Poor's Ratings Services believes there's no cause for alarm. Below, we answer some frequently asked questions about shadow NAVs in money market funds."
Among the "Frequently Asked Questions, the article asks, "How do funds calculate their NAV?" It answers, "A fund's marked-to-market NAV, also known as its price per share, or "shadow" NAV, is determined by dividing the total value of all the investments in its portfolio, minus any liabilities, by the number of fund shares outstanding. This marked-to-market calculation stems from the true market value of a fund's assets, rather than "amortized cost" NAV. The amortized cost method of pricing permits money funds to price their securities by amortizing any discount or premium in the purchase price straight to its maturity.... Standard & Poor's requests that our rated money market funds calculate and report to us at least weekly the shadow NAV per share using marked-to-market prices with NAVs rounded to at least five decimals."
It also asks, "What factors cause a fund's NAV to fluctuate?" S&P answers, "A money market fund's shadow NAV will change due to the pricing of underlying securities in a fund's portfolio, shifts in interest rates, and the flow of money into and out of a fund. For example, if the Federal Reserve raises or lowers interest rates, the Treasury market rallies, or a downgrade or upgrade of a particular security occurs, a fund's shadow NAV may react. Shareholder redemptions and subscriptions can also greatly magnify those factors on a fund's marked-to-market NAV. Because money funds issue and redeem shares at $1.0000, provided that their market value is between $0.9950 and $1.0050, funds can pay out $1.0000 on shares that may actually be worth as little as $0.9950. When a fund redeems or pays out $1.0000 on shares that are worth less, the redeeming shareholders dilute the remaining assets for the remaining shareholders. This dilution will exacerbate any realized or unrealized losses that exist in the fund."
Finally, they ask, "How will investors react to shadow NAVs posted on the SEC's Web site?" The piece responds, "It's difficult to know how investors will react when they see a marked-to-market NAV on the SEC's Web site that is less than $1.0000. As we approach the Dec. 7, 2010, deadline for fund companies to submit these marked-to-market NAVs to the SEC for public disclosure, we've seen instances in which fund sponsors have chosen to put money into their funds to boost their NAVs above $1.0000. It appears fund managers are concerned that investors may pull out of their money market funds if they see anything less than $1.0000 on the SEC's site. However, it's important for investors to know that the numbers will be reported on a 60-day lag and that the current marked-to-market NAV could be different from what is reported. In addition, investors should be aware that funds whose NAVs have small deviations, either above or below $1.0000, are common and expected given unrealized or realized gains and losses in the funds, and changing interest rates. For the past 25 years, we have seen these deviations daily by tracking the marked-to-market NAVs of our rated money market funds out to five decimal places, and we expect slight fluctuations around $1.0000. These slight deviations are no cause for alarm."
In their latest "Short-Term Fixed Income" weekly, J.P. Morgan Securities' strategists Alex Roever and Teresa Ho feature a piece entitled, "Revisiting the Sec Lenders." It says, "For better or for worse, money market funds have been the subject of many people's attention over the past few years. With $1.6tn of assets under management, prime money funds have the ability to influence many parts of the short-term markets. Other investors, like securities lenders, who also play a large role in the money markets, tend to get lost in the shuffle. Although securities lending balances have declined significantly since mid-2007, we estimate that they still hold as much as $1.5tn of short term investments."
The piece explains, "Agent Securities Lenders (Sec Lenders) are banks that lend securities that their clients have in custody. In return, Sec Lenders receive cash as a form of collateral. The cash is then reinvested, usually in shortterm securities as well as in some highly-rated securities just outside of 2a-7 guidelines. This structure allows the clients, subject to predetermined investment guidelines, to earn an extra return on their securities portfolio for a fee paid to the Sec Lenders. During this process, Sec Lenders manage the spread earned on investments and the return distribution to clients."
Roever and Ho write, "At their peak in mid-2007, we estimate that the cash reinvestment portfolios of Sec Lenders measured around $3.0tn. We say estimate because the securities lending industry is largely an opaque market, unlike money market funds that are regulated by the SEC and have become more transparent recently. Not only are they less transparent, Sec Lenders also have fewer restrictions in terms of their investment strategies than money market funds. Historically, they used to be large participants in longer-dated (i.e., greater than 397 days) floating-rate securities from ABS and corporate issuers that 2a-7 funds are not permitted to buy. Their participation fueled the growth of corporate FRN outstandings from 2005-2007 as well as term ABS securities such as credit card and auto ABS."
They add, Not surprisingly, the onset of the credit crisis has prompted them to adopt more conservative investment strategies, particularly after experiencing losses related to their FRN and ABS holdings. The value of those securities suffered dramatic losses as credit spreads widened. Today, cash reinvestment portfolios of Sec Lenders are much more 2a-7 like, driven primarily by the lower risk tolerance of their clients. According to the most recent data released by the Risk Management Association, holdings of floating-rate instruments fell from 36% in 2Q2007 to 23% in 3Q2010, as they pursued more fixed-rate or repo instruments. At the same time, the overall size of their portfolios was cut roughly in half. Investments beyond 13m also declined by 21%, in favor of securities with very low interest rate and credit risks.
The weekly writes, "Similar to 2a-7 portfolios, the median weighted average maturity of Sec Lenders has increased recently (from 53 days to 61 days) as they try to enhance yields in today's low interest rate environment. Allocation to repo has increased from 26% to 30%, driven most likely from elevated repo levels and their desire for liquidity. Composition of their repo collateral has also gradually shifted toward higher yielding collateral like corporates and equities, and away from US Treasuries and Agencies."
Finally, it says, "Interestingly, Sec Lenders' allocation to money market funds has increased by 10% since June 2007. During 3Q2010, they held on average 12% of their cash reinvestment portfolio in money funds. This is relatively surprising as investments in other short-term instruments, most of which earn higher yields than money funds, have experienced a decline or modest gain in asset allocation. There are several reasons for this behavior. The supply of money market securities has shrunk.... There are counterparty exposure limits.... With that said, not all money funds are the same.... Money funds provide some operational advantages over repo.... Non 2a-7 money funds exist."
As we wrote in Tuesday's Crane Data News ("Comment Letters Argue Against Added FSOC Supervision for MMFs"), a number of investment managers have recently written to the new Financial Stability Oversight Council, arguing that mutual funds and money market funds should not be "designate[d] nonbank financial companies for enhanced supervision" under the Dodd-Frank Act. Today, we excerpt more from Vanguard's "Advanced Notice of Proposed Rulemaking Regarding Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies (FSOC-2010-0001)" letter.
Vanguard's Gus Sauter and John Hollyer write, "We appreciate the opportunity to comment on the Advanced Notice of Proposed Rulemaking Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies.... On behalf of the mutual fund investors we serve, we are deeply committed to working with financial regulatory authorities to improve the efficiency, stability, and liquidity of our financial markets. As the financial crisis has demonstrated, our markets can be vulnerable when certain interconnected financial companies engage in risky lending and financial engineering involving highly complex transactions coupled with the use of leverage." The letter "explains why mutual funds and their advisers should not be supervised by the Board or be subject to the prudential standards contemplated by the Act."
The comment continues, "In the recent financial crisis, some money market funds had to liquidate assets quickly when faced with unusually high redemption activity. The demand on certain funds to sell assets in short order to satisfy redemption requests demonstrated the need for money market funds to maintain minimum liquidity thresholds. Money market fund regulations have since been revised to require all funds to maintain such liquidity thresholds. We believe the revised regulations ... make money market funds resilient to liquidity pressures. We do not believe the market-wide illiquidity that occurred in the recent market crisis resulted from money market fund activity, but rather from banking entities' unwillingness to accept each others' credit risk. We believe it is unlikely that the liquidity challenges of any one money market fund would produce severe market-wide illiquidity."
Sauter and Hollyer also say, "Equity, bond, and money market mutual funds may experience losses, however, these losses do not infect the broader financial markets. Rather, they are shouldered by the funds' investors, who have agreed to accept the risk of loss. In the two instances where money market mutual funds have 'broken the buck,' the losses amounted to pennies on the dollar. [A footnote here says, "The Reserve Primary Fund and the Community Bankers fund are the only two money market funds that have 'broken the buck' in the industry's thirty-nine year history. The Reserve fund eventually paid out .99/share to its shareholders, while the Community Bankers fund paid out .96/share in 1994."] Such small losses do not pose a threat to financial stability, especially where the loss is borne by the shareholders of the fund, not the U.S. taxpayer. In the recent market crisis, one institutional prime money market fund's loss on its Lehman holdings prompted investors in other institutional prime money market funds to redeem their fund shares. These investors had no way of knowing whether their money market funds had similar Lehman holdings, as money market funds did not, at that time, frequently disclose portfolio securities. Faced with this uncertainty, investors began to redeem their shares. We believe the new money market portfolio holdings disclosure requirements ... adequately address this issue and mitigate the risk that a credit event experienced by one fund will prompt investors in other funds to redeem their shares."
They explain, "Complexity was one factor that contributed to market participants' inability to plan for and respond to the crisis; lack of transparency was another.... The Council should focus on identifying those nonbank financial companies that do not have transparent balance sheets (i.e., have off-balance sheet liabilities) and engage in leveraged trading activities with other important financial companies.... The existence of a primary regulator is another factor to be considered when determining whether a company presents systemic risk. The Council should not further regulate entities that have a primary regulator. Any gaps or weaknesses in regulation identified by the Council should be referred to and addressed by the primary regulator."
Vanguard writes, "Mutual funds and their investment advisers are subject to comprehensive regulation by the SEC under the Investment Advisers Act of 1940, Investment Company Act of 1940 and other federal securities laws. This regulatory framework provides investor protections including regular reporting to the SEC and fund shareholders, safekeeping of fund assets, transparency in disclosure, corporate governance requirements, prohibitions on affiliated transactions, limitations on leverage and illiquid securities, valuation standards, and audit and compliance policies and procedures. We do not believe further regulation by the Council would offer additional protection to investors and could detract from efforts to monitor and assess companies that do pose systemic risk."
Vanguard also says, "In short order, the SEC proposed and adopted a comprehensive overhaul of Rule 2a-7, embracing many of the proposed recommendations of the ICI's Working Group and adopting some additional changes. From the time the Guarantee Program expired to the present, the money market fund industry has not sought, nor needed, federal assistance to maintain the stable NAV. [This footnote adds, 'Unlike money market funds, support for banks has only increased since the financial crisis ended. For example, FDIC insurance has increased from $100,000 to $250,000/account. Most recently, the FDIC proposed a rule that would expand its insurance program and permit for taxpayer support in an unlimited amount on all non-interest bearing transaction accounts for a two-year period.']"
They add, "As acknowledged in the recent President's Working Group on Financial Markets report, Rule 2a-7 has been revised extensively in many important respects since the termination of the [Treasury] Guarantee Program. The revised Rule 2a-7 has several components designed to make money market funds self-provisioning for liquidity and more resilient: 1) Daily and weekly liquidity minimums.... 2) 'Know Your Customer' procedures... 3) Maximum weighted-average maturity (WAM) of 60 days (down from 90 days), coupled with a maximum weighted average life (WAL) of 120 days.... 4) Stress testing of portfolios.... 5) Portfolio holdings disclosure requirements.... and, 6) Rule 22e-3, which permits fund boards to suspend redemptions and payment of redemption proceeds if a board concludes that a fund must liquidate."
Finally, the Vanguard letter concludes, "We believe these changes strike the appropriate balance between allowing money market funds to continue to finance the short-term needs of private and public borrowers and mitigating any one fund's systemic risk. To the extent the Council has any remaining concerns with respect to money market funds, we believe they should be addressed by the options in the PWG Report, and not through the Council's authority to designate financial companies for further supervision by the Board."
A press release entitled, "SunGard Extends SGN Short-Term Investment Portal to Cash Managers in Australia," tell us, "SunGard has expanded its SunGard Global Network (SGN) Short-Term Cash Management portal to include Australian Money Market Funds. The SGN portal helps cash managers efficiently research, trade and report on their money market fund investments, while diversifying their investment options and establishing global best practices."
SunGard's release continues, "While corporations, insurance companies, pension funds and other cash investors in Australia typically invest cash in overnight holdings with banks, many are seeking greater yield, liquidity, diversification and ease of use. As part of an initiative to deliver the portal to customers in the greater Asia-Pacific region, SunGard's expansion of the portal into Australia includes funds from Goldman Sachs Asset Management & Partners Australia Pty Ltd., and Colonial First State Investments Limited. The SGN portal helps cash managers simplify tasks and limit the risk of errors. It also helps them integrate information into their treasury systems, including SunGard's AvantGard corporate treasury, cash and risk management solution, and increase transparency with fund managers by providing a wide variety of fund portfolio data."
Subash Pillai, head of fixed interest and multi-sector at Goldman Sachs Asset Management & Partners Australia Pty Ltd, says, "In today's more volatile credit environment, investors are increasingly focused on managing the credit risks associated with their cash and short term liquidity holdings. As a result, we are seeing a trend towards AAAm rated MMFs due to the ability of specialist investment managers to assess credit and liquidity risks."
Tony Togher, head of short-term investments at Colonial First State Global Asset Management, comments, "Asset managers and corporations seeking diversification of assets, liquidity and opportunity for enhanced yield may be ideally suited to using money market funds."
John Vander Vennet, managing director, Asia-Pacific for SunGard's wealth management business, adds, "It is our experience that since the global financial crisis, corporations, super funds and fund managers tend to hold greater amounts of liquid assets, including cash reserves. SunGard's Short Term Cash Management portal provides treasurers and asset managers with easy access to a wide variety of money market funds through which they may readily invest these assets. We look forward to working with both investors and money managers in extending SGN's presence in Australia and more broadly throughout Asia, as well as expanding opportunity for US and European investors already on the portal."
Crane Data is only aware of a handful of Australian Dollar Money Market Funds available to multinational investors, but Australia does have a budding domestic money market fund business. (See our Sept. 30 Link of the Day "Moody's Withdraws Some Ratings", which says, "Moody's Investors Service has withdrawn for business reasons the Aaa/MR1+ ratings of six Nomura money market funds: Nomura Multi Currency MMF -- US Money Market Fund, Australian Dollar Money Market Fund, G.B. Pound Money Market Fund, Canadian Dollar Money Market Fund, Euro Money Market Fund, and New Zealand Dollar Money Market Fund.") In Crane Data's Nov. 2 News piece, "Worldwide MMF Assets Down 7.5 Percent in Q2; France, Portugal Fall", we wrote, "Australia ranks fifth with 4.8% of assets, or $233.8 billion, citing ICI's "Worldwide Mutual Fund Assets and Flows Second Quarter 2010".
Finally, for more recent news on online money market trading portals, see Crane Data's Nov. 8 News "ICD and BNY Mellon Portals Unveil Transparency Reports at AFP" and our November Money Fund Intelligence article, "Guzman to Launch MF Portal; More AFP News."
Below, we excerpt from an interview that appeared in the October issue of our flagship Money Fund Intelligence newsletter, when we decided to get an issuer's perspective on the money markets. We interviewed members of SMBC, Sumitomo Mitsui Banking Corporation, the second largest bank in Japan, to discuss their thoughts on recent developments in the cash marketplace, including funding strategies, ultra-low yields, and changes in money funds. Our discussion follows.
Q: How long has Sumitomo Mitsui been issuing in the money markets? Nobuyuki Kawabata, General Manager, Planning Department, Americas Division, tells us, "We've been issuing in the U.S. money markets for several years and have become more active since the liquidity crisis of 2008. The U.S. money markets are the largest in the world by a far margin and institutionally we've always felt that it's important to be a major player here. We've also been able to increase our presence recently as a result of the European sovereign crisis. During this time, we saw that investors withdrew a great deal of funding from Southern European names to be deployed into those credits perceived to be safer, like the Japanese banks. I believe that investors recognized the inherent stability of the Japanese banks and diversified their investments accordingly. In fact, the crisis turned out to be a good business chance for us."
Hideo Kawafune, Senior Vice President of the Planning Department adds, "Here in New York, we've taken a step-by-step approach to increase our presence in the market. Starting a few years ago, we made the decision to greatly increase our CD issuance. Additionally, last November, we also successfully began our USCP program which was a first for a Japanese mega-bank. In this fiscal year, we took further steps and created an Institutional Investor Team within the Americas Division in order to enhance relationships with our investors and to acquire market intelligence in the money market space. These steps have allowed us to solidify our existing relationships and create new ones as well."
He continues, "Expanding our presence in the U.S. money market also has an important strategic benefit. Given the size of the mutual fund industry in the U.S., I think based on some of your past issues almost $7 trillion with some $2.8 trillion in money markets, it's important for a truly international bank to be an active and complementary participant. The previous crisis has shown us that the mutual fund industry often reacts as a leading indicator, and it's critical that we be deeply involved, not just as an issuer but also as an active voice in the dialogue."
Q: What kinds of short-term debt do you have outstanding? How much? Yasuyuki Takeda, General Manager, and Takao Kanetani, Senior Vice President, of the International Treasury Department, New York, tell MFI, "Well, SMBC has more than enough deposits, especially in our domestic market. SMBC New York currently concentrates on CD and CP, as well as Time Deposits, which we've had great success with. We also have a separate ABCP conduit called Manhattan Asset Funding here in the U.S. Without getting too much into the specific amounts, we like to keep our outstanding size within the $30 billion to $50 billion range for our U.S. operations. As we mentioned before, accessing the U.S. money markets is more strategic than simply to acquire funding; feeling out the market and participating in the dialogue is incredibly important as well."
Q: How have your funding patterns changed over the past two or three years? Takeda explains, "Clearly Japanese banks have had ample liquidity on the balance sheets. However, the past two years have reminded us of the importance of liquidity control. At that time, making the right management adaptations, particularly from a funding perspective became critical to ensure stability in an unsure and unstable environment. To that end, SMBC created a USCP program to complement our existing CD program. Our reasoning was that while we don't need the funding specifically, we could seize the opportunity to offer supply to the marketplace and in the process, create new relationships."
Q: Are you concerned about possible regulatory changes to the money fund space? Kawabata tells us, "From an issuer standpoint, it seems clear that the SEC is pushing the money funds to invest in shorter, more liquid securities, and at the same time Basel is pushing issuers to fund longer. This creates a gap that many of our internal economists fear will lead to decreased issuance and higher funding costs."
Q: How important are money market funds to the short-term funding markets? Kawafune answers, "We believe that money market funds are integral to the U.S. short-term funding markets.... Understanding the importance of money market funds, we have worked closely with them in order to bring to the market structured paper that both fits with their new regulatory requirements and matches with our desire for longer and cheaper funding. Last year, we were the first Japanese mega-bank to do a putable CD.... We believe relationships are built through innovative transacting, communicating, and deal-making as exemplified with our putable CD that we worked hard to provide to our investors." (For the full article, contact Crane Data.)
Mutual fund industry publication ignites.com and Bloomberg both reported Friday on comment letters submitted to the new Financial Stability Oversight Council in response to the FSOC's "Advance Notice of Proposed Rulemaking Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies." In ignites' "Big Guns to Feds: Don't Tread on Money Funds" and Bloomberg's "Mutual Funds Seek to Avoid Risk Supervision by Fed", fund managers and the ICI argue that money market mutual funds should not be "designate[d] nonbank financial companies for enhanced supervision" under the Dodd-Frank Act. (See Crane Data's Oct. 7 "Link of the Day".)
Ignites says, "Fidelity, Vanguard and Federated are going on the offensive to ensure money market funds are not designated as products that pose a potential systemic risk to the economy. The fund giants submitted comments to the Financial Stability Oversight Council acknowledging the importance of money market funds as a source of liquidity and financing for the wider economy, but insist that the funds are nowhere near posing a systemic risk. The council is the product of the Dodd-Frank Act and is charged with determining if individual nonbank financial firms pose a systemic risk. It has the power to recommend new regulations for entities it deems to pose a risk."
The Bloomberg piece explains, "Mutual funds pose little threat to the U.S. financial system and should remain beyond the reach of Federal Reserve oversight, the firms's lobbying group said. It quotes an ICI letter, "Many characteristics of funds -- including their simple capital structure, limited used of leverage and comprehensive regulatory scheme -- put funds at the 'less risky' end of the spectrum when considering the potential for systemic risk'."
ICI's comment letter continues, "In this advance notice of proposed rulemaking, the Financial Stability Oversight Council requests information to assist in its development of 'the specific criteria and analytical framework by which it will designate nonbank financial companies for enhanced supervision' pursuant to Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FSOC's ability to determine that an individual company poses potential risk to the entire U.S. financial system -- and the regulatory oversight and heightened standards that would flow from that determination -- is an extraordinarily potent legal authority powerful tool, and one that should be used with great care. ICI believes that the designation of individual companies for heightened supervision should be reserved for those circumstances, presumably quite limited, when the FSOC has determined that a specific company poses significant risks to the financial system that clearly cannot otherwise be adequately addressed through enhancements to existing financial regulation and/or other regulatory authorities provided by the Dodd-Frank Act."
A footnote in the ICI letter adds, "Money market funds have been subject to heightened regulatory attention following the market crisis. In January 2010, the SEC issued comprehensive rules designed to strengthen these funds by, among other things, adding strong liquidity buffers, improving credit quality, shortening the average maturity limits of the funds' portfolios, mandating periodic stress tests, and increasing the information reported to fund shareholders and the SEC. The President's Working Group on Financial Markets recently issued a report on Money Market Fund Reform Options, requesting that the FSOC consider the options discussed in the Report. We agree that the FSOC should examine possible structural reforms to the way money market funds operate, as outlined in the PWG Report. To assist the FSOC in its analysis, the SEC, as the regulator of money market funds, was tasked with soliciting public comments. ICI's comment letter to the SEC will include a detailed discussion of money market funds and the options outlined in the PWG Report."
Vanguard's comment letter says, "We believe [recent SEC and other] changes strike the appropriate balance between allowing money market funds to continue to finance the short-term needs of private and public borrowers and mitigating any one fund's systemic risk. To the extent the Council has any remaining concerns with respect to money market funds, we believe they should be addressed by the options in the PWG Report, and not through the Council's authority to designate financial companies for further supervision by the Board.... In conclusion, we urge the Council to focus its efforts on overseeing only those entities that pose the greatest systemic risk to our markets. It is impossible and unwise to attempt to eliminate all risk from our financial system. Efforts to identify any entity that could impose any degree of systemic risk will be overwhelming and fruitless, and could cause the Council to miss the next systemically risky actor that threatens the markets."
The mutual fund industry's trade association, the Investment Company Institute, recently released a comment letter on the SEC's Proposal to change "Mutual Fund Distribution Fees" and to eliminate 12b-1 fees over 0.25%. Though money market mutual funds are not dramatically impacted by these proposals, since just a fraction of money funds have 12b-1 fees over 0.25%, there are several issues in the proposals that involve them. (Crane Data's Money Fund Intelligence XLS shows less than 15% of taxable money funds with distribution fees over 0.25% representing less than 5% of all assets; most institutional money funds shifted from 12b-1 fees to "shareholder service" fees years ago.) The ICI's "Mutual Fund Distribution Fees; Confirmations" letter says, "The Investment Company Institute appreciates the opportunity to comment on the Securities and Exchange Commission's proposed new rule and rule amendments that would replace Rule 12b-1 under the Investment Company Act of 1940."
The letter explains, "The SEC has a number of legitimate concerns with 12b-1 fees. Rule 12b-1 was adopted in 1980 and is in need of an update. Investors may not have sufficient understanding of what 12b-1 fees are, other than a line in the fund's fee table, or what they pay for. Boards currently feel compelled to make findings pursuant to outdated guidance that is impractical and largely unnecessary. We share many of these concerns and commend the SEC for its attempt to address these issues. Ultimately, however, we believe that the proposal places the agency in the inappropriate role of a ratemaker, and is far more extensive and intrusive than necessary. If adopted as proposed, the revisions could fundamentally alter the way intermediaries use funds in various distribution channels, significantly affect the lineup of share class options currently available to investors, necessitate major systems changes, and require the renegotiation of thousands of dealer agreements. All of this would be done at a great cost that would be reflected in higher expenses borne by shareholders. And the benefits are uncertain and quite possibly illusory. As a result, the significant operational and transitional costs on funds, intermediaries, and investors are simply not warranted."
ICI continues, "We are concerned that, while the SEC did not propose to eliminate C shares, the proposal would have a significant impact on these shares as we know them and disadvantage many small investors. To the extent that, despite our concerns, the SEC moves forward with this part of the proposal, it should distinguish the C share context from other uses of 12b-1 fees, such as for retirement shares and money market funds, where the use of 12b-1 fees is far different from the use of a front-end sales charge."
In its summary on "Money market funds," the letter says, "The use of 12b-1 fees in the money market fund context is clearly not the functional equivalent of a front-end sales charge; money market funds are not sold with a front-end sales charge. The Release does not appear to contemplate the use of 12b-1 fees by money market funds, either with respect to marketing and service fees or ongoing sales charges. Before the SEC goes forward with this rulemaking, it should carefully consider the application of the rules in this context, and in doing so should reject the notion that 12b-1 fees in excess of 25 basis points must in this case be treated as an ongoing sales charge subject to conversion. Requiring systems to be built for money market funds to track and age their shares, including, for example, the daily investment of overnight balances in a sweep account, would be costly and pointless."
The "Money Market Funds" section on page 19 explains, "Money market funds are not sold with front-end sales charges, so in this context the proposal's ongoing sales charge concept -- treating a portion of 12b-1 fees as the functional equivalent of a frontend sales charge -- is wholly inapt. Money market funds with 12b-1 fees higher than 25 basis points often are used in commercial sweep accounts. As in the retirement plan context, the transfer agency systems used to manage the flows into and out of the sweep accounts are not built to track and age investments by share lot, and would have to be built if funds were required to treat the amount of current 12b-1 fees over 25 basis points as an ongoing sales charge -- a needless and wasteful exercise, given that the intended purpose of the funds in this context are for managing overnight cash balances, not long term investments. Moreover, the application of the ongoing sales charge concept seems particularly misplaced here, because 12b-1 fees are used in this context far more like platform fees than an alternative to a front-end sales charge. Put another way, 12b-1 fees in this context are much more like marketing and service fees than ongoing sales charges."
It continues, "It does not appear that the use of 12b-1 fees by money market funds was contemplated in the Release, either with respect to marketing and service fees or ongoing sales charges. Before the SEC goes forward with this rulemaking, it should carefully consider the application of the rule in this context."
Finally, ICI's letter adds, "Ultimately, our recommendation is similar to the retirement share context. To the extent the SEC goes forward with this rulemaking and decides to apply the new framework to money market funds, it should reject the notion that all current 12b-1 fees in excess of 25 basis points must be treated as an ongoing sales charge. The mere fact that money market funds are not sold with front-end sales charges belies the premise that money market funds should be included in this rule. The SEC might direct FINRA to permit the payment of higher marketing and services fees by money market funds. In any event, requiring systems to be built to track and age daily investment of overnight balances for the theoretical conversion to another share class years in the future is clearly pointless, and would fail any cost-benefit analysis the SEC undertook as required by statute. The needless costs associated with such a requirement would serve only to make money market funds less efficient, without providing even theoretical benefits to investors."
In early September, Moody's Investors Service caused quite a stir in the money fund industry by proposing to abandon its AAA rating standard and to make major changes to its ratings methodology. (See Crane Data's Sept. 8 News "Moody's Proposes New Money Market Fund Rating Methodology, Symbols".) The NRSRO's Request for Comment, "Moody's Proposes New Money Market Fund Rating Methodology and Symbols", stopped accepting feedback on Nov. 5, but the changes were a major topic of conversation at this week's Association of Financial Professionals conference. The verbal and anecdotal feedback Crane Data's heard has been decidedly negative, but we had yet to see any of the written responses (Moody's keeps them confidential) ... until now.
Treasury Strategies has released its comment letter on Moody's tentative changes. It focuses on the parental support aspects of the changes and urges Moody's to withdraw its proposal. TSI's Anthony Carfang and Jacob Nygren, along with Illinois Institute of Technology's Professor John Bilson, write, "We comment on Moody's proposed new ratings system for money market funds. In particular, we comment on the proposal to award higher ratings to money market funds (MMFs) based on subjective assumptions regarding a fund sponsor's ability and willingness to support a financially stressed fund and the likelihood of its doing so. We believe the proposal will result in serious adverse consequences for MMF investors, sponsors (especially commercial banks), and the financial system as a whole." (See also, Treasury Strategies' press release on its comment letter.)
The letter explains, "Some of the dangers of the proposal include: Inaccurate and misleading ratings, Investor confusion, Damaged integrity and efficiency of money market funds, Moral hazard and systemic risk, Increased risks for investors, Challenges for fiduciary investors, Regulatory and policy issues, and Adverse consequences for bank sponsors. Only money market funds with sponsor support will be able to attain the highest rating under Moody's new rating methodology.... But, as discussed below, a sponsor's creditworthiness is an illusory measure of the likelihood that it will support a distressed fund."
Treasury Strategies says, "An assigned rating would depend not only on a fund sponsor's ability to provide support but also on Moody's qualitative assessment of the sponsor's willingness to provide support.... As Moody's notes, however, most money market fund sponsors have no legal obligation to support their funds, for accounting and other reasons. In the absence of a contractual agreement, Moody's states that it will consider factors such as 'the strategic importance of the sponsor's asset management franchise, in general, and its liquidity franchise, in particular.' Moody's also will consider the sponsor's 'track record for supporting its funds' and the 'extent to which the failure of a money market fund would likely affect the sponsor's brand name or reputation, thereby creating incentive to provide support to its funds. Finally, Moody's will take into account 'any limitations -- legal, regulatory, or accounting -- that could restrict a sponsor's ability to provide support."
The comment letter argues, "These factors will result in unreliable ratings that will mislead investors, undermine the integrity of money market funds, and damage the financial system." It says, "A money market fund rating system that depends on sponsor support as a requirement for attaining the highest rating necessarily will result in inaccurate and unreliable ratings. The likelihood of sponsor support is a highly subjective and speculative conjecture of questionable validity. A recent Federal Reserve staff study (see Crane Data's Sept. 23 News "Fed's McCabe Pens Paper on Cross Section of Money Market Fund Risks") of sponsor-supported money market funds characterizes sponsor support as 'discretionary, unregulated, and opaque' and 'probably most unreliable when systemic risks are most salient.' Absent an express written agreement obligating a sponsor to provide support, Moody's would need to rely on verbal indications of support -- hardly a credible underpinning for a rating. No bank or bank holding company sponsor could make any statement suggesting that it would guarantee an affiliated fund without significant regulatory consequences."
The critique continues, "Moody's methodology depends largely on Moody's assessment of whether an implicit guarantee exists. Moody's proposed methodology will result in invalid and unreliable ratings of money market funds because the ratings will be dependent on assumptions that cannot be proven and in most cases will be denied.... A fund that receives the highest rating from Moody's will be presumed to have an implicit guarantee from its sponsor.... It is unlikely, however, that any sponsor -- particularly a sponsor of a bank affiliated fund -- would be able to acknowledge that any implicit guarantee exists. Accounting and capital consequences would prevent it from doing so.... If a money market fund or its sponsor disavows or fails to confirm an implicit guarantee, Moody's then will be faced with the dilemma of whether to downgrade the fund. If Moody's does not downgrade the fund, the integrity of its MMF rating methodology will be completely undermined. Again, it is reasonable to ask what purpose is served by such a rating system that will produce such illusory and confusing ratings."
Finally, Treasury Strategies' 13-page comment argues, "Money market funds are widely used by a wide range of investors who rely on credit ratings in making their fund selections. If the ratings are inaccurate and unreliable, the integrity of money market funds themselves will be called into question and their important role in the financial markets will be undermined. Money market funds are used by individual investors, retirement plans, pension funds, corporations, bank trust departments, brokerage firms, state and local governments, charitable foundations, and other investors for cash management and investment purposes.... If the ratings system for money market funds is perceived as unreliable and confusing, the investors who rely on these funds may be forced to seek other, less efficient, alternatives for their cash management and short-term investment needs. Money market funds were developed specifically to serve these needs and have done so successfully and efficiently for decades. A flawed ratings system will undermine the efficacy of money market funds in the financial markets and thereby reduce the overall efficiency of the markets.... We urge Moody's to withdraw its proposal."
A news release posted yesterday entitled, "FDIC Approves Temporary Unlimited Deposit Insurance Coverage for Noninterest-Bearing Transaction Accounts," says, "The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved a final rule to implement section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 343 provides temporary unlimited coverage for noninterest-bearing transaction accounts. This separate coverage will become effective on December 31, 2010, and will end on December 31, 2012."
It continues, "The final rule revises the FDIC's deposit insurance regulations to include noninterest-bearing transaction accounts as a new temporary deposit insurance account category. All funds held in such accounts are fully insured, without limit, and this coverage is separate from, and in addition to, the coverage provided to depositors for other accounts at an insured depository institution. Noninterest-bearing accounts, as defined in the Dodd-Frank Act, include only traditional, noninterest-bearing demand deposit (or checking) accounts that allow for an unlimited number of transfers and withdrawals at any time, whether held by a business, individual or other type of depositor."
The FDIC explains, "The new temporary provision for unlimited coverage of deposit insurance for noninterest-bearing transaction accounts is similar to the FDIC's Transaction Account Guarantee Program (TAGP) but differs significantly in the definition of 'noninterest-bearing transaction account.' The TAGP, which expires December 31, 2010, includes low-interest NOW (negotiable order of withdrawal) accounts and Interest on Lawyer Trust Accounts (IOLTAs). The final rule expressly states that NOW and IOLTA accounts are not covered under the Dodd-Frank Act definition of noninterest-bearing transaction accounts and do not qualify for temporary unlimited coverage."
In other news, a release entitled, "SunGard Expands SGN Short-Term Investment Portal for Cash Managers with Addition of BofA Funds" says, "SunGard has added BofAGlobal Capital Management's U.S. money market funds to its SunGard Global Network (SGN) Short-Term Cash Management portal. SGN is a global, multi-currency trading and connectivity solution that helps institutional cash investors, such as corporate treasurers, local authorities and asset managers, meet their short-term investment requirements."
Bob Ward, chief operating officer of SunGard's wealth management business, says, "Institutional investors come to SunGard for solutions that help them connect to their valued partners, like BofA Global Capital Management, in a fully-disclosed, transparent manner. We are pleased that the BofA Funds are now available via the SunGard Global Network."
The following is excerpted from the November issue of Crane Data's Money Fund Intelligence.... This month, Invesco commemorates its 30th anniversary in the cash management business. Its STIC Prime Fund was launched on Nov. 18, 1980, and it remains one of the industry's largest institutional money market funds. The company, which manages over $69 billion in "cash" assets, has since expanded its lineup to 19 money funds in four currencies. We discuss the investment manager's current efforts, and we look back at money fund history with Karen Dunn Kelley, CEO of Invesco Fixed Income, Lyman Missimer, Head of Global Cash Management and Municipals, Tony Wong, Head of Short-Term Investment Grade Credit Research, and Bill Hoppe, Executive VP of Invesco Distributors.
Q: How did Invesco get into the money fund business? Hoppe tells us, "Many years ago when interest rates were significantly higher, (what was then known as) AIM was approached by some people in the banking business.... At the time, expense ratios were in the 35-45 basis point range.... So, ultimately, we got started in the business for institutional investors who wanted a safe product at a more affordable price. We grew the business by creating classes of the funds to accommodate a pricing structure different units of banks and brokerage firms needed, and it has expanded from that point."
Q: What's the biggest challenge today vs. historically? Missimer answers, "We've been living by our famous three tenets of safety, liquidity and yield, and we've stuck with those through thick and thin. In the last few years, we've certainly seen a much more challenging world from a credit standpoint. From a yield standpoint, the challenge has been finding the appropriate securities to buy and finding creditworthy counterparties. The business has evolved and changed. We have had difficult times and easy times. But we've stuck with what we have been doing since 1970 and it has served us well.... We'll stay focused on what we do best, which is providing a creditworthy, stable product for our customers."
Dunn Kelley adds, "From the firm level, we have always looked at cash as an asset class.... We've really put a tremendous amount of effort into the cash business from the entire firm.... We've historically provided our customers what they need to manage their cash and have always tried to be very responsive to them."
Wong says, "The way Karen and the founders of AIM had set it up, the money market product was to be about safety and liquidity. We have always managed on this very steady and intrinsic philosophy of reinforcing those two points before yield. As industry practices and regulatory standards have evolved through the years, and even with the most recent iterations, these changes have typically affected us less than the marketplace. We've always managed in a style that is focused on those things before yield. We really feel the marketplace is moving toward how we have historically managed, so it has had less impact on our shop."
Q: Is it true that Invesco has never had a bailout? Dunn Kelley responds, "That is absolutely correct and it is something that quite frankly we are all very, very proud of as we look at how we've managed the business over many different cycles.... I think when you have an independent, highly qualified expert staff -- their perspective and their sharpness are different from somebody who looks at credit as a relative value."
The Association of Financial Professionals Treasury conference takes place in San Antonio this week (Nov. 7-10), and a number of companies are announcing new products, enhancements and initiatives. One of the hottest trends in Texas involves "transparency," or the ability to look through to a fund's underlying securities, and two of the largest online money market mutual fund trading "portals" have announced new tools to assist corporate cash managers. This morning, Institutional Cash Distributors, or ICD, unveils its "Transparency Plus" product and BNY Mellon's Liquidity DIRECT releases a Transparency Report feature.
A press release entitled, "ICD Revolutionizes Corporate Treasury with On-Demand Money Market Risk Management Application Transparency Plus," says, "Institutional Cash Distributors (ICD) today announced the launch of its new proprietary money market fund risk-exposure analytics application, Transparency Plus. As part of ICD's broader trading platform strategy, Transparency Plus provides corporate treasury departments the visibility required to make critical investment decisions, increasing efficiency while decreasing risk."
It continues, "Developed in response to feedback from ICD's Fortune 500 clients, following the 2008 financial crisis, Transparency Plus' development was guided by 23-year Corporate Treasury veteran, Tom Knight to deliver enhanced transparency for corporate treasurers, helping them achieve capital preservation, liquidity and yield. Until now there hasn't been a risk-exposure analytics application for this market. Transparency Plus transforms the burdensome manual process of evaluating funds and provides the ability to take data snapshots of the fund marketplace, which enables clients to run 'what if scenarios' using the virtual analysis capabilities of the system."
ICD's Jeff Jellison comments, "Due to large cash balances and market concerns, corporate treasury departments are demanding transparency to better understand their credit exposure. Transparency Plus is the game-changing application that meets this demand.... Our clients trusted ICD to provide clarity on headline risk throughout the 2008 financial crisis. We took what we learned, consulted with our clients and developed a treasury-focused application, Transparency Plus. This is another example of ICD's mission to bring innovative solutions to our customers."
Matthew Post, Treasury Manager for Qualcomm adds, "As a long-term customer of ICD, we are especially impressed with ICD's customer service, particularly throughout the credit and liquidity crisis of 2008. Their powerful transparency and analytics application takes risk management to a whole new level." ICD SVP/Treasurer Tom Knight adds, "The primary feature of Transparency Plus is to provide immediate visibility into counterparty exposure," explains "It is also designed to provide critical financial information on these counterparties, enabling investor access to deeper investment intelligence."
BNY Mellon writes in a "Liquidity Direct Update, "In an effort to increase transparency, improve investment diversification, and mitigate risk, Liquidity DIRECT has added a dynamic new feature to its investment reporting package. Our new Transparency Report details how your cash is allocated to specifc securities that all of the money market funds invest in, and across all the accounts you have with Liquidity DIRECT. This provides a whole new depth from which to view and calibrate your cash allocations."
They continue, "Investing your cash across a variety of money market funds may not provide the level of diversification you seek. This is because different funds may invest in the same securities which can dampen the diversification benefits of allocating assets across money market funds. By viewing your direct exposure to specific securities on the new Transparency Report, you will be able to make better informed investment decisions through Liquidity DIRECT. Liquidity DIRECT's Transparency Report is generated on a monthly basis and is available on the sixth business day after month-end. In addition to showing the percentage allocation that each security comprises among your overall holdings, the Transparency Report will also show security name, security type and cusip number. Going forward, we plan to add even more detail to this report as well as new money funds as they become available through Liquidity DIRECT."
A Liquidity DIRECT press release adds, "Among the asset managers not affiliated with BNY Mellon currently participating in Liquidity DIRECT's new Transparency Report are Federated Investors Funds, Fidelity Institutional Funds, Goldman Sachs Asset Management, Invesco Funds, JP Morgan Asset Management, Morgan Stanley Institutional Funds, Wells Fargo Advantage Funds and Western Asset Liquidity Funds. Liquidity DIRECT plans to add Dreyfus Funds and BlackRock to the Transparency Report by the end of this year."
Jonathan Spirgel, Executive Vice President and Global Head of Liquidity Services at BNY Mellon, comments, "By providing increased transparency, this innovative addition to Liquidity DIRECT will help investors improve investment diversification and risk management. The new Transparency Report reflects our commitment to helping our clients succeed in a challenging investment environment."
The November issue of Crane Data's flagship Money Fund Intelligence newsletter, which was e-mailed to subscribers Friday morning, contains the articles, "PWG Report Discounts Radical Reform Options," which reviews the MMF Reform Options Report and feedback to date; "Still Loving Liquidity: Invesco Cash Turns 30," our monthly fund manager interview; and "Guzman to Launch MF Portal; More AFP News," which features a new entrant in the online money market fund trading "portal" marketplace. The issue also includes News on fee waivers, DWS's Variable NAV Money Fund, recent CFTC proposals, the new class of ultra-short money funds, and more.
We also have updated our Money Fund Wisdom database software and our MFI XLS performance rankings spreadsheet. Our latest monthly data and Crane Indexes show that yields and assets both declined slightly during October. Both our MFI and MFI XLS products have added WAL, or weighted average life, to our data tables this month, and we continue to expand our collection of liquidity information and portfolio holdings.
Our lead piece says, "The U.S. Treasury finally released its 'Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options,' which briefly explores 7 possible paths regulators may take to decrease systematic risk. While the report doesn't endorse any option, it appears to discount the possibility of a floating NAV and to support the concept of a private liquidity facility." We cite comments and feedback from industry participants and observers to date, most of which are favorable towards the report.
MFI also profiles Invesco, which is commemorating its 30th anniversary in the cash management business. Its STIC Prime Fund was launched on Nov. 18, 1980, and it remains one of the industry's largest institutional money market funds. The company, which manages over $69 billion in 'cash' assets, has since expanded its lineup to 19 money funds in four currencies. We discuss the investment manager's current efforts, and we look back at money fund history with Karen Dunn Kelley, CEO of Invesco Fixed Income, Lyman Missimer, Head of Global Cash Management and Municipals, Tony Wong, Head of Short-Term Investment Grade Credit Research, and Bill Hoppe, Executive VP of Invesco Distributors.
Finally, starting Sunday, thousands of corporate treasurers will gather in San Antonio for the Association of Financial Professionals annual conference. Many of the largest institutional money fund managers will be exhibiting, and several online money market trading 'portals' and technology companies will be announcing new products or features. Among these is the first new entrant to the portal market in years, Guzman & Company's TreasuryHelm. We review these and more in the November issue.
Note that Crane Data will be exhibiting at AFP, which is November 7-10 in San Antonio. Our Peter Crane will present along with The Mosaic Company's Ken Bodell on "Money Market Mutual Funds & Cash Investments: Doing More Due Diligence" on Tuesday morning, Nov. 9 at 10:30am. (E-mail Diana to request a copy of our Powerpoint slides.) Stop by Booth #1313 to say "Hello" if you're at the show!
A release entitled, "SEC Publishes Request for Comment on President's Working Group Report on Money Market Fund Reform Options" was sent out Wednesday afternoon, saying, "The Securities and Exchange Commission today published a request for public comment on the options discussed in the President's Working Group on Financial Markets report on possible money market fund reforms." Click here for the full "President's Working Group Report on Money Market Fund Reform" request for comment report and click here to submit a comment. (All comments will be made available to the public.)
The release adds, "As contemplated by the President's Working Group report, the SEC is requesting public comment on the options described in the report, including the effectiveness of the options in mitigating any systemic risk or susceptibility to runs associated with money market funds, as well as their potential impact on money market fund investors, fund managers, issuers of short-term debt, and other stakeholders. Comment received will assist the SEC and the Financial Stability Oversight Council in their further analysis. The public comment period will remain open for 60 days following publication of the comment request in the Federal Register." (Expect publication in another day or two.)
The RFC report's Summary says, "The Securities and Exchange Commission is seeking comment on the options discussed in the report presenting the results of the President's Working Group on Financial Markets' study of possible money market fund reforms. Public comments on the options discussed in this report will help inform consideration of reform proposals addressing money market funds' susceptibility to runs.... Comments should be received on or before January 10, 2011." It adds, for further information, contact Daniele Marchesani or Sarah ten Siethoff at (202) 551-6792, Division of Investment Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-8549.
Under "Supplementary Information," the RFC says, "Following the recommendation in the U.S. Department of the Treasury's 2009 paper on Financial Regulatory Reform: A New Foundation, the President's Working Group on Financial Markets ('PWG') conducted a study of possible reforms that might mitigate money market funds' susceptibility to runs. The results of this study are included in the report issued on October 21, 2010 and attached to this release as an Appendix. The Report expresses support for the new rules regulating money market funds that the Commission approved last February. These new rules seek to better protect money market fund investors in times of financial market turmoil and lessen the possibility that money market funds will not be able to withstand stresses similar to those experienced in 2007 and 2008. When we adopted these rules, we recognized that they were a first step to addressing regulatory concerns as the events of 2007 and 2008 raised the question of whether further, more fundamental changes to the regulatory structure governing money market funds may be warranted."
It continues, "The Report identifies the features that make money market funds susceptible to runs as well as the systemic implications of the run on prime money market funds that occurred in September 2008. The Report states that the Commission's new rules alone could not be expected to prevent a run of the type experienced in September 2008. `Accordingly, the Report outlines possible reforms that could supplement the new rules we adopted and, individually or in combination, further reduce money market funds' susceptibility to runs and the related systemic risk. Some of the measures discussed in the Report could be implemented by the Commission under our existing statutory authority; others would require new legislation, coordination by multiple government agencies, or the creation of new private entities."
Finally, the SEC's RFC says, "The Commission requests comment on the Report. Comments received will better enable the Commission and the newly-established Financial Stability Oversight Council (which will be taking over the work of the PWG in this area) to consider the options discussed in this Report to identify those most likely to materially reduce money market funds' susceptibility to runs and to pursue their implementation. As the Report states, we anticipate that following the comment period a series of meetings will be held in Washington, D.C. with various stakeholders, interested persons, experts, and regulators to discuss the options in the Report. We request comments on the options described in the Report both individually and in combination. Commenters should address the effectiveness of the options in mitigating systemic risks associated with money market funds, as well as their potential impact on money market fund investors, fund managers, issuers of short-term debt and other stakeholders. We also are interested in comments on other issues commenters believe are relevant to further money market fund reform, including other approaches for lessening systemic risk not identified in the Report. We urge commenters to submit empirical data and other information in support of their comments."
Reich & Tang has filed to launch what appears to be the second "ultra-short" money market fund, RNT Natixis Liquid Prime Portfolio. (See our Oct. 1 News "JPMorgan Rolls Out Ultra-Short Money Mkt Fund, Enhanced Cash Fund".) The new RNT fund, which was just rated AAA by S&P, will have a maximum WAM of 9 days, daily transparency of holdings, and a 5:30pm cut-off time for purchases.
In a release entitled, "RNT Natixis Liquid Prime Portfolio Rated 'AAAm', S&P says, "Standard & Poor’s Ratings Services said today that it assigned its 'AAAm' principal stability fund rating to the Daily Income Fund - RNT Natixis Liquid Prime Portfolio. The fund is scheduled to launch on Nov. 30, 2010. The 'AAAm' rating, the highest assigned to principal stability funds, is based on our analysis of the fund's credit quality, market price exposure, and management."
S&P continues, "Reich & Tang Asset Management LLC (RTAM) is the investment manager for the fund. RTAM has been an investment adviser since 1970 and as of Sept. 30, 2010, had approximately $11.6 billion in assets under management. RTAM is a direct subsidiary of Natixis Global Asset Management. Natixis Global Asset Management had approximately $719 billion in assets under management as of Sept. 30, 2010. In addition to this newly rated fund, RTAM manages two other 'AAAm' rated principal stability funds. The custodian for the fund is the Bank of New York, and Reich & Tang Distributors Inc. is the distributor."
S&P explains, "The RNT Natixis Liquid Prime Portfolio seeks to provide as high a level of current income to the extent consistent with the preservation of capital. The fund is unique in that, under normal market conditions, it will maintain a maximum dollar-weighted average maturity and dollar-weighted life of nine days or less and offer daily transparency of holdings. Eligible investments include securities issued or guaranteed by the U.S. government, its agencies or instrumentalities; debt securities issued by U.S. and foreign banks, including certificates of deposit, commercial paper, time deposits, and other short-term securities and repurchase agreements collateralized by securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities. The fund is not permitted to invest in asset backed commercial paper, asset-backed securities, collateralized loan obligations, or loan participation notes. The fund's credit quality is excellent, with more than 50% of the securities invested in 'A-1+' rated securities and the remainder in 'A-1' rated paper. The RNT Natixis Liquid Prime Portfolio is available in two share classes: Liquidity Class (LIQXX), which offers a 5:30 p.m. EST cutoff [and an 18 bps expense ratio]; and Treasurer Class (LQTXX), which has a 12:30 p.m. cutoff and a 15 basis point expense ratio."
Finally, the release says, "The 'AAAm' rating reflects the fund's extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit risks. This is achieved through conservative investment practices and strict internal controls. We review pertinent fund information and portfolio reports weekly as part of our ongoing rating process." (Note that Crane Data has begun tracking the new JPMorgan Current Yield Money Market Fund (JCCXX) -- look for statistics in our November Money Fund Intelligence XLS -- and that we will begin tracking the new RNT fund following its launch.)
In late October, the Investment Company Institute updated its latest quarterly "Worldwide Mutual Fund Assets and Flows Second Quarter 2010." The release says, "Mutual fund assets worldwide decreased 6.8 percent to $21.44 trillion at the end of the second quarter of 2010.... In contrast to long-term funds, money market funds experienced negative net cash flows for the fifth consecutive quarter. Although money market fund outflows slowed to $247 billion in the second quarter from $406 billion in the first quarter, money market fund outflows more than offset flows into long-term funds."
The report explains, "The Investment Company Institute compiles worldwide statistics on behalf of the International Investment Funds Association, an organization of national mutual fund associations. The collection for the second quarter of 2010 contains statistics from 45 countries.... On a U.S. dollar–denominated basis, equity fund assets declined by 10.8 percent to $8.2 trillion in assets at the end of the second quarter of 2010. Balanced/mixed fund assets decreased 5.6 percent and money market fund assets fell 7.5 percent in the second quarter. Bond fund assets grew 0.7 percent to $4.8 trillion in the second quarter."
ICI says, "Money market funds worldwide experienced $247 billion in net outflows in the second quarter, after registering $406 billion in net outflows in the first quarter of 2010. Reduced net outflows were attributable to money market funds in the Americas, were net outflows fell to $172 billion in the second quarter from $340 billion in the previous quarter. Outflows from European money market funds were $65 billion in the second quarter, compared to net outflows of $53 billion of net outflows in the first quarter.... Money market fund assets represented 21 percent of the worldwide total."
The Worldwide Assets and Flows report shows that the U.S. accounts for 57.5% of all assets with $2.814 trillion (as of June 30, 2010). France ranks second with 10.8%, or $526.4 billion (though some don't consider France true "money market funds"). Crane Data estimates that Ireland ranks third with 8.6%, or $418.7 billion; Luxembourg ranks fourth at 7.9%, or $385.1 billion; and, Australia ranks fifth with 4.8% of assets, or $233.8 billion. (Ireland and Luxembourg are home to the vast majority of "offshore" U.S.-style money market funds marketed to multinational companies. Note too that Crane Data has adjusted ICI's numbers to include Ireland, which doesn't break out money market funds. We estimate that half of Ireland's total $837.4 billion in assets are money funds.)
The list of largest money fund markets also includes: Korea ($64.8 billion), Italy ($54.7 billion), Mexico ($50.6 billion), Canada ($41.3 billion), South Africa ($33.7 billion), Brazil ($32.5 billion), Japan ($25.0 billion), Taiwan ($25.6 billion), Switzerland ($25.4 billion), and India ($15.5 billion). The largest percentage declines were seen by `Portugal and Spain, which experienced declines of 34.0% and 30.7%, respectively. France (down $96.4 billion, Luxembourg (down $39.6 billion) and Ireland (down $23.9 billion) also saw large declines in dollar terms.
E-mail Kaio to request a copy of Crane Data's compilation of ICI's data into a "Largest Money Market Mutual Fund Markets Worldwide" spreadsheet.
As we mentioned in Friday's "Link of the Day," Federated Investors released its third quarter earnings late last week and hosted a conference call. As usual, a number of questions relating to money fund matters were discussed in the call's Q&A section. We excerpt from these below.
First, Michael Carrier from Deutsche Bank asked about the President's Working Group report, in particular the insurance and two-tiered system options. Federated CEO Chris Donahue replied, "On the insurance, we just don't see how it works. One of the philosophies we have that we share with many others in this industry is that socialization of credit risk is unwise.... Then, the cost and expense of it and actually having someone do it, is highly problematic. So yes it's an okay discussion. But understand that this discussion has gone on since the 70's. People have looked in and out of this question. There hasn't been a solution to date, and we are just not optimistic that's what is going to happen."
He continued, "On the two-tiered, it's interesting that our friends in Europe did a similar thing. But we don't think that really is the way to go. What they did was set in their rules, something called the money market fund that had a variable net asset value and then something called the short-term money market fund that had a one dollar net asset value. We just don't see how that is going to exactly work."
Donahue explained, "I think that you also get from the flavor of the Presidents Working Group is an understanding that if you keep the resiliency of money funds, that have been improved under 2a-7, strong, you will be able to attract the money funds into that corral where you can see what is going on. The regulators are not really that interested, at least if you read the President's Working Group, in having that money squish out into something else that doesn't have the strength associated with the money funds. So it's good that all of these things are discussed back and forth, and all of the points are analyzed. But of all of them, we think that the lead one coming out of that is ... the liquidity bank."
In response to another question, Donahue commented, "We also remain convinced that even though they will discuss and talk about ideas of capital as regards to money funds, that it is very unlikely that they will try to do something that the net effect economically kills the business, because the capital can't be sustained by the marketplace on the money funds. They make that very clear in the Presidents Working Group, simply by looking at all the ebbs and flows, positive things that money funds offer into the economy. We remain enthusiastic and positive that they are not going to put any kind of crazy capital requirements on. We think we're in a pretty good spot with cash and capital."
An analyst also asked, "Do you feel like there could be some volatility around flows as maybe investors move away from all the funds that are maybe towards the bottom end of the [new shadow NAV disclosure] range? Donahue said, "I don't really expect something like that. Now if you say bottom of the range, I don't know what that is going to be since I have not seen everybody's report. But here are a couple of factors to remember. When you look at those numbers, at least in our case, what you are going to see is three nines or three zeros after the decimal spots which you may see some numbers change in the forth sport behind the decimal. These funds are not a dollar, they are priced at a dollar, and they are a dollar. Therefore, I wouldn't expect to see much flow movement because of this. On the other hand, we think it's a good thing that this information is coming out because it reminds people that these are investment products and it is a way of showing what is going on in addition to the portfolio inside the fund."
Donahue was also asked about a recent CfTC proposal to restrict the amount FCMs (futures commodities merchants) may invest in money funds. He answered, "It's a proposal, and we have a very excellent working relationship with the staff at the CfTC. We will be commenting and working with them with these proposals, so we don't yet know what will come out. That is an important thing to remember. The next thing is that this is a two pronged proposal. One is an overall limit, the 10, and the other is by family limit of 2.... If it go to a diversification over we probably be that winners and that the current levels, we don't see how it effects the clients right now."
Finally, he responded to another question, "I think that the liquidity bank does add a feature of strengthening the resiliency of money funds. Therefore it should not surprise you that the leading purveyors of money funds, who have been working together on coming up with this, should also speak in favor of it.... So it has a certain beauty, namely that it would be capitalized by the advisors of prime funds, that it would issue securities that would be available to third-parties and others, and that it would build up capital. At the end of the day, after the 30% of cash in funds were used, it could buy high quality securities at amortized cost from funds that were having liquidity challenges. And then [they would] have access to the discount window, which would of course have attendant costs and charges. That would make it something you'd just as soon not do."