A press release posted Thursday says, "U.S. Bancorp today announced that it will receive a 9.5 percent stake in Chicago-based Nuveen Investments and cash consideration in exchange for the long-term asset management business of FAF Advisors (FAF)." The FAF money market mutual fund unit will remain and will be renamed U.S. Bancorp Asset Management.
The release explains, "FAF, an affiliate of U.S. Bancorp, is advisor to the First American Funds family of mutual funds. This transaction will add approximately $25 billion of long-term assets under management, which are currently managed by FAF Advisors, to Nuveen Asset Management, which manages $75 billion in municipal fixed income assets and serves as the advisor of the Nuveen funds. Upon completion of the transaction, Nuveen Investments, which currently manages $150 billion of assets across several high-quality affiliates, will manage a combined total of $175 billion in institutional and retail assets."
Regarding the cash business, the release says, "U.S. Bancorp will retain the investment products and capabilities to support custom cash management, securities lending, stable value and advisory services to the First American Money Market Funds. These investment products and services will continue to be provided by the same team that provided them prior to this transaction. This team will operate under the new name, 'U.S. Bancorp Asset Management,' and will be led by Joseph Ulrey, who will be named chief executive officer of U.S. Bancorp Asset Management."
It adds, "Liquidity and cash related investment vehicles will continue to be a core competency of U.S. Bank where it has achieved both scale and significant expertise, with almost $60 billion in assets under management. U.S. Bank's clients will see no change to the investment teams that have supported them and provided excellent investment performance over the years. U.S. Bank is committed to investing in the resources necessary to manage these products going forward. U.S. Bancorp Asset Management will continue to have its headquarters at its present location in downtown Minneapolis."
The release also says of the stock and bond funds, "FAF and Nuveen Asset Management will operate under the name of Nuveen Asset Management with operations in Chicago and Minneapolis once this strategic alliance is completed. The vast majority of the employees of FAF joining the combined business will remain located in Minneapolis. The transaction is expected to close before year end and is subject to customary closing conditions and approvals of the mutual funds' boards of directors."
The First American Money Market Funds rank 17 among 82 U.S. money fund managers tracked by our Money Fund Intelligence XLS with $45.8 billion in assets.
As we reported Monday in our story "ICI's Stevens Unveils Stable Value Coalition at Crane's MF Symposium," a number of groups have been mobilizing to oppose a floating NAV for money market funds. Many have written letters to Secretary of the Treasury Timothy Geithner and U.S. S.E.C. Chairman Mary Shapiro, and others have begun soliciting support from investors, issuers and fund providers. We excerpt some of the letters below, and check here for more letters and lobbying links in coming days.
Chairman Paul Stevens said in his speech at Crane's Money Fund Symposium Monday afternoon, "At ICI, we have been making this case to anyone who will listen, and urging users of money market funds and issuers in the money markets to speak out. And I'm pleased to report that they are responding. In the last several weeks, groups representing state and local governments have come out squarely in opposition to forcing money market funds to float. The National Association of State Treasurers; the Government Finance Officers Association; and the National Association of State Auditors, Comptrollers, and Treasurers -- all have voiced their support for the ability of funds to operate with a stable NAV. The SEC's own Investor Advisory Committee has before it a resolution, strongly backed by one of its subcommittees, that calls upon the Commission to preserve the stable NAV as a core feature of money market funds."
Stevens adds, "And America's businesses are also mobilizing. Just last week, four of the leading organizations in corporate finance joined in a letter to Treasury Secretary Timothy Geithner urging him to reject the notion of abandoning the stable NAV. The letter was signed by the National Association of Corporate Treasurers; the Association for Financial Professionals; Financial Executives International; and the U.S. Chamber of Commerce. They note that floating these funds will drive away investors, and the resulting drain of assets will 'severely impair the ability of companies to raise capital in the U.S. and undermine efforts to strengthen the American economy'. More than 40 companies -- many of them household names -- have signed on to this letter or others urging the President's Working Group to drop the idea of floating NAVs."
The NAST letter says, "At its 2009 annual conference, the National Association of State Treasurers (NAST), the organization that represents the treasurers or chief financial officers of the fifty states, the District of Columbia, and Puerto Rico, considered the SEC proposal to promote a floating Net Asset Value (NAV), rather than a stable $1 per share, for money market funds. In the opinion of NAST, going to a floating NAV could significantly change investor behaviors (especially institutional investors) and, as a result, potentially destabilize financial markets for both investors and debt issuers. Currently money market funds are a relatively low-cost, efficient, and convenient cash management tool for managers of public funds, and NAST would like to see them remain that way."
It adds, "While NAST understands that reasonable individuals can and have made arguments in favor of a floating NAV, this organization is firmly of the opinion that the arguments against a floating NAV are much stronger than are those in its favor. For these reasons, the National Association of State Treasurers hereby goes on record as opposing a floating NAV for money market funds."
Another letter, signed by a number of organizations and corporations, says, "The undersigned companies and organizations represent a diverse range of industries that rely on money market mutual funds to support their capital raising and investment needs. American business will lose one of its most important sources of short-term funding if money market funds are forced to abandon their stable per-share value -- one of the ideas under consideration by the President's Working Group on Financial Markets and the U.S. Securities and Exchange Commission (SEC). With such a change, the expected flight of investors from these funds will severely impair the ability of companies to raise capital in the U.S. and undermine efforts to strengthen the American economy."
It continues, "We have supported appropriate steps taken by the Department of the Treasury and the SEC to preserve and strengthen this vital source of business financing, but believe this is one proposal that should be rejected outright. We urge your support for policies that promote the use of the stable NAV that has served American investors and businesses so well for decades."
The second annual Crane's Money Fund Symposium, which began Monday afternoon in Boston, concludes this morning with sessions on FDIC Sweeps, Floating-Rate Money Funds, Online Portals, and Critical Questions on The New Rule 2a-7. Over 330 attendees, sponsors and speakers participated in the largest gathering of money fund professionals ever held, and the mood was surprisingly upbeat considering the continued zero-yield environment and the shifting regulatory landscape.
Recent evidence indicates that yields are inching higher and asset outflows are subsiding, and speakers revealed that an `impressive lobbying coalition has formed to fight the possibility of a floating rate NAV being mandated at some point in the future. (See the full text of ICI President Paul Stevens full speech, "The Seventh-Inning Stretch: The State of Play for Money Market Funds".)
Reuters covered the conference in Tuesday's "U.S. money funds cope with changes, wary of more," saying, "U.S. money market funds have been coping with a sweeping set of regulatory changes this year and are wary of more in the coming months. Persistently low interest rates, the European sovereign debt crisis and a tight supply of investments have intensified the headache for the $2.5 trillion industry, analysts and investors said on Monday at a conference here sponsored by research firm Crane Data LLC."
The article continues, "More changes will likely further restrict the types of securities that funds can buy and drive investors into alternatives like bank accounts to park their cash. For borrowers like local governments and banks, which rely on money funds to buy their debt, there are concerns that more stringent rules will likely pare demand and raise borrowing costs."
It says, "The Obama administration has a working group studying money market issues, which ICI's Stevens called 'the biggest potential game changer.' 'The idea of floating these funds' value is likely to be discussed in the President's Working Group report,' he said. Other looming industry issues include the reporting of 'shadow' net asset value (NAV) and fallout stemming from the recently enacted federal financial regulatory overhaul, analysts and investors said. In early 2011, a money market fund will have to report with a 60-day lag its per-share value, which can be fractionally above or below $1."
Reuters adds, "Despite the challenges for the industry, there have been bright spots, such as a modest pickup in yields from earlier this year and the containment of the European debt crisis in the wake of the release of the stress test results of the region's banks on Friday. Another sign that the worst for the industry may have passed was a lighter atmosphere at the conference, according to participants." "At least we are not dead," joked Alex Roever, short-term fixed income strategist at JP Morgan Securities, writes Reuters reporter Richard Leong.
Look for more coverage in coming days and in the August issue of Money Fund Intelligence. Copies of the Money Fund Symposium conference binder, which includes all the Powerpoints and attendee list, are available to new Crane Data subscribers.
Monday afternoon, the Investment Company Institute's President & CEO Paul Schott Stevens gives the opening keynote at Crane's Money Fund Symposium at the InterContinental Boston. Entitled, "The Seventh-Inning Stretch: The State of Play for Money Market Funds," Steven's speech comments, "My topic today is the 'Washington and the New Regulatory Regime' for money market funds. This is an opportune time to check the scoreboard and see where we stand."
He explains, "Here are the points that I'd like to discuss with you today. First, the industry and the Securities and Exchange Commission have already scored some impressive gains in making money market funds more secure. We've worked together with a common goal -- to make money market funds more resilient under extreme market conditions, to ensure they can withstand another deep and widespread loss of liquidity in the money markets. ICI's Money Market Working Group offered responsible and innovative ideas for making these funds stronger, and the SEC built upon those concepts in its final Rule 2a-7 amendments.... I think those new rules are already making a difference.."
Stevens continues, "Second, we're not through with this process. In baseball terms, you might say we're in the seventh-inning stretch -- there's been a lot of action, but we still don't know how the final innings will play out. The biggest potential game-changer, of course, is the report that the President's Working Group on Financial Markets is expected to issue on money market funds. But we are also working with regulators on other fronts, including the Federal Reserve Bank of New York's efforts to strengthen the underpinnings of tri-party repurchase agreements."
He says, "A third point I'd like to make is that money market funds remain firmly opposed to proposals that would force them to abandon their stable per-share value. And we are not alone in that stance. America's businesses, along with state and local governments, are rallying in opposition to any suggestion that regulators would force money market funds off their stable $1.00 net asset value. The idea of floating these funds' value is likely to be discussed in the President's Working Group report, whenever it may be issued. And it's still in the air at the SEC, which is contemplating a 'round two' rulemaking to address any lingering issues in money market funds and Rule 2a-7."
His comments continue, "Proponents of the floating NAV see this idea as a home run -- a way to solve any problems of systemic risk that might somehow arise from money market funds with one swing of the bat. We think it's more of a foul ball. Forcing money market funds to float their NAV will not eliminate the chances of investor runs. Nor will it reduce risks to the financial system in a severe liquidity crisis. What it will do is destroy money market funds as we know them -- imposing severe dislocations on America's households, businesses, and governments, and disrupting the American economy."
Stevens adds, "At ICI, we have been making this case to anyone who will listen, and urging users of money market funds and issuers in the money markets to speak out. And I'm pleased to report that they are responding. In the last several weeks, groups representing state and local governments have come out squarely in opposition to forcing money market funds to float. The National Association of State Treasurers; the Government Finance Officers Association; and the National Association of State Auditors, Comptrollers, and Treasurers -- all have voiced their support for the ability of funds to operate with a stable NAV. The SEC's own Investor Advisory Committee has before it a resolution, strongly backed by one of its subcommittees, that calls upon the Commission to preserve the stable NAV as a core feature of money market funds."
He continues, "And America's businesses are also mobilizing. Just last week, four of the leading organizations in corporate finance joined in a letter to Treasury Secretary Timothy Geithner urging him to reject the notion of abandoning the stable NAV. The letter was signed by the National Association of Corporate Treasurers; the Association for Financial Professionals; Financial Executives International; and the U.S. Chamber of Commerce. They note that floating these funds will drive away investors, and the resulting drain of assets will 'severely impair the ability of companies to raise capital in the U.S. and undermine efforts to strengthen the American economy.' More than 40 companies -- many of them household names -- have signed on to this letter or others urging the President's Working Group to drop the idea of floating NAVs. These organizations and others have emphasized that it is vital to preserve the essential, defining characteristic of money market funds -- because they all recognize the highly important role that these funds play in our markets and our economy."
NOTE: Watch for News postings beginning Monday afternoon from the opening of Crane's Money Fund Symposium, which takes place through Wednesday at The InterContinental Boston....
As we noted Friday, Federated Investors hosted its latest quarterly earnings call Friday. Today we excerpt some highlights, which include evidence that fee waivers are decreasing and that money fund outflows are nearing an end. CEO Chris Donahue said, "Money market asset changes are best understood within the context of the unprecedented cycle we're experiencing.... While market conditions continue to be challenging, our clients have remained strong, stable and growing. Our clients have appreciated the strength, the stability and the availability of our products. We remain confident that our cash management business is well positioned, and we expect this business to grow over time with higher highs and higher lows during particular cycles."
He also commented, "We also expect further growth from consolidation. The transaction we announced last week with SunTrust (see Crane Data's July 19 News "Federated to Take Over SunTrust's RidgeWorth Money Mkt Fund Assets") is expected to result in the transition of about $17 billion in money market fund assets into Federated money market products during Q4. We expect to see more of these arrangements as banks and other organizations are attracted to our long-term commitment to this business and our long-term record of providing high quality products and service that they can rely on for their clients."
Donahue added, "Turning to money market fund yield waivers, Q2 saw some relief in the impact from these waivers. As we expected, repo rates moved into the upper portion of the zero to 25 bps target range. LIBOR rates further increased.... This helped to decrease the waivers more than anticipated. We expect these waivers to decrease going forward, though at a slower rate than we saw in Q2.... We remain active in looking for consolidation deals, including money market business."
CFO Tom Donahue explained, "As expected, we saw less impact from money market fee waivers in Q2 [$13 million vs. $17.8 million in Q1].... We do not expect the impact from fee waivers to decrease materially from this level until the Fed begins to increase interest rates.... In terms of sensitivity, we have estimated that a 10 basis point increase in gross money fund yields would decrease waivers by about one-third, and this is essentially what we experienced in the second quarter. Looking forward, we estimate that gaining another 10 basis points in gross yield will likely reduce the impact of these waivers by another one-third from our current levels, and a 25 basis point increase would reduce the impact by about two-thirds."
When asked where money fund assets would bottom out, MM CIO Debbie Cunningham responded, "If you look at where some of those assets went, they went into some bank deposit-type instruments that, with the increase in the yield curve that we've seen over the last quarter, has made funds competitive with those products again. That's why you’ve seen sort of a leveling off of those asset flows. The expectation would be that that would be maintained. Having said that, any time you go into a rising rate environment, although we're pushing that out ... we can't go lower.... Rising rate environments are accompanies on a cyclical basis with a decline in money fund assets.... [But] we think a good portion of that has already played itself out."
She added, "Money funds are definitely the vehicle of choice from an ease and a usage perspective, and to the extent that they are even with, or even close to, what's happening from a direct market perspective, I think they win the game in that regard."
Federated Investors, which released second quarter earnings late yesterday and which hosts its quarterly conference call at 9am Friday, showed lower revenues but also lower fee waivers in Q2. The company's release says, "As the equity and fixed-income markets contracted in 2007 and 2008, Federated's money market assets increased by $182 billion and as markets recovered in 2009 and 2010, Federated's assets reflected industry trends as $95 billion flowed out of Federated's money market products. Since the end of 2006, Federated's money market managed assets have increased $86.9 billion to $260.5 billion at June 30, 2010."
It continues, "Money market assets in both funds and separate accounts were $260.5 billion at June 30, 2010, down $85.9 billion or 25 percent from $346.4 billion at June 30, 2009 and down $11.8 billion or 4 percent from $272.3 billion at March 31, 2010. Money market mutual fund assets were $231.2 billion at June 30, 2010, down $81.6 billion or 26 percent from $312.8 billion at June 30, 2009 and down $9.0 billion or 4 percent from $240.2 billion at March 31, 2010."
Federated explains, "For Q2 2010, revenue decreased by $75.4 million or 25 percent from the same quarter last year. The decrease in revenue primarily reflects a $41.3 million increase (to $58.3 million from $17.0 million for Q2 2009) in voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields. This increase in fee waivers was largely offset by a related decrease in distribution expenses of $33.9 million (to $45.3 million from $11.4 million) such that the net impact on operating income was a decrease of $7.4 million (to $13.0 million from $5.6 million.) In addition, revenue decreased due to lower average money market managed assets. In Q2 2010, Federated derived 50 percent of its revenue from money market assets."
It adds, "[V]oluntary fee waivers on certain money market funds in order to maintain positive or zero net yields were $11.2 million lower (to $58.3 million from $69.5 million) than Q1 2010. This decrease in fee waivers was largely offset by a related increase in distribution expenses of $6.4 million (to $45.3 million from $51.7 million) such that the net impact on operating income was an increase of $4.8 million (to $13.0 million from $17.8 million) compared to the prior quarter."
Federated's release continues, "Revenue for the first half of 2010 decreased by $153.1 million or 25 percent compared to the same period last year. The decrease in revenue primarily reflects a $101.2 million increase (to $127.8 million from $26.6 million for YTD 2009) in voluntary fee waivers on certain money market funds in order to maintain positive or zero net yields. This increase in fee waivers was largely offset by a related decrease in distribution expenses of $81.1 million (to $97.0 million from $15.9 million) such that the net impact on operating income was a decrease of $20.1 million (to $30.8 million from $10.7 million). In addition, revenue decreased due to lower average money market managed assets."
Finally, they say, "Fee waivers to produce positive or zero net yields are expected to decrease over time, but could vary significantly based on market conditions. The amount of these waivers will be determined by a variety of factors including available yields on instruments held by the money market funds, changes in assets within money market funds, actions by the Federal Reserve and the U.S. Department of the Treasury, changes in the mix of money market customer assets, changes in expenses of the money market funds and Federated’s willingness to continue these waivers. Federated will host an earnings conference call at 9 a.m. Eastern on Friday, July 23, 2010. Investors are invited to listen to Federated's earnings teleconference by calling 877-407-0782 (domestic) or 201-689-8567 (international) prior to the 9 a.m. start time."
BlackRock, the 5th largest manager of U.S. money market funds with $171 billion and the 2nd largest manager of money funds outside the U.S. with $64 billion, announced second quarter earnings yesterday and made several comments relevant to the money market mutual fund business. Crane Data's Money Fund Intelligence XLS shows BlackRock's domestic money fund assets declining by 7.1% in the quarter and 31.7% over the past year vs. an industry average of 14.1% for the quarter and 24.0% for the year.
The company's earnings release quotes Chairman & CEO Lawrence Fink, "While the money market industry continues to contract in favor of bank deposits, the effect on our revenues is significantly less than the headline effect on new business flows and AUM. More significantly, recent reports show that non-financial businesses hold more cash and cash equivalents on their balance sheets than at any time over the past 50 years. As fears over sovereign credit risk and the economic recovery abate, these balances will be a powerful source for market flows, M&A and business investment."
BlackRock's release adds, "Cash management closed the quarter with $279.2 billion AUM. Outflows of $24.9 billion were consistent with industry trends. Outflows spanned all regions, including $16.9 billion from clients in the Americas and $8.0 billion from investors in EMEA. Similarly, we experienced net redemptions from investors in all client categories, including $21.7 billion from institutional clients and $3.2 billion from retail and high net worth investors. We expect rates to remain low and, consequently, we do not expect the flow trend to reverse in the near-term."
On yesterday's conference call, Fink commented, "It's important to note about cash -- I've said this in the last few quarters -- as we continue to have low rates ... the money market business is not as competitive as bank deposits. Banks are still offering higher rates than money market funds. But ... banks are building so much cash and now 2-year Treasuries [are] trading around 60 bps, [so] we are now beginning to see the banks bring down their deposit rates.... [T]he competitive arbitrage between banks deposits and money funds is narrowing. So we don't believe, going forward, we're going to see the type of outflows [we've been seeing].... And quite frankly, we may start seeing, as an industry, more inflows if 2-year Treasuries continue to trade where they're trading now. And if they trade even lower, then banks are going to have a problem offering 30 or 40 basis points for overnight money versus money market funds."
One analyst asked, "How do regulatory reform and other issues like [potential] money market capital charges might potentially affect the industry and BlackRock?" Fink answered, "FinReg doesn't speak about money market funds. That's a separate issue the SEC is working on. We've had meetings with the SEC as recently as two weeks ago. The big issue for money market funds is going to be, 'Does the SEC demand variable NAVs?' That to me is the most important issue related to the money market business."
Finally, he added, "In terms of capital charges, our proposal has been to have capital charges that we could build over a number of years. We believe we need to find ways of making sure that money market funds are as competitive as any bank deposits. So we believe were the industry to go to the next level, we have to have as competitive a product in the money market industry as bank deposits. When the FDIC guaranteeing up to $250,000 in deposits now, we need to make sure we have some form of safety for investors. And I do believe the [disclosure of a delayed] shadow NAV is a good start. I do believe a liquidity bank, which we're in favor of, is a very good first step.... [But] at this moment I don't see any real threats to the financial situation related to money market funds."
See also our July 20 Crane Data News "BlackRock Makes The Case Against Floating the Net Asset Value". Note too that Federated Investors releases earnings late Thursday and will host a conference call Friday at 9am.
This month Money Fund Intelligence profiled the Dreyfus money funds and interviewed several veteran members of BNY Mellon's new Cash Investment Strategies unit, one of the world's largest. We spoke with Charles Cardona, President of The Dreyfus Corporation and BNY Mellon Cash Investment Strategies, Patricia Larkin, Chief Investment Officer of CIS for the Taxable 2a-7 and Tax-Exempt Money Funds, and Louis Geser, Director of Short Duration Credit Research. Excerpts from our Q&A follow.
First we asked, "What's new with Dreyfus, BNY Mellon and CIS? Cardona told MFI, "We've been working to integrate all of the BNY Mellon short duration, fixed income activities under a division of The Dreyfus Corporation called BNY Mellon Cash Investment Strategies.... [W]e are managing over $550 billion dollars in terms of assets within short duration fixed income. Our goals were three-fold. First, we wanted a unified credit and risk analysis approach supporting all of our separate products under the short duration fixed income space. Second, this has enabled us to consolidate a large portion of our distribution and client coverage efforts across different products. Third, [it's allowed us to] provide all CIS constituents with a consistent process across all of our portfolio activities whether it is money market funds, bank commingled funds, separate accounts, stable value, or securities lending reinvestment proceeds."
We then asked, "What's the biggest challenge managing your money funds? Larkin answered, "I think it would really be capacity issues. Twenty five years ago, we had a lot more banks that issued hundreds of millions of dollars in CDs every day. In the commercial paper space over the last two years, there has been tremendous consolidation and less issuance. It's been more and more difficult to find corporate issuance day to day. The asset-backed market has shrunk considerably the last two years."
Geser added, "Another dimension of capacity risk is correlation risk. To the extent that the major issuers in the markets are financial intermediaries, the concentration within available 2a-7 capacity has gone from a more robust tier-one corporate credit ecosystem to one primarily consisting of financials. Asset backed commercial paper give us an opportunity to at least replace part of that. [But] now of course that entire asset class, including the multi-seller and single sponsor, has really diminished in size. Other than select corporate issuers where we can find pockets of capacity, the big issues from a credit perspective revolve around the assessment and the stratification of risks within banks."
We also asked, "Have you seen these 7-day put deals? Geser responded, "The BBVA deal was a small issue relative to their overall balance sheet, but it's an intriguing product. There are other products out there that in one way shape or form begin to resemble some of the extendable product that was issued pre-crisis. That, I think, we do have some reservations about.... [W]e are watching this with a fair degree of interest and we want to see how the market evolves."
MFI queried, "Any concerns about Europe or any pressing credit concerns in general? Geser answers, "We are somewhat more constructive with respect to the 'contagion' hypothesis. We believe that credit and individual issuers can continue to be stratified by specific variables around the contagion theme that allow you to make independent calls on specific issuers. We are comfortable with that up to a point; I would say more broadly that there are real, tangible sovereign risks globally in terms of debt metrics. Inside of the sovereign risk issue and from a credit perspective, we believe that the universal banking model will survive. But I would argue from a credit perspective that it is important to position these kinds of issuers within compartments because a lot of exogenous risks remain present."
Cardona added, "The only other comment I would like to make on Europe is from a client perspective.... We have had a lot of inquiries and client calls about what was going on, and we did see a couple of customers move to a government or treasury portfolio. But it really was very minimal, and I would say it has largely calmed down over the past several weeks." Look for more excerpts in coming days, and e-mail firstname.lastname@example.org to request the latest issue of Money Fund Intelligence.
BlackRock, the fifth largest manager of money market mutual funds, recently published an article entitled, "The Case Against Floating the Net Asset Value," which argues strongly against the merits of abandoning a stable NAV and which urges "less distruptive solutions" for preventing future problems. The "ViewPoint: Money Market Mutual Funds" piece says, "In the wake of the financial crisis, much has been said about money market funds. Did they contribute to the problem or were they victims of the credit crunch? How are they important to our financial system going forward? What changes, if any, should be made to reduce risk while maintaining the integrity of the product? The SEC Money Market Reform rules, effective in May 2010, together with the Dodd-Frank Wall Street Reform and Consumer Protection Act, have already gone a long way toward addressing some of the issues, but additional proposals remain on the table. Among them is a recommendation that money market funds -- known and appreciated for their stable net asset value (NAV) -- assume a floating NAV structure. In this paper, we make the case that such a change would not simply alter the nature of a single investment vehicle, but would have far-reaching implications and negative consequences for the entire financial system."
BlackRock explains, "The Role of Money Market Funds," "Money market funds are extremely important to our economy, acting as credit intermediaries matching nearly $3 trillion of issuers and investors. The issuers of short-term debt instruments include the US government and its agencies, corporations (including banks), and state and local municipalities. The investor side is equally diverse and includes corporations, municipalities, pension plans, trust funds, hospitals, universities and individuals; all use money funds for some portion of their operating funds or as a component of a broader portfolio. Money market funds are attractive to investors specifically because they provide a stable NAV and daily access to funds, while also offering a competitive yield versus bank deposits and direct investments. Prior to the unprecedented credit crisis of 2008, money market funds had successfully provided this service to the financial markets since the early 1970s without ever requiring government intervention."
They continue, "The events of 2008, including the historic 'breaking of the buck' by the Reserve Primary Fund, exposed both idiosyncratic (fund-specific) and systemic (industry-wide) risks associated with money market funds, and gave rise to several reform measures designed to mitigate such risks. The changes enacted to Rule 2a-7 -- the rule governing money market funds -- include more conservative investment parameters related to credit quality, maturity and liquidity, as well as enhanced guidelines around transparency to investors. The recent Dodd-Frank Wall Street Reform and Consumer Protection Act has imposed further safeguards that touch nearly every part of the financial industry. As we move forward, the collective goal of the investment community and policymakers should be to manage risk while avoiding unintended negative consequences. The potential imposition of a floating NAV on money market funds is of particular concern."
The piece says, "The SEC, in recognition of the events of the past two years, is exploring whether more fundamental changes to the regulatory structure may be warranted to improve money market funds' ability to weather liquidity crises and other shocks to the short-term financial markets. While the SEC acknowledges that the stable NAV is a core feature of money market funds, some on the panel argue that a floating NAV would reflect a fund's true market value, allowing investors to see regular fluctuations in their investment and provide a clearer idea of the risks associated with a particular fund. Essentially, proponents argue that floating the NAV reduces the likelihood of a run on a fund because, in a crisis, the fund would redeem people at less than $1.00 per share, thereby reducing the incentive to leave and protecting the remaining shareholders. The idea of a floating NAV is among the most controversial of the recommendations related to money funds, and with good reason."
It continues, "BlackRock is among a diverse group of money market fund sponsors, industry organizations, individual and institutional investors and issuers that believe maintaining a stable NAV structure for money market funds is critical not only for liquidity markets, but for the broader financial and economic system. The vast majority of investors use money market funds specifically because of their $1.00 NAV feature. For many investors, floating the NAV negates the value of the product. A floating NAV fund generates taxable gains and losses..., creating a tax and accounting burden.... Perhaps most notably, floating the NAV does not solve the underlying issue of investors fleeing the funds and disrupting the cash markets and the broader financial system. In the event of a significant decline in NAV, both retail and institutional investors are likely to leave floating NAV funds -- and quickly."
BlackRock adds, "It is our opinion that retail clients strongly favor a stable NAV and will move a substantial percentage of assets out of money market funds if the NAV floats. Direct investors don't want tax consequences and seek the reliability of a stable NAV. Retail intermediaries feel a fiduciary duty to use stable NAV product for cash. In many cases, sweep systems cannot even handle fluctuating NAV.... Institutional clients, in our view, require a stable NAV and will move the majority of their assets to cash equivalents with a stable NAV if money market funds adopt a floating NAV. In many cases, investment guidelines require stable NAV, forcing the decision to move the assets."
Finally, the paper suggests "Recommendations for Today: Less Disruptive Solutions," saying, "Clearly, the financial and economic environment has changed substantially since 2008. New SEC rules are designed to mitigate risk in investor portfolios, addressing credit quality, maturity structure and providing liquidity buffers. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a Financial Stability Oversight Council and establishes a framework for identifying and tackling potential problems in the financial system.... Given all of these changes, we believe policymakers should be careful to avoid unintended and potentially devastating consequences for the economy associated with sweeping changes. Instead, we recommend that emphasis be directed at incremental ideas, such as: Allow for rainy day reserves.... Enhance disclosure.... Foster multi-agency dialogue.... [and] Convene a symposium."
A press release Friday morning entitled, "Federated Investors, Inc. to Acquire $17 billion in Money Market Assets from RidgeWorth Capital Management," says, "Federated Investors, Inc., one of the nation's largest investment managers, reached a definitive agreement with SunTrust Banks, Inc. to transition approximately $17 billion in money market assets to Federated. The assets are currently managed by SunTrust's RidgeWorth Capital Management Inc. and its subsidiary StableRiver Capital Management LLC."
The release continues, "In connection with this business transaction, money market assets currently managed in nine RidgeWorth money market mutual funds will be transitioned into six existing Federated money market mutual funds with similar investment objectives. Certain assets maintained by SunTrust Bank in collective and common funds also will be transitioned to Federated money market mutual funds. The transaction is expected to occur through a series of closings by year-end."
J. Christopher Donahue, Federated's president and chief executive officer, says, "As a leading provider of liquidity management services, Federated regularly works with organizations of many types and sizes as they evaluate their cash management needs. The transition builds on Federated's long-term relationship with SunTrust by providing current SunTrust clients access to Federated's impressive breadth of products, experienced money managers, proven credit process and extensive customer-service capabilities."
The release adds, "The board of directors of Federated Investors, Inc., has approved the transaction. The transition of assets from the RidgeWorth funds to the Federated funds is expected to be completed through various consent processes. The transaction is also subject to normal and customary approvals. Federated Investors, Inc. is one of the largest investment managers in the United States, managing nearly $350 billion in assets as of March 31, 2010. With 137 funds and a variety of separately managed account options, Federated provides comprehensive investment management to nearly 5,300 institutions and intermediaries including corporations, government entities, insurance companies, foundations and endowments, banks and broker/dealers. For more information, visit FederatedInvestors.com."
Federated comments in an 8-K filing, "This transaction, which is expected to occur through a series of closings by December 31, 2010, includes upfront cash payments that could total up to $8.75 million due at the transaction closing dates. Based on asset levels as of May 31, 2010, the upfront cash payments would total $7.9 million. The transaction also includes contingent purchase price payments payable over five years. The contingent purchase price payments will be calculated as a percentage of revenue less operating expenses directly attributed to certain eligible assets. Based on asset levels as of May 31, 2010, these additional payments would total approximately $30 million over five years."
Crane Data's latest Money Fund Intelligence XLS shows RidgeWorth as the 22nd largest manager of money funds with $15.7 billion. A combined Federated/RidgeWorth complex would still rank as the third largest manager of U.S. money market mutual funds (behind Fidelity and J.P. Morgan) with $239 billion. To see a listing of current RidgeWorth money funds, ask to see our latest Money Fund Intelligence or MFI XLS.
Economists at the Federal Reserve Bank of New York recently released a publication entitled, "Shadow Banking," which was written by Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, and Hayley Boesky. The Abstract says, "The rapid growth of the market-based financial system since the mid-1980s changed the nature of financial intermediation in the United States profoundly. Within the market-based financial system, 'shadow banks' are particularly important institutions. Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without access to central bank liquidity or public sector credit guarantees. Examples of shadow banks include finance companies, asset-backed commercial paper (ABCP) conduits, limited-purpose finance companies, structured investment vehicles, credit hedge funds, money market mutual funds, securities lenders, and government-sponsored enterprises."
It continues, "Shadow banks are interconnected along a vertically integrated, long intermediation chain, which intermediates credit through a wide range of securitization and secured funding techniques such as ABCP, asset-backed securities, collateralized debt obligations, and repo. This intermediation chain binds shadow banks into a network, which is the shadow banking system. The shadow banking system rivals the traditional banking system in the intermediation of credit to households and businesses. Over the past decade, the shadow banking system provided sources of inexpensive funding for credit by converting opaque, risky, long-term assets into money-like and seemingly riskless short-term liabilities. Maturity and credit transformation in the shadow banking system thus contributed significantly to asset bubbles in residential and commercial real estate markets prior to the financial crisis."
The authors say, "We document that the shadow banking system became severely strained during the financial crisis because, like traditional banks, shadow banks conduct credit, maturity, and liquidity transformation, but unlike traditional financial intermediaries, they lack access to public sources of liquidity, such as the Federal Reserve's discount window, or public sources of insurance, such as federal deposit insurance. The liquidity facilities of the Federal Reserve and other government agencies' guarantee schemes were a direct response to the liquidity and capital shortfalls of shadow banks and, effectively, provided either a backstop to credit intermediation by the shadow banking system or to traditional banks for the exposure to shadow banks. Our paper documents the institutional features of shadow banks, discusses their economic roles, and analyzes their relation to the traditional banking system."
The study, which doesn't spend much time discussing money market funds, includes the following conclusions: "The volume of credit intermediated by the shadow banking system is of comparable magnitude to credit intermediated by the traditional banking system." The paper says, "At a size of roughly $16 trillion in the first quarter of 2010, the shadow banking system remains an important, albeit shrinking source of credit for the real economy. The official liquidity facilities and guarantee schemes introduced since the summer of 2007 helped make the $5 trillion contraction in the size of the shadow banking system relatively orderly and controlled.... While these programs were only temporary in nature, given the still significant size of the shadow banking system and its inherent fragility due to exposure to runs by wholesale funding providers, it is imperative for policymakers to assess whether shadow banks should have access to official backstops permanently, or be regulated out of existence."
It also concludes, "The collapse of the shadow banking system is not unprecedented in the context of the bank runs of the 19th and early 20th centuries." It speculates that "private sector balance sheets will always fail at internalizing systematic risk. The official sector will always have to step in to help.... `Shadow banks will always exist. Their omnipresence -- through arbitrage, innovation and gains from specialization -- is a standard feature of all advanced financial systems.
Capital Advisors Group published a research piece yesterday entitled, "Prudent Risk Diversification: Challenges to and Solutions for Short-Duration Investors." Written by Director of Investment Research Lance Pan, its Abstract says, "A common misconception of risk diversification may be that additional credits automatically result in a safer portfolio. Today however, one of the primary challenges in developing a successful diversification strategy for short duration investors is a smaller pool of eligible investments. A mad dash into European financial debt, certain sovereign debt, municipal debt, and bank deposits by money funds and other investors provides evidence that some diversification strategies may actually increase, rather than decrease, risk."
Pan explains, "The benefits of risk diversification are so widely accepted these days that almost every investment policy statement (IPS), including those for short-duration portfolios, requires diversification targets for specific investments. However, investors may not be aware that the pool of eligible investments has shrunk dramatically in recent years. Diversification for diversification's sake, thus, may increase credit risk and reduce portfolio performance. This is especially true for short-duration portfolios in which an increased probability of default may overshadow the incremental yield gained when adding peripheral credits to satisfy diversification targets."
He continues, "In last month's newsletter, we attempted to summarize Eurozone bank credit exposures in U.S. prime money funds. One observation we made from the datasets was that the largest exposures tended to be found within large and systemically important entities. This phenomenon illustrates the trade-off that managers of money funds and separate accounts may often have to make: concentration in large and stronger names versus diversification into smaller, less liquid, and perhaps less credit-worthy names. Our commentary traces the sources of the current dilemma and some possible responses to this issue. Ultimately, we hope to establish that individual credit selection should be at the core of the decision process."
The piece explains, "The aforementioned factors significantly challenge a short-duration portfolio, be it a separately managed account or a prime money market fund, to find ways to diversify risk through investing in other asset categories.... [W]e have noticed several trends in risk diversification that actually introduced new risks to credit portfolios. Less Liquid Foreign Financials: This first trend arose from the ruins of the SIV debacle in late 2007.... Sovereign Guarantors: Fresh credit concerns developed courtesy of the Lehman Brothers bankruptcy in September 2008 when global governments rushed to institute massive liquidity and credit support schemes for their respective banking institutions.... [S]overeign governments replaced the banks they support as the debtors of the bonds, similar to the U.S. FDIC bond guaranteed program.... Municipal Bonds: Yet a third trend of diversification involves taxable investors, including prime money funds, buying tax-exempt securities in the municipal bond market.... Although some of these bonds may offer bona fide diversification benefits, the very fact that tax-exempt bonds offer higher yield than their taxable counterparts ought to sound alarms for potential investors."
Pan adds a "Caution on Bank Deposits," saying, "Another popular, although somewhat less obvious, strategy of diversification is to fallback to simple bank deposits. One of the beneficiaries of the flight from prime money funds after the Reserve Primary fund debacle in 2008 has clearly been the banking sector which benefits from both the liquidity support of the Federal Reserve discount window and the deposit insurance of the FDIC. In the context of this commentary, we would like to comment on two potential drawbacks of good old bank deposits."
He explains, "Money Market Deposit Accounts (MMDAs): As part of the Treasury Department's emergency liquidity measures, the FDIC's Transaction Account Guarantee (TAG) program expired on December 31, 2009, but banks with weak funding access can still continue to tap into the program through December 31, 2010, albeit at higher opt-in fees. Commercial banks sought to retain deposits after the TAG expired by offering depositors higher rates on MMDA balances, which double as sweep accounts. But without the benefit of the TAG, large corporate accounts essentially take on the credit risk of the banks at which they keep their accounts."
Finally, on Aggregated Insured Deposits Programs, Pan adds, "In recent years, deposit aggregators also wooed short-duration investors with aggregated insured deposits from banks in their networks that each offer up to the $250,000 FDIC insurance limit. While these programs have merit in that they facilitate greater access to deposit insurance for smaller community banks to the savers community, large corporate accounts should take note of the programs' inherent limitations. Along with the non-marketable nature of the investments and steep early withdrawal penalties of some of these programs, these deposits are generally operated by a centralized entity that negotiates rates, facilitates transfers, administers recordkeeping and processes subscriptions and redemptions."
Fitch Ratings released a study yesterday entitled, "Assessing and Comparing Risks of Money Market Funds," which "summarizes the main risk factors Fitch Ratings considers when analyzing and surveying money market funds." The factors include: "periodic review of the fund's investment policies and procedures," "frequent reviews of other key fund metrics, including an up-to-date review of portfolio holdings," "ongoing communication with the fund's portfolio manager and support staff, including periodic formal on-site reviews," and, "consideration of the fund sponsor's role in terms of strategic commitment, operational support, and financial resources."
Fitch says about monitoring MMF Investment Policies and Procedures, "Key parameters of a fund's investment policies and procedures, as well as a description of its objectives and fundamental strategy, can normally be found in the fund's prospectus and offering documents. However, critical information often can only be acquired through direct dialogue with a fund's portfolio management team."
They add, "Market or fund-specific events may, from time to time, cause rated MMFs to deviate temporarily from internal investment guidelines and/or Fitch criteria. For example, a downgrade of a portfolio security may breach the fund's minimum credit quality guidelines or a large cash outflow may increase a fund's single obligor exposure or impair available liquidity. In such cases, Fitch communicates with the fund advisor to understand the nature of such a deviation and whether mitigating factors exist."
The publication says, "Ongoing active surveillance of MMFs is an important part of the rating process, as MMF risk profiles can change rapidly due to redemption activity and portfolio turnover or other factors. Fitch requests and reviews surveillance information, including portfolio holdings on an ongoing basis, normally weekly.... In addition, frequent monitoring highlights any shifts in portfolio composition, which may reflect changes in the investment advisor's views on credit, liquidity, or interest rate risks or shifts in investor preferences that could result in unexpectedly high redemption activity."
On "Fund Management <b:>," they comment, "Fitch seeks to evaluate the degree to which the organization has a well-defined, consistently implemented credit research, asset selection, portfolio investment processes, and operational practices. For example, a meeting with a prime MMF portfolio management team would entail a review of an approved list of issuers and counterparties, a discussion of permitted asset classes, and anticipated changes in the portfolio composition given an expected level of interest rates and credit environment."
The report adds, "Considerations related to liquidity risk management include the nature and concentration of fund shareholders, which are used to evaluate the likelihood that unexpected redemptions could lead to forced asset liquidations. Additionally, the liquidity of portfolio securities in secondary markets, as well as any alternative sources of liquidity a fund may have access to, is also considered. Alternative sources of liquidity include but [are] not limited to external credit facilities with the fund's custodian banks or other third parties and interfund lending arrangements."
Note that Fitch co-author Viktoria Baklanova will present, along with Moody's Marty Duffy and Capital Advisors' Lance Pan on "Analyzing Fund Portfolios & Holdings the afternoon of July 27th in Boston at this month's Crane's Money Fund Symposium.
Money market mutual fund assets tracked by Crane Data's Money Fund Intelligence Daily rose by $17.6 billion to $2.655 trillion in the week ended July 9. On Friday, however, assets declined by $2.1 billion. Yields continued to claw their way higher. Our Crane 100 Money Fund Index rose by one basis point to 0.09% last week. Yields rose by 0.01% in June too reports our latest Money Fund Intelligence monthly, but assets declined by $27.9 billion during June.
Prime Institutional money funds accounted for all of the inflows on the week, rising $19.6 billion to $902.1 billion. On Friday, the Prime Inst inflows reversed and assets fell by $839 million. The Crane Prime Institutional MF Index, an average of 163 general purpose funds sold to corporations and large investors, rose by one basis point to 0.14% on the week. (This is the indexes' annualized 7-day net yield as of July 9; the 30-day yield, or average annualized return over the past 30 days, was 0.13%.)
Treasury and Government Institutional funds continued to see outflows, falling by $3.0 billion and $1.6 billion, respectively, last week. The Crane Treasury Inst MF Index continued to yield (7-day annualized) a mere 0.01%, while the Crane Government Inst MF Index yielded 0.04%, up 0.01% from the prior week. Our MFI Daily Treasury Inst Index includes 91 funds with $261.9 billion, while our MFI Govt Inst Index includes 92 funds with $368.3 billion in assets.
The Crane Prime Retail MF Index added $2.26 billion to $600.1 billion last week and averaged a yield of 0.02% (unchanged on the week). The Crane Treasury Retail MF Index added $288 million to $80.2 billion and averaged a yield of 0.01%, while the Crane Government Retail MF Index added $948 million to $103.5 billion and averaged a yield of 0.01%. Our Crane Tax Exempt MF Index saw assets decline by $881 million to $338.5 billion; the average tax-exempt money funds' yield fell slightly to 0.04%.
In June, our Crane 100 Money Fund Index saw its yield inch higher to 0.08%. On the month, the Crane 100, an average of the 100 largest taxable money funds, returned 0.01% (unannualized). For 3 months, the Crane 100 returned 0.02%; YTD it returned 0.03%. Over 1 year, the index returned 0.09%; over 3 years it returned 1.76% (average annualized); over 5 years it returned 2.85%; and over 10 years the Crane 100 returned 2.61%.
Contact us to request more information on our Money Fund Intelligence Daily, Money Fund Intelligence and Crane Index products or for more details on the Crane Money Fund Indexes.
The Evergreen Funds name disappeared today as The Wells Fargo Advantage Funds completed the final step in their intergration and rebranding. The fund company's latest merger news, entitled, "Wells Fargo Advantage and Evergreen Funds Shareholders Approve All Reorganization Proposals", says, "On July 6, 2010, a significant milestone was met when shareholders of the Evergreen New York Municipal Money Market Fund approved a reorganization proposal for the Fund as a Wells Fargo Advantage Fund.... The mergers and reorganizations for the money market and fixed-income funds are expected to occur after the close of business on July 9, 2010."
As we quoted in Crane Data's Jan. 14, 2010 News, "Merger Approved for Wells Fargo Advantage, Evergreen Fund Families", "Wells Fargo Funds Management, LLC, the advisor to the Wells Fargo Advantage Funds, and its affiliate Evergreen Investment Management Company, LLC, the advisor to the Evergreen Funds, have announced plans to streamline and strengthen their mutual fund product offerings. The plans include a series of fund mergers, reorganizations, and liquidations which, following approval by fund shareholders, will result in a Wells Fargo Advantage Funds family offering 128 mutual funds ... representing what we believe to be the best investment management talent from both firms." (See Evergreen press release.)
The new "Proposed Fund Lineup," which should be reflected in tonight's rate files and in tomorrow's edition of our Money Fund Intelligence Daily, eliminates all the Evergreen taxable money funds (31 are tracked by our Money Fund Intelligence, merging these assets into existing Wells Fargo Advantage (22 currently) funds. It also remanes a number of the Evergreen Tax-Free money funds (we list 20 in MFI) and merges most of Wells' Tax-Exempt lineup (10) into newly renamed WFA funds.
Among the taxable fund changes: Evergreen Prime Cash Mgmt and Evergreen Institutional MM (share classes included AD, I, IN, IS and P) are merged into Wells Fargo Adv Heritage; Evergreen Money Market Fund merged into Wells Fargo Adv Overland Ex Swp; Evergreen US Govt MMF and Evergreen Institutional US Govt merged into Wells Fargo Adv Govt MM; Evergreen Treasury MMF I and Evergreen Institutional Treas merged into Wells Fargo Adv Trs Plus; and Evergreen Inst 100% Treasury merged into Wells Fargo 100% Treas MM. Wells Fargo Adv Cash Inv, Wells Fargo Adv MMF and Wells Fargo Adv Prm Inv MM remain unaffected by the fund mergers.
Among tax-exempt funds: Evergreen CA Muni MMF merged into Wells Fargo Adv CA T-F; Evergreen Institutional Muni was renamed to WFA Municipal Cash Management Money Market; Wells Fargo Adv Muni MM merged into Evergreen Municipal Money Mkt; Evergreen NJ Muni MMF, Evergreen NY Muni MMF, and Evergreen PA Muni MMF were renamed as WFA Funds; and Wells Fargo Adv MN T-F and Wells Fargo Adv Nat T-F were unaffected by the changes.
Wells Fargo currently ranks 8th among the 82 managers of money market funds tracked by Crane Data with $143.2 billion in assets as of June 30, 2010. It ranks below 7th-largest complex Schwab's $154.9 billion but above No. 9 Goldman Sachs with $137.0 billion. (Note that Wells Capital's David Sylvester will be presenting on "Merging Money Fund Investment Teams" at the upcoming Crane's Money Fund Symposium.)
The latest weekly "Money Market Mutual Fund Assets" report shows a surprisingly strong jump in money fund assets, likely due to start-of-quarter dividends, bond coupon payments and funding allotments. While probably temporary, it does appear that money fund assets are struggling to form a bottom at the $2.8 trillion level -- the same level assets stood at in September 2007, at the start of the Subprime Liquidity Panic.
ICI's release says, "Total money market mutual fund assets increased by $17.83 billion to $2.830 trillion for the week ended Wednesday, July 7, the Investment Company Institute reported today. Taxable government funds decreased by $10.57 billion, taxable non-government funds increased by $22.43 billion, and tax-exempt funds increased by $5.97 billion. Assets of retail money market funds increased by $6.53 billion to $988.20 billion. Taxable government money market fund assets in the retail category increased by $1.42 billion to $172.53 billion, taxable non-government money market fund assets increased by $2.00 billion to $602.50 billion, and tax-exempt fund assets increased by $3.11 billion to $213.17 billion."
It adds, "Assets of institutional money market funds increased by $11.30 billion to $1.841 trillion. Among institutional funds, taxable government money market fund assets decreased by $12.00 billion to $688.41 billion, taxable non-government money market fund assets increased by $20.44 billion to $1.014 trillion, and tax-exempt fund assets increased by $2.86 billion to $138.71 billion."
After averaging $17 billion a week in outflows throughout 2010, money fund asset declines have slowed to an average of just 2.6 billion over the past 8 weeks. But year-to-date, money fund assets remain down by $463 billion, or 14.1%, and over 52 weeks money fund assets remain down by an eye-popping $838 billion, or 22.0%. Nonetheless, the outflows are certainly slowing, and the inflows into competing products -- banks, bonds, etc. -- appear to be experiencing fatigue too.
The most recent (July) issue of Money Fund Intelligence, our monthly newsletter ($500/yr) commented, "In the 12 months through May, the Federal Reserve's data shows money fund assets falling by $896 billion, or 25.5%, while bank savings rose by $613 billion, or 13.8%. But there is recent evidence that the shift from money funds into banks has slowed dramatically." Bank savings inflows slowed dramatically in May, and the FDIC's recent capping of rates at 0.25% instead of 0.5% in TAG "noninterest bearing account rates" is bound to push money out of banks. (See our March 25 News "FDIC's TLGP TAG Backing 834 Billion in Non-Interest-Bearing Accounts" and our Nov. 24, 2009, News "Unlimited FDIC Transaction Account Guarantee Insurance Fading Away".)
The July issue of Money Fund Intelligence, Crane Data's monthly newsletter, gets e-mailed to clients this morning, along with our monthly performance statistics, rankings and Crane Money Fund Indexes. This month's edition features the stories, "Deposits Gain on MMFs, But Liquidity Still Rising," "Big Leagues of Cash: BNY Mellon's CIS," and "ABCP & Repo Conduits: A Q&A w/Doug Rivkin."
The lead article says, "Bank deposits continue to gain assets from money market mutual funds, according to recent surveys and data series. But two things are clear from this recent information -- money funds and bank deposits are the only significant competitors for institutions' 'cash,' and, investors continue to increase their cash holdings overall. This growing wave of liquidity bodes well for future money fund asset growth, especially as bank products reach capacity and lose their temporary yield advantage." The piece shows tables of recent money fund vs. bank deposit growth, and features a table of investment allocations from the AFP's recently released Liquidity Survey.
For our regular monthly fund company feature, MFI says, "`This month we profile the Dreyfus money funds and interview several veteran members of BNY Mellon's new Cash Investment Strategies unit, one of the world's largest. We speak with Charles Cardona, President of The Dreyfus Corporation and BNY Mellon Cash Investment Strategies, Patricia Larkin, Chief Investment Officer of CIS for the Taxable 2a-7 and Tax-Exempt Money Funds, and Louis Geser, Director of Short Duration Credit Research."
Finally, in our last article, "We discuss one emerging investment, Repo Conduits, with fixed-income analyst Doug Rivkin.... He explains why these instruments may offer a viable avenue for investor diversification."
Look for excerpts of these articles in the coming days, and let us know if you'd like to see a demo copy of our MFI newsletter. MFI is $500 a year; $1,000 with its Excel "complement," MFI XLS. It comes with web access to archived issues and additional features, such as expanded 'Fund Profiles'.
We learned from Moody's latest "Weekly Credit Outlook" about pending changes to Canadian money fund regulations in a brief entitled, "Rules on Canadian Money Market Funds Will Strengthen Credit Quality but Could Have Gone Further." Moody's one-page summary cites a publication from the Canadian Securities Administrators (CSA), which appears intended to bring Canadian money fund regulations more closely in line with the U.S. Security & Exchange Commission's Rule 2a-7 of the Investment Company Act of 1940.
Moody's writes, "On 25 June, the Canadian Securities Administrators (CSA) published proposed changes to the definition of a Canadian money market fund (MMF) intended to improve the liquidity and credit quality of MMFs. The proposed definition is a credit-positive step, but stops well short of eliminating 'break-the-buck' risk. Money market funds in Canada were buffeted by the financial crisis generally, and more specifically by the collapse of the country's non-bank asset-backed commercial paper (ABCP) market in August 2007, which resulted in a number of parent companies coming to the support of funds stressed by illiquid ABCP holdings."
They continue, "The CSA's proposed MMF definition takes positive portions of the recently adopted US Securities and Exchange Commission (SEC) rule 2a-7 amendments for US MMFs, as it requires them to maintain a weighted-average life (WAL) of 120 days or less, and hold 5% of assets under management in overnight investments and 15% in less than seven-day investments. The introduction of liquidity buckets and shorter WAL requirements will limit risk-taking by MMFs and enhance funds' ability to meet unexpected redemptions. The proposed definition also incorporates more restrictive requirements on portfolio credit quality, since money market funds will be allowed to invest only in assets that have an approved credit rating. However, contrary to the new SEC requirements, the CSA's proposal does not recommend changes to portfolio diversification or weighted-average maturity requirements, nor does it require MMFs to perform periodic stress testing."
The Canadian Securities Administrators' (CSA) release says, "The [CSA] published for comment proposed amendments to National Instrument 81-102 Mutual Funds and related instruments, which represents the first phase of the modernization of investment fund product regulation. The proposed amendments are part of a process to update existing regulation of mutual funds in the wake of product developments in recent years. The amendments include proposals to: codify the exemptive relief from regulatory requirements which was frequently granted to certain mutual funds, such as exchange-traded funds; and create new requirements for money market funds."
It continues, "These amendments are intended to simplify processes and reduce regulatory costs incurred by both new and existing mutual funds," said Jean St-Gelais, Chair of the CSA and President and Chief Executive Officer of the Autorite des marches financiers (Quebec). "This is an important first step in the CSA's approach to modernize existing mutual fund product regulation."
The CSA release adds, "The proposed amendments to National Instrument 81-102 Mutual Funds as well as related instruments, including National Instrument 81-106 Investment Fund Continuous Disclosure, and the CSA Notice and Request for Comments are available on various CSA members' websites. The comment period is open until September 24, 2010.... The CSA, the council of securities regulators of Canada's provinces and territories, coordinates and harmonizes regulation for the Canadian capital markets."
Canada's money fund and mutual fund markets remain miniscule when compared to the U.S. The Investment Funds Institute of Canada, the trade group for Canadian mutual funds, shows money market fund assets totalled $45.1 billion as of the end of May 2010, down 38.3% from a year earlier. The IFIC shows total Canadian mutual fund assets of $600.5 billion.
Last Wednesday, we listened in on a Webinar hosted by Confluence, a company fund administrators use to automate reporting, entitled, "Managing the Countdown to Money Market Reform Reporting: Chaos or Control?" The talk featured Chuck Daly, Vice President, Assistant General Counsel of Fund Administration at JP Morgan, Sara Reece, Assistant Financial Controller at The Principal Financial Group, and Scott Powell, Senior Market Analyst, Confluence. The three discussed the pending SEC portfolio reporting requirements, including the October 7 deadline for website reporting and the December 7 deadline for the new XML Form N-MFP. We excerpt some of the webinar comments below.
On the webinar, Daly explained, "While it seems like it's a long way out, there is not really much time to get ready. It requires a detailed and a well orchestrated preparation and approach to be ready for the October 7 and December 7 deadlines. Website reporting is going to be a five day business day turn, starting you're your September 30 data filed by October 7. The N-MFP starts with the November 30 data filed by December 7 and will overlap with the web posting data, so at that point you'll be filing both. The first N-MFP link with your website data will be with your February 7 data that November 30 piece that goes in with the N-MFP. But the focus really needs to be on the process and all of the data that is going to be required for both reports and down to the administrator details of posting and filing."
He continued, "How we would get there, really is driven much by the NRSRO designation and how you are going to back into the data that is required.... The last of the 2010 deadlines is December 31, the last day to file that SAI. You can certainly do it before that, and from an operational standpoint it'd probably be desirable because it is arguably the most critical deadline. It's going to drive the data that goes to the N-MFP and much of the portfolio holdings disclosures. The SEC addressed some of the timing of the designation in their May question and answer piece. You can continue to operate under the pre-amendment structure until you make your designation and make it effective with the filing of your SEC disclosure document, your SAI.... So I can't stress enough that the NRSRO designation is going to be one of the drivers of being ready for the data sources for those two deliverables."
J.P. Morgan's Andrew Freed commented, "The first step is making sure you got a good reading and a good review of the SEC release, which came out at the end of February or the beginning of March. So this release gave great detail of all the data elements that are going to be required for each of the two web filings.... For me the first step was defining a source for each of the data elements. Unlike your N-Q ... we're going to have more sources for where that data is coming from.... Now we've got to do all this in 5 business days."
Reece added, "People and the process are going to be what is important. We have a team of three people involved in implementing the holdings portion of this rule. To get up to speed, that team has read the rule including the adopting release, participated in webinars such as this one, and even talked to some other fund companies about certain technical points of the rule.... Right now we are trying to define what our process for producing the website holdings and form N-MFP will look like. That includes mapping out data sources, specifically when we'll be able to get that data.... We are also looking at a technology solution. We looked at the applications that were available to us and decided to move ahead with [Confluence's] Unity regulatory reporting functionality."
She adds, "It is the first time that we have to file anything using the XML requirements, so we are just going to need to get our arms around that new technology. It requires a significant amount of data that has not traditionally been house in the fund accounting system, which has been the fund administration primary source for data. A lot of information is contained on off line spread sheet and that we will likely have to get information from the portfolio management system.... That five day turnaround is a very short window of time to pull the information together.... My team has been completing the EDGAR filings for a number of years for forms and N-Q and N-SAR. We anticipate that we will follow the same internal controls."
Finally, Powell commented, "In speaking with people across the industry, both clients and other stakeholders, there is three areas where people are challenged with Form N-MFP. Those are the data, the technology, and the new data file format. Form a data stand point, the format N-MFP introduces the need to capture NRSRO information, also introduces the need for collateral for any repurchase agreements that are out there, and also some detailed information on your enhancements.... This is information that isn't currently reported in your N-Q or your N-CSR, and people are really struggling to where to get this data and how to get it normalized and ready for report in time for the compliance date.... From a technology standpoint, people are dealing with new XML file format and the SEC has not released the schema for that file format yet. In their guidance that they provided last week, they did say that they are expecting to release that information mid late summer."
Money fund assets declined slightly in the latest week but they continue to remain above the $2.8 trillion level. ICI's weekly statistics show assets decreasing by $5.57 billion to $2.812 trillion in the week ended June 30. For the month, money funds lost approximately $28 billion, following another relatively modest outflow ($32 billion) in May. In the second quarter, money fund assets declined by $170.4 billion, and year-to-date money funds have dropped by $481 billion, or 14.6%. While its far too soon to declare the large declines of 2009 and early 2010 over, it does appear that assets are levelling off here.
Asset declines in 2010 have been twice as fast for institutional investors, a reveral of 2009's retail-led outflows. YTD, institutional money funds, those sold to corporations and other large buyers usually in blocks of well over $1 million, have declined by $395 billion, or 17.8%, to $1.830 trillion. Retail money funds, on the other hand, which broke below the $1 trillion level for the first time since early 2007, have declined by $86 billion, or 8.0%, to $982 billion. In 2009, retail assets fell by $287 billion, or 21.2% while institutional assets fell by $260 billion, or 10.5%.
The Investment Company Institute's latest "Month-End Portfolio Holdings of Taxable Money Market Funds report shows money funds selling CDs in large quantities in May and adding Repo. While CDs remain the largest segment of money fund holdings, at 20.9% or $519.6 billion (we add both CDs and Eurodollar CDs), they declined by $43.1 billion on the month. Meanwhile, repurchase agreement holdings rose to 20.5%, or $39.5 billion, to $509.9 billion. Clearly funds were reducing European exposure and adding liquidity in May.
Money funds also reduced their third-largest holding, U.S. Government Agency securities, by $8.1 billion to $437.6 billion (17.6%), and they reduced their (fourth-largest) holdings of Commercial Paper by $11.6 billion to $398.6 billion (16.0%). Corporate Notes, which together with Bank Notes represent just 7.1% of holdings, saw a sharp decline, falling $9.3 billion to $119.5 billion (Bank Notes total an additional $56.1 billion).
Holdings of Treasury Bills and securities increased by $7.7 billion to $353.3 billion, or 14.2%. Banker's Acceptances, which in the past accounted for a significant portion of money fund holdings, have attrophied to almost nothing. Funds hold just $205 million in BAs.
ICI's statistics showed the Average Maturity of taxable portfolios declining to 41 days, its lowest level in over 2 years. The report also showed the Number of Accounts Outstanding falling by 34.5 thousand to 28.96 million. This series showed total assets of taxable funds falling $19.6 billion to $2.485 trillion in May.
Two weeks ago, the London-based Institutional Money Market Funds Association, or IMMFA, a trade group representing triple-A rated, "U.S.-style" money market funds in Europe, held its 10th anniversary dinner and featured a speech by Eddy Wymeersch, Chairman of CESR, the Committee of European Securities Regulators. We recently obtained a copy of Wymeersch's comments and excerpt from them below. (See also our May 20 News "European Regulators Keep Two-Tiered Definition of Money Market Fund".)
Wymeersch told the IMMFA dinner, "[The] Money Market Funds industry is one of the important segments of the collective investment industry, and deserves full attention of the regulators as it is considered to be the safest segment of the market. Investors consider investment in money market funds as equivalent to depositing their money in a bank account, and are -- or better: were -- not well aware of the risks that may exist even in such an investment vehicle that often they considered as being quite simple and straightforward."
He continued, "The Reserve Primary Fund in the US has been a rude awakening for all of us, regulators included. The subsequent fraud charges brought against the manager of this fund only underline the dangers of being not fully transparent to investors about the composition of the funds and its liquidity especially after massive requests for redemption have been introduced.... Both in the US and in Europe this evolution is now receiving considerable attention, to better protect investors and avoid these confidence undermining events to happen again."
"CESR -- this is the securities regulators of the 27 EU Member states -- has also worked on the subject, mainly in terms of 'truth in the portfolio', i.e. making clear to investors what are the essential characteristics of the fund. As you know CESR cannot impose legally binding requirements, but is acting by way of recommendations and guidance. In this case the guidance is expected to be followed up by the national authorities and to have it implemented at the national level.... In the future, some of these matters may be the subject of a 'binding technical standard', that will have the character of a full European regulation, effectively applicable in the national legal order of the Member states," he explained.
Wymeersch said, "CESR's approach has been to deal with the name under which MMF are presented for investment. It requires Member states to use only two standardised designations, avoiding confusion with other types of portfolios. The latter remain fully free, but cannot be presented under the MMF-label. To that extent, the CESR document contains a list of translations in all EU languages, creating thereby a protected area, comparable to a trademark. The basic approach followed by CESR is directly inspired by the EFAMA - IMMFA study on MMFs of July 2009. It constitutes a good example of the fruitful dialogue between the profession and the regulator."
He continued, "CESR's statement distinguishes ... 'Short-Term Money Market Funds' and 'Money Market Funds' which operate a longer weighted average maturity and weighted average life. This proposal differs from the one that was originally adopted, distinguishing 'money market funds' from 'long term money market funds'. But the basic idea is the same: in actual practice, the first category are the funds that are really close to the money market and hence are more short term, incorporate less risk, better liquidity, etc and those funds that somewhat move away from these objectives without taking a long term perspective, as than they would be gradually come close to bond funds, and all the possible variations in between."
Finally, Wymeersch said, "But with this guidance, the work is not finished. One can expect in the future additional attention being addressed essentially to the liquidity issue, as liquidity concerns may trigger systemic risks and lead to contagion effects. Therefore stricter liquidity requirements will be necessary, along with the possibility to suspend the redemption period, or even introduce redemptions in kind. In the US the liquidity requirement has been established at 10% on a daily basis, and 30% on a weekly basis.... The choice between fixed NAV or floating NAV will however have to be decided.... These considerations are also in line with the reforms that are being considered in the US. Additional questions are likely to be raised e.g. on the application of the bank levy to asset managers, having an indirect effect on the fund management and return."