Yesterday, we excerpted from the main body of Federated Investors' most recent quarterly earnings call. Today, we quote the Q&A section, which features Federated's responses to various questions on possible regulatory options, acquisitions and contingency plans. Federated CEO Chris Donahue says in the Q&A, "`Mary Schapiro had said that she expected or wanted to release a proposal before the end of the first quarter." When asked, "If a [capital] proposal were something that required 40 basis points or so ... but there were seven years to get there. Is that a model that you can manage to as a non-bank money market sponsor?" Donahue answers, "Probably. It would be an unnecessary and unwise.... [But] the concept that Fidelity put out ... is something that could work, because that comes out as a fund and is simply taking yield from today or number of years. There's not much yield today, but taking yield from certain times and then putting it into the fund up to some number, 35 basis points or 40 basis points that does not cause the fund to trigger a (1.005) and thereby jump a penny. So stuff within that context is workable but unnecessary."
Donahue answers a question on the SEC Commissioners, "There are five votes as to whether to come up with a proposal and what would be in the proposal.... [W]e tell the story and hopefully we're able to ... convince three of the Commissioners that they've done enough.... [Also, the] Administrative Procedures Act has been a little bit of a stumbling block for some SEC rules, like the Proxy Access Rules and the Independent Chair Rules, because there has been no study yet of unintended consequences [or] cost-benefit analysis of what doing something really crazy to the money funds would do. So ... hopefully [we will] have at least some of them see the wisdom of hitting pause mode on this whole thing."
Asked about acquisitions, the Federated CEO comments, "We are continuing to look there. The Prime Rate [Capital] thing is a good thing to have happened and came out of that effort.... [T]hat effort continues. We think that we're going to be seeing more product come on to the market ... because of the effect of Basel III on some large banking institutions in terms of how they will handle their investment management operations from a capital standpoint.... As regards to our appetite, we have appetite to do good solid money fund deals for the long haul, and so we would continue to do that.... [T]here is, as we've talked about before, an oligopolization occurring in this business and this lower-for-longer theme will influence that more so. I think it was in the end of 2007 there are 300 people offering money funds, today there are less than 100. So that will continue. So, it's really hard to say how some of the other big people will look at it, but we would be happy to receive any big people's calls on that subject."
On contingency plans for drastic regulatory change, Donahue responds, "What you will see as a contingency plan is first to fight it initially, then to fight it regulatory-wise and legal-wise as much as can be done. There will be time if this actually occurs, wherein they don't want disruption in the marketplace as the money funds unwind, and so that will all be planned out and be organized in that way. Then, you get to the next level where you start shining up all your other products. You've got UCITS products, you've got separate accounts, and you've got a short and intermediate and ultrashort bond funds, that, if everything else becomes illegal for inappropriate reasons and inappropriate results, then you have to face that reality. So that's the area where the plans would go. There are number of clients who are large enough that they could sustain separate accounts. They don't want to go there and we don't want to go there. But if forced to, that's certainly an area that could be covered."
One analyst asked about legal actions to stop the SEC. Federated answers, "Well, what happens is when they come up with a rule that's, what I meant by the Proxy Access Rule comment and the Independent Chair comment, that the SEC for those rules had not done their homework in terms of studying the potential effects, i.e. the cost benefit. This went to court and the information that the SEC supplied was deemed inadequate under the Administrative Procedures Act and therefore the rule was overturned. So that is a path that we would go down.... It depends on whether or not you're able to get the injunction at the moment of impact and then you fight it out in court. So that would all be court type determination, and it could delay it indefinitely.... I think if they did any really thorough analysis of the cost-benefit of the kind of ideas they are talking about on money funds, they would discover it's a whopping negative. So, the study would probably end up delaying it forever."
Well I don't have a lot of evidence that they have done studies on the effects of taking money funds out. We're seriously diminishing their participation. I think that they are rather driven by higher goals that they have in mind and because the first round of changes in 2a-7 were basically designed around enhancing the resiliency of money funds and on this next round doesn't seem to do that, and therefore it must be oriented towards some other goal which has not exactly been articulated. So, I tried to take them into words and what we are after is enhancing resiliency and not killing. That should take off the table all the things that tend to kill or severely injure. So, I can't say what kinds of internal studies they have done. They haven't said them with us and I'm just not aware of them. They are all smart people though and are very knowledgeable and I think they should therefore have done the homework first before they come up with these ideas which don't help the funds, don't help us, don't help our stock and don't appear to have in the public domain anyway. A lot of evidence is to how they could do what they want to do and not end up breaking a lot of things, with a lot of unintended consequences.
When asked about a 3% redemption holdback for 30 days and a floating NAV, CFO Tom Donahue quips, "It's like the choice between you want to die by hanging or by bullet. So you can go one way or the other. You have guided exactly right because they each injure the basic concept of daily liquidly at par. At the next level, they each injure severely the operational things that have been set up for 40 years to use money funds. The variable NAV is obvious because people then have no anticipation of coming in, going out and all of their internal transactions to the dollar. On the holdback, a fiduciary has a heck of a time figuring out that the fiduciary is going to put himself or herself into an investment where 3% of it doesn't come back out for 30 days and then what happens then.... So, in each of those cases, it's just chose your different poison."
Finally, CEO Donahue comments, "If the deal is closed around the Fidelity buffer idea, that's probably something people could agree to. But if it goes beyond that, then it's going to have a lot of the same problems as the other one has. One of the other comments on capital that [one] SEC Commissioner made was that ... either the numbers are so big that it makes the industry uneconomic, or it isn't big enough to take care of a problem.... So in either case, it doesn't work. [R]emember, we're dealing here with an investment company under the Investment Company Act of 1940, which was passed in order to enhance disclosure. This is not a capital regime like the banking industry.... [T]oying with the fundamental rights like the right to redeem, it's just antithetical, as is adding capital into a fund where basically it's all capital already."
On Friday, Federated Investors hosted a conference call discussing their latest quarterly earnings. (See the transcript here.) We excerpt most of the scripted money fund related comments from the call below, and will quote from the Q&A section later this week. Chris Donahue, CEO and President of Federated, says, "Looking first at cash management, total money market assets increased by $13 billion in the fourth quarter and average money market assets were $8.5 billion higher than the third quarter levels. The growth was concentrated in our Wealth Management & Trust channel. Money market mutual fund average assets were $249 billion, up about $10 billion, compared to the prior couple of quarters. Our market share increased to over 9%. Growth occurred in government money fund assets as prime and munis were about flat. While yields remained low, our business continues to grow."
He explains, "Looking at the regulatory front, money fund discussions continue. The Chairman of the SEC has indicated those further regulations will likely be proposed and may include fluctuating NAV [or] capital from sources, this could include sponsors, fund shareholders entering the capital markets along with potential redemption barriers. At Federated, we are firm in our belief that money funds were meaningfully and sufficiently strengthened by the 2010 extensive regulation revisions into 2a-7. We saw those changes work successfully through series of events in the United States, the debt-ceiling crisis, and the downgrade and in Europe, with Greece, in European banks, among the challenges that were faced in 2011."
Donahue continues, "Investors continue to use money funds as an efficient and effective way to manage cash. The funds had ample liquidity in compliance with the revised regulation. Investors have ready access to recent portfolio data and the SEC has a view into the holdings of all money funds.... We are encouraged to see support for allowing these changes to be more thoroughly evaluated before imposing additional and potentially damaging additional regulations as expressed ... last month by an SEC commissioner. In another favorable development, the Commodity Futures Trading Commission recently confirmed their positive view of the liquidity and stability of money market funds for investment of customer funds. This follows an exhaustive multiyear review."
He adds, "As I said before, we are favorably disposed to measures that would enhance the resiliency of money funds while maintaining the critical features that make money funds viable to 30 million investors and to our capital markets. These 30 million investors, who currently maintain $2.7 trillion in money funds, do so in a large measure because they desire daily liquidity [for] their cash investments from high-quality funds and managers. We believe changes that fundamentally alter the money funds, like floating NAVs or imposing redemption fees or 30 day holdbacks on a portion of redemptions, will cause many investors to abandon money funds. This change has potentially enormous negative systemic consequences. Moving money out of money funds could be expected to move to banks where it is ill-suited for lending and will require additional capital and FDIC insurance while making the top banks even too bigger to fail. Perhaps money would also move to less visible, less regulated alternatives, which raises the question of adding to systemic risk."
Donahue also says, "Imposing capital requirements on a product that already has basically 100% equity capital is not necessary or in our view advisable. Capital held against money funds may give you illusion of protection to investors who are informed clearly that money funds are investment products and are not guarantees. This concept was, of course, illustrated by the Reserve Fund. Imposing sponsor capital is another way to set in motion the demise of money funds. In our view, it is very unlikely that sponsors of money funds holding capital against these funds would avoid consolidating the funds on to their balance sheet. The implications to banks and other fund sponsors are likely to be enormous and detrimental while the benefits are uncertain at best. In our view, this will lead to sponsors moving away from offering money funds. In the event that changes are made to fundamentally alter money funds and cause investors to exit, short-term debt issues will be hurt by the destruction of an efficient and effective funding mechanism that has worked well for over four decades with very few exceptions."
Finally, he adds, "We recently announced the acquisition that will broaden our international business. We are in the process of acquiring the London-based Prime Rate Capital Management. In addition to approximately 1.5 billion pounds sterling of assets, we will incorporate their experienced team in our money market business, and gain sterling, euro and dollar-denominated usage product to boost our growth prospects abroad. We expect this deal to close in the first quarter. We continue to seek additional alliances to further advance our business outside the U.S., and we continue to work to grow our current offshore businesses organically. In the U.S., we are seeking consolidation opportunities as they come available."
Tom Donahue, Chief Financial Officer of Federated, explains, "Taking a look first at the money market fee waivers, the impact of pretax income in Q4 was $26.1 million. The increase from last quarter can be attributed to Treasury money fund products, as changes in other fund categories roughly netted out. In Treasuries, we have higher assets, higher revenue, higher distribution expense and higher waivers. Gross yields were in the mid to upper single digits. In certain funds, we exhausted broker sharing of waivers with intermediaries, and as a result, distribution expense waivers as a percentage of revenue waivers decreased from 74% in the third quarter to 71% in Q4. Based on current assets and yield levels, we think these waivers could impact Q1 2012 by around $27 million in pretax earnings."
He adds, "Compared to the prior quarter, revenue from money market asset increased by $5.5 million to $99 million, due to higher yields and higher assets. Operating expenses, increased primarily due to higher money market related distribution expense also from higher yields and higher assets. In particular in our prime funds, higher yields during Q4 led to an increase in revenue and an increase in related distribution expense. The rest of the distribution expense increase was due mainly to higher yields and higher assets in the other money fund categories again with related revenue increases. Looking forward and holding all of our other variables constant, we estimate by gaining 10 basis points in gross yields will likely reduce the impact of minimal yield waivers by about 36% from these levels. The 25 basis point increase would reduce the impact by about two-thirds."
Fitch Ratings is the latest money fund watcher to weigh in on December money market mutual fund holdings. Their latest publication, entitled, "U.S. Money Fund Exposure and European Banks: Euro Zone Diverging, says, "U.S. prime money market funds (MMFs) continued to reduce their exposure to euro zone banks." The Investment Company Institute also produced an analysis earlier this month, titled, "Data Update: Money Market Funds and the Eurozone Debt Crisis." Finally, we excerpt a little bit from Federated Investors' 4th Quarter Earnings release, which shows that fee waivers continue to bite hard at money fund manager's revenue and earnings. (Federated's earnings conference call is this morning at 9 a.m.)
Fitch Ratings's commentary explains, "As of month-end December, exposure to euro zone banks was approximately 10% of total MMF holdings in Fitch Ratings' sample, a 16% decline on a dollar basis since end-November (see the "Euro Zone Continues to Decline" chart). Aggregate MMF exposure to European banks outside of the euro zone remained stable at approximately 22% of MMF holdings. Exposure to banks in Australia, Canada, and Japan each increased relative to end-November (see the "Change in Exposure [on a Dollar Basis]" table) and represents more than 30% of MMF assets, up from 20% of MMF assets as of end-May 2011."
It adds, "The proportion of exposure to European banks in the form of repurchase agreements (repos) remained above historically observed levels. As of month-end December, repos represented 24% of total European exposure, a slight decline from end-November but still above the end-August level of 17%.... This increase in repos (and proportionate reduction in unsecured MMF exposure) mirrors broader shifts toward secured funding within European bank debt markets.... Short-term U. S. Treasurys and agencies continued to represent approximately 19% of MMF assets, which is unchanged since end-November but a sizable allocation relative to historical levels." (See also The Wall Street Journal quotes Fitch's numbers in "U.S. Money-Market Funds Cut Euro Zone Bank Debt Holdings".)
ICI's recent piece on European exposure in MMFs, by Emily Gallagher and Chris Plantier, comments, "In October and December, we discussed how portfolio managers of U.S. prime money market funds have addressed the ongoing debt crisis in the eurozone. Here is a look at the latest monthly data on these funds' holdings by home country of issuer. Holdings of French issuers continued to fall in December, and almost 80 percent of these French holdings are either short-dated collateralized repurchase agreements or other instruments that mature in seven days or less. We will revisit the topic in mid-February with updated analysis once January figures become available."
Lastly, Federated Investors says in its latest earnings release, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.36 for the quarter ended Dec. 31, 2011 as compared to $0.45 for the same quarter last year. Net income was $36.9 million for Q4 2011 compared to $46.4 million for Q4 2010. The decrease of $9.5 million primarily relates to an increase in the negative impact of money market fund minimum-yield waivers."
The release adds, "Money market assets in both funds and separate accounts were $285.1 billion at Dec. 31, 2011, up $9.1 billion or 3 percent from $276.0 billion at Dec. 31, 2010 and up $13.4 billion or 5 percent from $271.7 billion at Sept. 30, 2011. Money market mutual fund assets were $255.9 billion at Dec. 31, 2011, up $11.1 billion or 5 percent from $244.8 billion at Dec. 31, 2010 and up $10.6 billion or 4 percent from $245.3 billion at Sept. 30, 2011."
In yet another body blow to money funds and savers, the Federal Reserve extended its "exceptionally low" language from mid-2013 to late 2014. The latest FOMC Statement from the Federal Reserve Board says, "Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable."
It continues, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate."
The Fed explains, "To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
It adds, "The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability."
They say, "Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate."
A separate statement released by the Fed yesterday entitled, "Federal Reserve issues FOMC statement of longer-run goals and policy strategy <i:http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm>`_," says, "Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society."
A new research paper, "The Quiet Run of 2011: Money Market Funds and the European Debt Crisis," written by Sergey Chernenko of The Ohio State University, Fisher College of Business and Adi Sunderam of Harvard Business School, describes money fund outflows due to European concerns and financing difficulties faced during the summer of 2011. The Abstract says, "We show that money market funds transmitted distress across firms during the European sovereign debt crisis. Using a novel data set of US money market fund holdings, we show that funds with large exposures to Eurozone banks suffered significant outflows between June and August 2011. These outflows have significant short-run spillover effects on other firms: non-Eurobank issuers that typically rely on these funds raise less financing in this period. The results are not driven by issuer riskiness or direct exposure to Europe: for the same issuer, money market funds with greater exposure to Eurozone banks decrease their holdings more than other funds. Our results illustrate that instabilities associated with money market funds persist despite recent changes to the regulations governing them."
Chernenko and Sunderam write, "In the aftermath of the financial crisis, risk taking by financial intermediaries has been heavily scrutinized by academics, regulators, practitioners, and the general public. One important reason for this scrutiny is that financial firms may be subject to runs if the concerns develop about the quality of their assets (Gorton and Metrick, 2011; Gorton, 2010). And as pointed out by Bernanke (1983), runs can result in a contraction of the supply of credit to firms and consumers with potentially serious consequences for the macroeconomy."
They explain, "Despite its importance, there is little empirical evidence directly demonstrating how risk taking by financial intermediaries can set the stage for runs and therefore lead to eventual reductions in the supply of credit to creditworthy firms. In this paper, we provide such evidence, studying the role US money market mutual funds play as intermediaries in short-term credit markets. Using a novel data set of the security-level holdings of money market funds, we document the interaction of risk taking, runs, and credit supply in the context of the European sovereign debt crisis. Specifically, we show that risk taking by money market funds, in the form of investments in risky Eurozone banks, drives large investor redemptions in Summer 2011, significantly reducing the ability of other firms to raise short-term financing."
The paper's Introduction continues, "This paper empirically identifies a novel channel through which runs on financial intermediaries may have consequences for the real economy. We demonstrate how runs can create collateral damage: they can result in a sudden and indiscriminate loss of funding for a large number of firms. Due to institutional and market frictions, issuers maintain relationships with specific money market funds and cannot always seamlessly substitute between different funds as suppliers of financing. Thus, concerns about the creditworthiness of one firm or a set of firms can lead investors in a particular money market fund to run, resulting in short-term funding difficulties for the other firms financed by that fund."
It adds, "Our analysis proceeds in three steps. We first show that prior to June 2011 money market funds had strong incentives to take on risk in order to increase their offered yields. Facing a at yield curve and regulatory constraints on portfolio maturity, funds took on risk primarily by holding large positions in Eurozone banks -- in May 2011, more than a quarter of all prime money market fund assets were invested in Eurozone banks. Our results point to franchise value and operating leverage as important determinants of risk taking."
The pair concludes, "We use the market turmoil involving Eurozone banks in the summer of 2011 to explore the instabilities associated with money market funds. We document how money market funds transmitted distress from Eurozone banks to other issuers. Money market funds with large exposures to Eurozone banks suffered significant outflows between June and August 2011. Due to institutional and market frictions, other issuers that historically raised financing from these funds were unable to immediately and completely substitute to other money market funds. As a result, these issuers raised less overall financing from the money markets in the short run."
Finally, they write, "We make several contributions. First, we document how financial intermediaries transmit distress across firms. Our results demonstrate that problems at some firms raising financing from an intermediary can be detrimental to other firms raising financing from the same intermediary. Second, we show that fund-issuer relationships are important in the commercial paper market. Since these issuers are large, highly rated firms, this suggests that relationships always play a central role in finance -- arm's length financing is never completely arm's length. Third, we study the consequences of money market fund risk taking for issuers. We show that creditworthy issuers may encounter financing difficulties because of risk taking by the funds from which they raise financing. Our results suggest that money market fund risk taking may have spillover effects to the broader economy."
We were reminded by Bob Plaze, Director of the SEC's Division of Investment Management, that money funds should continued to annualize using 365 days even during a leap year (like the current one) with 366 days. Plaze cites a 1984 by former SEC staffer Gene Gohlke to former ICI Chairman Matt Fink, which says, "It has come to our attention that some money market funds in calculating their advertised yields are using a multiplier of 366/7 rather than the 365/7 multiplier specified by applicable Commission rules. As we learn of such funds we are sending them the attached letter."
The 1984 letter explains, "We have been informed that a number of money market funds, including the Registrant, have recently begun advertising and publishing annualized 7-day yield quotations based on a multiplier 366/7 rather than the 365/7 multiplier specified by applicable Commission rules. Apparently, those funds using the 366 multiplier are doing so because 1984 is a leap year with 366 days." (Money funds must include an annualized 7 day yield in any performance advertising. The formula is: 7-Day Yield = Past 7 days of dividends * 365 * 100 / 7.)
It explains, "Computations for advertised yields of money market mutual funds were standardized by pertinent provisions of Forms N-1 and N-1A and Rule 482. Rule 482 does not provide for the use of 366 days in leap years (and no comments were received during the relevant comment periods suggesting that such a provision was required). The use by some funds of a 366 day multiplier impairs the comparability of advertised yield quotations, which was the reason for their standardization in the first place. Therefore, the staff believes that all money market funds should adhere to the prescribed formula in computing their advertised yields. If the Registrant is using a 366 day multiplier, please switch back to 365 as soon as possible."
In other news, BlackRock, the 4th largest money fund manager globally (with $436 billion) and the 7th largest (with $146 billion) U.S. money fund manager (according to Crane Data's Money Fund Intelligence XLS and MFI International), released its 4th quarter earnings and hosted a conference call last Thursday. While there wasn't as much discussion of money market funds as usual, there was a brief exchange in the Q&A section.
Citigroup Analyst Bill Katz commented, "[Y]ou didn't really discuss the money market reform. [I'm] sort of curious where your thoughts are today, and what you think the most likely outcome will be for the industry given some of the dialogue between floating rate and NAV, capital buffers and redemption restrictions."
BlackRock CEO Larry Fink responded, "I think it's really fluid. We've had conversation with different regulators, and I don't think there's a consistent view from all the different regulators at the moment. But there is a consistent view that there must be some change.... I think every regulator says we need to find ways to stabilize society from the risk of money market funds, and we can't have the same risks that we exhibited in 2008. How you implement, whether as you suggested variable NAV or capital or some form of restrictions, each, I would say there are biases by the different regulators. So I don't know where it's going to come out."
He continued, "We have been a strong advocate of having capital put aside.... We believe no different than the Basel standards, whereby you have multi-years to build your capital standard. From our vantage point, the regulators should have allow managers to build capital associated with the money market fund business over many years, maybe reserving a component of the fees to build that capital buffer. I think it'll make the money market fund industry a stronger one. And so we have been, for 2, 3 years, a strong advocate of that."
Finally, Fink added, "As you know, at this moment, FASB does not allow us to retain any of our fees for a capital buffer. So ... right now, under accounting standards, we can't do that. So we need changes in not only regulatory, but we need changes in accounting to get that done. And we have been fighting our -- this is one of the issues that I've always had with the accounting standard board related to why can't we have capital buffers. But we have not been permitted. So we'll see.... I really don't have a final view, but we are advocating for change."
On Friday, the U.S. Chamber of Commerce sent a letter to The Honorable Mary Schapiro, Chairman of the Securities and Exchange Commission, and members of the Financial Stability Oversight Council (FSOC), which was signed by 22 companies and which expressed opposition to any further regulation to money market mutual funds. The letter, entitled, "US Chamber Joins with 22 Companies to Highlight Risks of Increased Regulation to Money Market Funds," says, "The undersigned companies and organizations, representing a diverse range of industries, rely on money market mutual funds to support our capital raising and investment needs. We strongly believe current rules governing money market funds strike the right balance, ensuring conservative operation and liquidity while fulfilling the cash management needs of businesses across the country. As such, we urge regulators to avoid making additional regulatory changes that would fundamentally alter the nature of money market funds, undermining their usefulness to businesses as a source of short-term investing and financing."
The Chamber-led coalition piece explains, "Money market funds are a crucial instrument for businesses' daily cash management and the efficient operation of the U.S. economy. Throughout their 40-year history -- a period which saw countless bank failures and substantial losses in other investment vehicles -- money market funds have provided investors a variety of benefits, including enhanced diversification, robust credit analysis, high-quality, short term assets, and preservation of capital. Moreover, money market funds provide significant administrative efficiencies and accounting and tax simplicity because of the stable $1.00 per share value."
It continues, "Money market funds play a vital role in providing short-term funding not only to corporations, but also state and local governments and financial institutions. Many businesses issue commercial paper to meet critical short-term financing needs such as replenishing inventories and financing expansion. Money market funds are major variable rate notes and tax anticipation notes."
The letter adds, "As such, money market funds are a vital part of the short-term liquidity marketplace, the backbone which supplies essential working capital to U.S. businesses. In fact, money market funds purchase more than one third of the commercial paper issued by American businesses each year. Anything that reduces the attractiveness of money market funds as an investment vehicle for business also reduces the role these funds can play as a source of short-term working capital for the economy. Said differently, if new regulations cause money market fund assets to decline, the decline will also be seen in money market fund purchases of commercial paper and short-term instruments that are so vital in funding U.S. companies, municipalities, and state governments."
The Chamber writes, "The 2010 revisions to SEC Rule 2a-7 have succeeded in strengthening money market funds' ability to withstand turmoil in the markets. However, additional changes to money market funds, such as moving to a floating NAV or adding a capital buffer, would almost certainly lessen the viability and attractiveness of these funds. With money market funds as less attractive investment options, businesses may find moving funds offshore or to other less-regulated products as alternatives -- which is hardly consistent with efforts to reduce risk, increase market transparency and ensure greater market stability. For borrowers, these changes would diminish the market demand for commercial paper, reducing the availability of short-term financing for businesses to meet critical short-term funding needs. A constricted commercial paper market would also translate into significantly higher costs of short term financing, assuming that such financing would even remain available."
The letter concludes, "Money market funds are a vital cash management tool for businesses and are part of the foundational fabric of the short-term cash marketplace. We firmly believe existing regulations ensure the continued stability and viability of money market funds, and that additional regulatory options being considered will have dramatic negative consequences on American businesses' ability to raise the capital necessary to restore economic stability and job creation. Therefore, we strongly urge you to thoroughly evaluate the impact of additional regulation on American businesses and the broader economy and ensure that money market funds maintain their current utility before moving forward with any regulatory changes."
The Chamber of Commerce's letter was signed by: Alcoa Inc., Association for Financial Professionals, Avon, Cadence Design Systems,Ciena, Comcast Corporation, Conair, CVS Caremark Corporation, Devon Energy Corporation, Dominion Resources, Inc., Financial Executives International's Committee on Corporate Treasury, FMC Corporation, Johnson & Johnson, Kraft Foods Global, Inc., National Association of Corporate Treasurers, Safeway Incorporated, The Boeing Company, The ServiceMaster Company, Treasury Strategies, Tyson Foods, U.S. Chamber of Commerce, and Wilbur-Ellis."
It was cc:'d to: The Honorable Timothy Geithner, Secretary of the Treasury, The Honorable Ben Bernanke, Chairman, Federal Reserve Board, The Honorable Martin Gruenberg, Acting Chairperson, Federal Deposit Insurance Corporation, The Honorable Gary Gensler, Chairman, Commodities Futures Trading, Honorable Debbie Matz, Chairman, Credit Union National Administration, The Honorable Edward DeMarco, Acting Director Federal Housing Finance Agency, Mr. John Walsh, Acting Comptroller of the Currency, Office of the Comptroller of the Currency, The Honorable Roy Woodall, Independent Member of Financial Stability Oversight Council.
The following is reprinted from our January MFI.... Money Fund Intelligence's latest monthly fund family "profile" features Charles Schwab Investment Management's Rick Holland, managing director & portfolio strategist for money market funds. We discuss Schwab's history with money funds, current portfolio tactics, recent customer concerns, and the outlook for the money market mutual fund business in general. Our Q&A follows.
MFI: How long has Schwab been involved in running money funds? Holland: Charles Schwab Investment Management, or CSIM, began managing proprietary money market funds in 1990, which is when we built out our portfolio management team and supporting infrastructure. We felt that the money market fund business was a natural extension of our expertise in managing our own balance sheet and corporate cash. Today, CSIM is the fifth largest money market fund complex, managing approximately $157 billion in money market fund assets.
MFI: What's new at CSIM? Holland: I was brought on board in October 2011 to build a team that can help financial intermediaries such as advisors and consultants, and our retail shareholders, better understand our money fund credit research and investment management philosophies, policies and procedures. Even though Schwab is not directly focused on corporate cash or balance sheet investors, our clients have plenty in common with institutional investors. Financial intermediaries and independent advisors are sophisticated investors who direct significant money fund assets to Schwab. They need similar access to information, transparency of process and high quality products as large, direct corporate cash shareholders.
MFI: What's Schwab's biggest challenge in managing money funds today? Holland: Currently, one the biggest challenges is the availability of supply. There is a lot of demand for short term, especially non-European, product. But an ever-dwindling supply poses obvious challenges. As the credit crisis in Europe continues, money fund managers are reducing exposure to many European countries -- especially those in the Eurozone -- and are investing assets in other regions, such as Australia and Canada. The shift is increasing demand for product issued within these other regions, but there is only so much available supply. And some nontraditional buyers are also looking for government or Treasury paper because of the credit crisis in Europe, which exacerbates the whole supply challenge. In addition, at Schwab we are limited by how much exposure we can have to any one region or to any one issuer. As credit conditions in Europe remain challenging and we avoid certain regions, finding suitable alternatives becomes additionally challenging.
MFI: Does Schwab have additional limits and policies beyond 2a-7? Holland: Our own policies are consistent with what you would expect to find in any highly regarded, conservatively managed money market funds complex. Our internal standards are always more stringent and conservative than those imposed by Rule 2a-7, but we are certainly in full compliance with that governance.
MFI: What are the funds buying now? Holland: Again, most of that bucket has been reallocated to financial institutions located in Canada and Australia, with just a smattering in Japanese paper. We are also starting to see just the slightest reemergence of very high quality, domestic, non financial commercial paper issuance -- but this is more the exception than the rule.
MFI: Are money funds like index funds? Holland: There is a real difference between pure index or passive management and the very active management we employ in the day to day activities associated with Schwab's 2a-7 funds. Approximately three-fourths of the more than $200 billion managed by Charles Schwab Investment Management is in our money market funds, making these funds a critical component of our business. Given the size of our money fund assets, management of our 2a-7 funds is very active here at CSIM, unlike that of a pure index fund.
Watch for Part II of our latest MFI interview in coming days.
A press release entitled, "Fitch: US MMF Shadow NAV Volatility Wanes but Challenges Remain" tell us, "U.S. money market fund (MMF) "shadow" net asset value (NAV) volatility has declined following material regulatory enhancements and relative changes in market conditions, according to a Fitch Ratings review of MMF NAVs reported over the last four years." The Fitch Ratings' 4-page Special Report, written by the Fund and Asset Manager Rating Group, is entitled, "U.S. MMF Shadow NAV Volatility Declines Post-Crisis: Future Drivers Include Macro Events, Risk Appetite, Regulation."
Fitch's release explains, "The shadow NAV offers investors an appraisal of the market value of a MMF's underlying assets on a per share basis. As long as the NAV does not deviate by more than 50 basis points, the fund's $1.00 stable share price is maintained. Under new guidelines imposed by the Securities and Exchange Commission (SEC) in May 2010, shadow NAVs for all U.S. MMFs are now publicly available, albeit it with a 60-day lag."
It explains, "MMF managers continue to exhibit heightened risk aversion as a function of ongoing Eurozone uncertainty. This, combined with limited yield pickup at the longer end of the maturity spectrum for certain MMF-eligible asset classes, has steered mangers toward safe-haven U.S. Treasurys or other high quality short-dated securities that continue to experience minimal volatility in the current market environment."
Fitch adds, "Regulatory reform imposed by the SEC in May 2010 has served to enhance the stability of all MMFs regardless of the risk appetite of individual fund managers. Minimum daily and weekly liquidity requirements for taxable funds are the clearest examples of this. Additional MMF reform, such as the introduction of subordinated capital or limitations on redemptions (gating provision), continues to be discussed. We believe additional regulatory reform could further stabilize NAVs by providing funds with the ability to absorb a small of amount of loss or limit their reliance on secondary market liquidity. That said, additional costs and potential unintended consequences require careful consideration."
Finally the release says, "While NAV volatility has abated, industry challenges remain. The potential for credit and/or market risk via exposure to global financial institutions remains. And longer-term, governments face fiscal challenges which could impact the credit quality or liquidity of their debt issues. Interest rates are expected to remain low, pressuring MMF yields and the economics for fund sponsors. Continued management fee waivers will support positive investor yields but could ultimately alter the industry landscape in terms of sponsor commitment to the product." (For Crane Data's latest "shadow" NAV statistics, see our monthly Money Fund Intelligence XLS.)
Crane Data recently announced the top-performing money funds over 1-year, 5-year and 10-year periods in its latest Money Fund Intelligence newsletter. Our article, "Top MMFs of 2011; Our 3rd Annual MFI Awards," explains, "Below, we recognize some of the top-performing money funds, ranked by total returns, for calendar 2011, as well as the top-ranked funds for the past 5-year and past 10-year periods. We bestow upon these funds our annual Money Fund Intelligence Awards."
The January 2012 MFI continues, "On page 5, we show a table with the winners. These include the No. 1-ranked fund based on 1-year, 5-year and 10-year returns, through Dec. 31, 2011, in each of our major fund categories (our "Type") -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Individual, Government Individual, and Treasury Individual."
The article says, "The top-performing Taxable funds overall in 2011 and among Prime Institutional funds were Fidelity Instit MM: MM Port Inst (FNSXX) and Flex-funds Money Market Inst (FFIXX), both of which returned 0.20%. Among Prime Retail funds, Flex-funds Money Market Retail (FFMXX) had the best return in 2011 (0.11%). SEI Daily Inc Trust Gov A (SEOXX) and DWS CAT Govt Cash Inst (DBBXX) tied for the Top Government Institutional fund over a 1-year period with returns of 0.05%, while Selected Daily Govt Fund D (SGDXX) won the MFI Award for Government Retail Money Funds (1-year return). BlackRock Cash Treas MMF Cap (BCYXX) ranked No. 1 in the Treasury Institutional class; Invesco Treasury Private (TPFXX) ranked tops among Treasury Retail funds."
Crane Data describes the "Top Funds Over Past Five Years, "For the 5-year period through December 2011, Touchstone Inst MMF again took top honors for the best-performing money fund with a return of 2.01%. Fidelity Select MM Portfolio ranks No. 1 among Prime Retail funds with an annualized return of 1.77%. Goldman's FGTXX and GSOXX again ranked No. 1 among Govt Inst and Treasury Retail funds. Vanguard Federal again ranked No. 1 among Govt Retail funds, and Vanguard Admiral Treasury ranked No. 1 over 5-years' performance among Treasury Inst money funds."
Under "Best Money Funds of the Decade," MFI comments, "The highest-performers of the past decade list continues to include: DWS Daily Assets Fund Inst (DAFXX), which returned 2.21% (No. 1 overall and first among Prime Inst); TIAA CREF MM Fund Retail (TIRXX), which returned 2.07% (the highest among Prime Retail); American Beacon US Govt Select (AAOXX), which returned 2.01%, (No. 1 among Govt Inst funds); and, Vanguard Federal Money Market Fund (VMFXX), which ranked No. 1 among Govt Retail funds. Milestone Treasury Obligs Fin (MIL01) returned the most among Treasury Institutional funds over the past 10 years; and, Goldman Sachs FS Trs Obl Sel (GSOXX) ranked No. 1 among Treasury Retail funds."
Finally, the article adds, "See our additional rankings tables on pages 7-9, and see our Money Fund Intelligence XLS for more detailed listings, percentiles, and rankings.... Winners will receive a letter and certificate stating their No. 1 ranking and the criteria used."
Crane Data's latest monthly Money Fund Portfolio Holdings reports show that the largest issuers of money market securities are now dominated by the U.S. Treasury and U.S. Government agencies, as well as by large dealers of repurchase agreements, or repo. Our December 31, 2011, dataset, which was sent to subscribers of our Money Fund Wisdom database and product suite on Friday, also shows that the retreat from unsecured French bank debt is almost totally complete, and that overall European exposure continues to decrease. Treasury holdings now account for over 20% of all taxable money fund assets ($470.6 billion), CDs rank 2nd with over 17% ($401.3 billion), and government agencies rank 3rd with $388.4 billion (16.8%).
Repurchase agreements would be the largest money fund position with 20.7%, or $476.4 billion, but the SEC's categorization breaks these holdings into three -- $223.9 billion, or 9.7%, in Government Agency Repurchase Agreements, $129.7 billion, or 5.6%, in Treasury Repurchase Agreements, and $122.7 billion, or 5.3%, in Other Repurchase Agreements. All three segments of repo showed asset declines in December, while almost every other sector showed increases. `In addition to Treasury holdings and CDs, Financial Company Commercial Paper ($190.1 billion, or 8.27%), Asset Backed Commercial Paper ($111.3 billion, or 4.8%), and Variable Rate Demand Note ($71.5 billion, or 3.1%) showed increases.
The Largest 30 Issuers to Taxable Money Market Mutual Funds, according to Crane Data's latest collection (which tracks approximately 92% of all assets), include: US Treasury ($471B, 21.8%), Federal Home Loan Bank ($172B, 8.0%), Federal Home Loan Mortgage Co ($89, 4.1%), Federal National Mortgage Association ($84B, 3.9%), Barclays Bank ($78B, 3.6%), Deutsche Bank AG ($78B, 3.6%), Credit Suisse, ($75B, 3.5%), UBS AG ($60B, 2.8%), Citi ($54B, 2.5%), Bank of America ($51B, 2.3%), RBC ($49B, 2.3%), JP Morgan ($46B, 2.1%), Bank of Nova Scotia ($46B, 2.1%), Bank of Tokyo-Mitsubishi UFJ Ltd ($40B, 1.9%), `Sumitomo Mitsui Banking Co ($40B, 1.8%), RBS ($38B, 1.8%), National Australia Bank Ltd ($37B, 1.7%), `Goldman Sachs ($36B, 1.7%), Westpac Banking Co ($36B, 1.7%), Rabobank ($35B, 1.6%), Svenska Handelsbanken ($32B, 1.5%), `Bank of Montreal ($30B, 1.4%), `Mizuho Corporate Bank Ltd ($28B, 1.3%), `Credit Agricole ($28B, 1.3%), `Commonwealth Bank of Australia ($26B, 1.2%), `Federal Farm Credit Bank ($26B, 1.2%), `Toronto-Dominion Bank ($26B, 1.2%), `BNP Paribas ($24B, 1.1%), `Nordea Bank ($24, 1.1%), HSBC ($23B, 1.1%).
As we've noted before, money market mutual funds have never has exposure to Greek-affiliated debt, and they have not owned any Ireland for years. They have not owned any Portugal, Italy or Spain in months either. Money funds continue to shrink their French bank exposure towards zero; money funds now own about $79.1 billion, or 3.4%, in France, with over 70% of this in Treasury and government-backed repo (and just $2.8 billion in unsecured CD debt). Looking through to the underlying affiliations, the largest Country exposures include: US ($1,225B, 53.1%), Canada ($182B, 7.9%), UK ($173B, 7.5%), Switzerland ($138B, 6.0%), Japan ($124, 5.4%), Australia ($116B, 5.0%), Germany ($95, 4.1%), France ($79B, 3.4%), Netherlands ($75B, 3.2%), and Sweden ($53B, 2.3%).
Taxable money funds now have 26.3% of their securities maturing overnight (as of 12/31/11) versus 29.4% maturing overnight a month ago. Another 12.2% matures in 2-7 days, so the weekly "liquid" total is 38.5% (not counting Treasuries and Agencies with maturities greater than 7 days, both of which are also included in the SEC's mandated "liquidity" buckets). Funds hold another 22.6% in securities maturing from 8 to 30 days, so 61.1% of money fund portfolios matures in a month or less. Almost 25.5% matures in the 31 to 90 day range, 8.6% matures in the 91 to 180 day range, and 4.7% matures in the 181 to 365 day range. Virtually zero (0.12%) has a maturity over 365 days. Contact Crane Data to request a copy of our new Money Fund Portfolio Holdings Reports & Pivot Tables to see these breakout by category or by fund.
Note: Crane Data has released its January 2012 Money Fund Portfolio Holdings dataset with data as of December 31, 2011. Money Fund Wisdom subscibers should have already received the XLS files via e-mail, and users may also download them via our Content Center web page........... Fitch Ratings distributed a press release entitled, "U.S. Prime Money Market Funds Continue Flight to Quality and Liquidity with Asset Allocations," which summarized the ratings agency's latest "U.S. Money Market Funds Sector Update." The release states, "U.S. prime money market funds (MMFs) continued their flight to quality and liquidity during the fourth quarter of 2011 (4Q'11), further reducing exposure to European financial institutions and increasing holdings of U.S. government securities, according to Fitch Ratings. As of November 2011, Fitch-rated prime MMFs invested 9.8% of their total assets in U.S. government securities, a significant increase from 5.4% allocation to this asset type in May 2011. The long-term decline of asset-backed commercial paper (ABCP) investments also continued, with overall ABCP outstandings declining by $52.4 billion, or 14% during the same period."
Fitch continues, "During 4Q'11, Fitch-rated prime MMFs remained conservatively positioned with respect to credit, interest rate, and liquidity risk as evidenced by a reduction in credit exposures, a high level of available liquidity, and low weighted average maturity to reset dates (WAMr). These MMFs reduced their average WAMr to 38 days at the end of November 2011, from 46 days at the end of May 2011."
They add, "Fitch notes that ongoing banking system deleveraging has affected the supply of MMF-eligible securities, with the decrease in ABCP outstanding as one example of this trend. U.S. prime MMFs have reacted by increasing allocations to municipal securities and utilizing new instruments such as collateralized commercial paper and variable-rate demand preferred stock issued by closed-end funds. MMFs are also making greater use of nongovernment repos backed by corporate bonds and equity securities, among other types of collateral."
The full report tells us, "The prolonged short-term interest rate environment continues to exert pressure on many fund operators in the form of fee waivers necessary to maintain positive yields for investors. Evidence of this pressure has come in the form of increasing industry consolidation and/or outright fund liquidations. According to CraneData, the number of U.S. money market funds decreased by 14 funds in the fourth quarter of 2011, to 1,235 funds from 1,249 funds, as a result of various liquidations and mergers. The Federal Reserve's Dec. 13, 2011 announcement of its intention to keep interest rates low for the time being is likely to influence additional consolidation and liquidation activity."
It adds, "Fees and expenses of prime institutional MMFs averaged 21 bps at the end of December 2011, representing an average increase of 1 bp since Sept. 30, 2011, when the average expense ratio stood at 20 bps. The average fund expense ratio with respect to government institutional MMFs as of the same date was 8 bps, remaining unchanged from the prior period. Fees that MMFs are able to charge in this low rate interest environment are still depressed relative to the precrisis level."
Finally, the Sector Update says, "Potential U.S. MMF regulatory developments remain actively debated by industry stakeholders. Changes aimed to improve MMF resilience are likely to be a net positive from a ratings perspective, but should be weighted against any additional conflicts and costs.... Fitch would have to consider the overall implications of any changes such as capital buffers, floating-rate net asset value (NAV), or liquidity charges/gates relative to its ratings criteria and investor expectations. Furthermore, Fitch would have to factor into its ratings any conflicts of interest that may arise due to different classes of shareholders, unintentional incentives to reach for yield, or changes in how Fitch views the sponsors' implicit or explicit commitment to the fund."
Early reports show that money market mutual funds continued gradually reducing their European exposure overall in December, and their unsecured exposure to any peripheral European and French banks is now virtually zero. Deutsche Bank's William Prophet wrote a piece entitled, "Springtime in January," earlier this week analyzing December 31 holdings of the largest money funds, and J.P. Morgan Securities' Alex Roever released his latest look at holdings late yesterday. Both show that any direct danger from European holdings to money market funds is largely passed, though we may wait another month to sound the all clear. We excerpt from these below. (Note that Crane Data's December 31 Money Fund Portfolio Holdings dataset will be released to Money Fund Wisdom subscribers tomorrow a.m.)
DB's Prophet writes, "The monthly data on U.S. money funds is finally a source of good news -- or at least it's not bad. In short, lending to Europe has stabilized. The levels are now only about half of what they were six months ago. But for the past two months now lending to European banks by the U.S. money fund industry has been flat. We show a brief history of European bank CD holdings among six of the largest funds in the industry.... Notice how lending actually went up in November and declined only marginally last month."
He explains, "This stabilization is mostly just a by-product of some big shifts in geographic exposure however. We detail the regional breakdown of the aforementioned CD holdings.... As the picture suggests, French banks in particular have been responsible for most of the big changes.... Or more specifically; between May and December there was a $98bn decline in European bank CD holdings among U.S. money funds and French banks were responsible for over 60% of that. The good news is that this simply can't go on any longer."
Prophet continues, "Indeed ... the money funds in our sample have more or less liquidated all French bank CD's from their portfolio. And that is a pretty shocking development considering that just a few months ago this was the number one asset on U.S. money fund balance sheets. Indeed if we would have known back in June that French bank risk would be completely eliminated from U.S. money fund balance sheets by January, we actually would have anticipated an even greater re-pricing in short-term rates. But anyway ... loans to banks in certain northern European regions (e.g. Germany and Sweden) have actually been going up recently. And we see no reason why that shouldn't continue for at least the next few months."
J.P. Morgan's "Update on prime money fund holdings for December", says, "Eurozone bank paper continued to roll off in December from prime money fund portfolios but has seen some slowing as nearly 70% of these exposures have been eliminated from prime fund portfolios over the course of the past year. In spite of continued reductions in Eurozone bank exposures, prime fund AUM was basically flat for the second consecutive month reflecting some level of investor comfort in the level of risk in prime fund portfolios as much of the cash that left Eurozone bank paper has been reinvested in non-European banks and other high quality products."
It continues, "Prime money funds saw relatively small net outflows of $2.6bn for the month of December, after experiencing net inflows of about $4bn in November, which was the first month of inflows since April. As we noted in our last weekly publication, the taxable money fund market experienced a significant shift in composition in 2011 with prime money funds losing $177bn in assets (-11%) and government money funds gaining $108bn in assets (+13%) (Exhibit 1) as investors sought safety from turmoil in Europe. Prime money fund balances have stabilized over the last couple of months as a great deal of Eurozone bank exposures have come off in a relatively short period of time."
Authors Roever, Teresa Ho and Chong Sin explain, "2011 marked a tremendous decrease in exposures to European bank credit (-$347bn), most of which were accounted for by reductions to Eurozone bank credit (-$331bn). By our estimates, the top 3 reductions in exposures by country of origin were to France (-$190bn), Germany (-$60bn), and the UK (-$52bn). The top 3 increases in exposures by country of origin were to Canada (+$45bn), Japan (+$40bn), and Sweden (+$33bn). Although increases to bank exposures in these banking jurisdictions offset some of the massive declines in European bank exposures, much of the cash that left European banks were reinvested into high quality assets such as Treasury bills and coupons, agency discount notes and coupons, and muni variable rate demand obligations."
They also write, "Exposures to French bank credit continued to decline in December (-$12bn) with much of the decline accounted for by declines in CP/CD exposures (-$10bn). French bank balances now stand at $32bn, a far cry from what it was at the end of 2010 ($222bn), which was at the time the single largest concentration by country of origin. Other notable declines included German and UK exposures, which were $10bn and $25bn, respectively. The large decline in UK exposures was primarily driven by declines in repo exposures, which is likely temporary as the reduction was year-end dealer balance sheet driven."
Finally, JPM's "Short Duration Strategy" comments, "Prime fund managers maintained high levels of liquidity in their bank paper holdings in December. The average final maturity of Eurozone bank CP/CD holdings dropped to 52 days. Notably, the average final maturity of Non-Eurozone European bank CP/CD holdings was even lower at 38 days. This is partially due to the fact that our Eurozone figures are inflated by the inclusion of Dutch bank floating rate CDs. However, if we compare the average final maturities of CP/CD holdings in French, German, Swiss, and UK banks, we see that the average final maturities were more comparable, ranging from 28 to 37 days. Our expectation is that prime fund managers will maintain short maturities for their European bank holdings in the near term."
We learned that J.P. Morgan Asset Management released the results of their "Global Liquidity Investment Survey 2011" to listeners on a conference call yesterday. In the latest edition of the annual survey, Robert Deutsch, Head of Global Liquidity for J.P. Morgan Asset Management, says, "I am delighted to introduce the J.P. Morgan Asset Management Global Liquidity Investment Survey 2011. Now in its 13th edition, the survey has provided an unbroken global benchmark for corporate treasurers since its launch in 1999. The 2011 survey is the most comprehensive yet, with a record 487 treasurers from around the world providing their views.... The survey maintained a truly global focus, with treasurers responding on behalf of organisations in a wide range of regions and markets.... Our longstanding partnership with the Association of Corporate Treasurers (ACT) continues to play a vital role in the success of the survey."
The Survey's Executive Summary explains, "Surplus cash levels have continued to grow, and treasurers are less satisfied with the returns they are able to obtain on their cash balances. After the financial crisis, preservation of principal became the main focus for treasurers, but last year we noted the beginnings of a renewed appetite for yield, and the trend has continued this year. However, treasurers emerged from the financial crisis with a new focus on risk, and they are not willing to set this aside. Counterparty risk is a particular concern, and risk management is perceived as a more important part of the treasury role than it was last year. Treasurers must therefore walk a tightrope between their appetite for yield on one hand and their caution about risk on the other -- a delicate balance that was summed up by one treasurer as 'managing the margin: getting the best return for minimum/zero risk'."
The survey's Key Findings include: "The appetite for yield is returning - After several years of extremely low yields, treasurers are becoming frustrated with the returns they are able to access on their cash investments. Return on investment is now the key metric for measuring investment success, with preservation of principal dropping to second place. A greater proportion of treasurers are now looking for higher yields, and they are more willing than last year to take on additional risk to achieve it. Liquidity is still key - Liquidity is the biggest concern in treasury departments today, and is also the most important consideration for those who segment their surplus cash. However, over a quarter of treasurers would now be prepared to sacrifice daily liquidity for higher yields -- a marked increase versus last year."
Additional key findings also include: "Risk remains in focus - Risk management is now the third-highest area of importance for the treasury department, moving up from fifth in 2010. Counterparty risk is a key concern, with the financial strength of the institution now the most important criterion for treasurers when selecting a primary bank, overtaking the quality of relationship management for the first time. Banking relationships have increased further - Treasurers increased their number of banking relationships again in 2011, continuing a trend seen since the beginnings of the credit crisis back in 2007.... Regulatory change is not yet a significant concern – So far, treasurers appear relatively sanguine about the potential impact of regulatory change, with only a very small number of respondents citing issues related to regulation as the biggest challenge they face in the next year. However, with two thirds of treasurers unwilling to consider investing in fluctuating net asset value funds if regulatory change makes stable value money market funds unavailable, it is possible that regulation may have a greater impact than treasurers currently anticipate."
JPMorgan's Global Liquidity Investment Survey 2011 also comments, "General cash management portals are the most widely used online portals/platforms, with 33% of treasurers using single bank cash management portals and 47% using multi-bank portals. By region, treasurers in North America are most likely to use general cash management portals, followed by those in Asia. Treasurers in EMEA remain the least likely. However, the uptake for foreign exchange portals is the highest in EMEA, where multi-bank platforms are used by 52% of treasurers. This year, for the first time, we asked why treasurers use online portals. The vast majority (83%) like the flexibility/ease of use, and almost half (46%) said portals provide better reporting."
The Survey also comments, "There remains a high degree of regional disparity in surplus cash allocations – unsurprisingly, given the adherence among cash investors to the investment management tools traditionally used in their regions. North American treasurers allocate a greater proportion of their surplus cash to money market funds than treasurers in any other region, and also allocate a much smaller proportion to bank deposits. In contrast, Asian and European treasurers favour bank deposits, which make up 64% of surplus cash portfolios in both regions." A table in the survey shows North America respondents with a 33% allocation to bank deposits, a 32% allocation to money market funds, a 15% allocation to direct securities -- repos, CDs, CP, bonds, and a 13% allocation to offset to bank costs.
It continues, "Among treasurers who are using or considering pooled instruments for their investment management, an emphasis on liquidity and credit quality remains evident. Prime/AAA-rated stable NAV money market funds are the most popular pooled vehicle, with 65% of treasurers either using them or considering doing so. Over 50% of treasurers either use or are considering using Treasury/government money market funds (AAA-rated stable NAV funds that invest only in government securities)."
Finally, the study adds, "Given the continuing discussions among regulatory bodies around the possibility of requiring money market funds to float their NAVs, treasurers were asked if they would use fluctuating NAV funds if stable NAV funds were not available. Two thirds of treasurers said they would not use fluctuating NAV funds, while 22% said they would and 11% said they already do so. The results were directionally consistent by region, but because of regional differences in fund availability, EMEA and Asia have a higher proportion of treasurers that already invest in fluctuating NAV money market funds." For the full study, visit J.P. Morgan Asset Management's "Surveys" page.
As we wrote in the January issue of our flagship Money Fund Intelligence newsletter, online money fund trading portal Treasury Partners announced the launch of a "transparency" initiative late last week. The firm issued a press release saying, "HighTower's Treasury Partners has launched a proprietary tool designed to assist its Money Market Portal clients in rapidly assessing portfolio risk and responding to global credit exposure."
The announcement explains, "This new analytical tool, FundView, enables clients managing their own liquidity to perform rigorous due diligence on the more than 140 domestic and offshore funds available via Treasury Partners online Money Market Portal. With FundView, these clients can search their investment portfolios for exposure to individual securities, issuers, maturity dates, asset classes and CUSIPs by country. FundView also enables investors to run cross-fund analysis, improve diversification, and adjust portfolio risk, including counter-party and headline risk."
It adds, "FundView is the latest in a series of innovative, proprietary technology Treasury Partners has launched on its platform over the past three decades."
Jerry Klein comments, "Due to the increasing volatility in the global markets, identifying and reacting quickly to portfolio exposures is now more critically important than ever. And, judging from the extremely positive comments we've received since the FundView launch, our Portal clients obviously agree."
Treasury Partners is one of a number of money fund "portals" or supermarkets that are using Crane Data's Money Fund Portfolio Holdings series to power their transparency and analytics initiatives. Recently, Comerica Securities' online money market fund trading system, `Maestro, began providing clients access to money fund news, fund statistics and portfolio holdings information from Crane Data too. Maestro users may now view issuer, country and concentrations of fund holdings, as well as 'shadow' NAVs and performance statistics."
Later this morning, Crane Data's January Money Fund Intelligence newsletter will be e-mailed to subscribers. The new edition contains articles entitled: "Outlook Bleak for 2012, But MMFs See Glimmers," which reviews recent asset and regulatory trends; "Interview w/Schwab MF Strategist Rick Holland," which quotes industry veteran Rick Holland; "Top MMFs of 2011; Our 3rd Annual MFI Awards," which announces the top-performing funds for 2011; and "Treasury Partners Enters Portal Transparency War;" which reviews the latest analytical tool offered to portal investors. We have also updated our Money Fund Wisdom database with December 31, 2011, performance information and are in the process of sending out our monthly Money Fund Intelligence XLS and Crane Index products.
The latest MFI says, "The coming year looks bleak for money market mutual funds, but things are not nearly as challenging as they appeared to be just one month ago. Sure, zero yields and the threat of radical regulatory change are even more threatening than they've been the previous three years. But glimmers of hope and relief appeared on both fronts late in the year, and money fund investors and providers have reason for optimism in 2012."
In our regular fund family article, we write, "Money Fund Intelligence's latest monthly fund family "profile" features Charles Schwab Investment Management's Rick Holland, Schwab's new portfolio strategist for money market funds. We discuss Schwab's history with money funds, current portfolio tactics, recent customer concerns, and the outlook for the money market mutual fund business in general. Our Q&A follows." Look for these product shortly, or watch www.cranedata.com for more excerpts in coming weeks.
In other news, Sunday's New York Times featured the article, "Money Funds Could Face More Changes". It discusses Norwegian lender Eksportfinans and potential pending regulatory changes. The piece says, "About 20 American money market mutual funds -- those trusted staples of institutional and individual cash management -- were caught holding notes issued by the bank, Eksportfinans of Norway. The downgrade put the notes well below the quality threshold set by fund regulators."
The Times explains, "What happened next? The answer depends on whether you're talking to mutual fund executives or to their regulators -- and the gap between the answers explains the regulatory fight that the $2.6 trillion money fund industry faces in 2012. Ask a mutual fund industry executive and you'll hear that the affected funds were quietly bailed out by their sponsors. In fact, fund industry executives say the Eksportfinans episode simply proved that the money fund industry is much safer and resilient because of the reforms put in place after 2008, when the Lehman Brothers bankruptcy set off a panic. But ask a federal regulator about the Eksportfinans event and you'll hear that the financial system dodged a bullet that could have started another ruinous stampede. As regulators see it, the episode is a worrisome reminder that, despite the new rules already in place, money funds still pose too big a risk to the nation's financial stability."
It adds, "The commission is expected to propose steps early in the year that would change the kind of money funds available to individual and institutional investors, and comments are already being filed from all sides. But industry executives and analysts contend that there doesn't seem to be a strong empirical link between the risks the regulators are trying to address and some of the changes they want to make.... Ms. Schapiro has confirmed that some combination of these ideas is likely to be proposed in the first three months of this year, but the fight over what is eventually adopted will be long and loud. Regulators seem to be betting that money funds are so strategically important to big mutual fund families that even the sweeping changes on the drawing board will not kill the funds."
Yet another name change is approaching in money fund land. A statement from the Highland Funds, which formerly were the GE Funds, says, "On January 9th, 2012, Highland Funds will become Pyxis Capital [pronounced PIK'-siss], a registered investment advisor serving financial advisors, institutions and individual investors seeking registered alternative investment solutions. The investment advisors and sub-advisors for all the Highland Family of Funds will not change. While the fund names will change to adopt the Pyxis identity, tickers will remain the same." Currently, our MFI XLS tracks the $67 million Highland Money Market II A (HAHXX) and the $8 million Highland Money Market II Inst (HIHXX). Both will become the Pyxis Money Market Fund II. (Look for more Fund Changes info in the pending January issue of Money Fund Intelligence, which should be delivered Monday morning.)
The full Dec. 13 PDF explains, "Highland Funds Asset Management, L.P. today announced that it will spin-off from Highland Capital Management, L.P..... Highland Funds will officially shift to Dallas-based Pyxis Capital on January 9, 2012, and all current registered investment company portfolio managers employed by Highland Capital and other related operations and management personnel will move to the new entity.... While fund names will change to adopt the Pyxis brand, tickers will remain unchanged. The Pyxis fund platform, Pyxis Funds, will include 20 funds comprising a diverse set of investment strategies -- from broad based equity and fixed income investments to alternative strategies including long/short and trend following."
Joe Dougherty, President, says, "For some time now, we have been operating our registered funds business independently from Highland Capital's institutional platform, so this spin-off and rebranding is a natural evolution of that process. Our full suite of diverse and alternative fund offerings is designed to help meet investors' needs as they continually look to diversify and optimize their portfolios."
In other news, BlackRock said in a press release, "BlackRock, Inc. today announced that it will report fourth quarter and full year 2011 earnings results prior to the opening of the New York Stock Exchange on Thursday, January 19, 2012. Chairman and Chief Executive Officer, Laurence D. Fink, and Chief Financial Officer, Ann Marie Petach, will host a teleconference call for investors and analysts at 9:00 a.m. (Eastern Time). BlackRock's earnings release will be available in the investor relations section of the Company's website, http://www.blackrock.com, before the teleconference call begins. Members of the public who are interested in participating in the teleconference should dial, from the United States, (800) 374-0176, or from outside the United States, (706) 679-4634, shortly before 9:00 a.m. and reference the BlackRock Conference Call (ID Number 39409145)."
Federated also announced dates for its Q4 earnings. The company said, "Federated Investors, Inc., one of the nation's largest investment managers, will report financial and operating results for the quarter and year-ended Dec. 31, 2011 after the market closes on Thursday, Jan. 26, 2012. A conference call for investors and analysts will be held at 9 a.m. Eastern on Friday, Jan. 27, 2012. President and CEO J. Christopher Donahue and CFO Thomas R. Donahue will host the call. Investors interested in listening to the teleconference should dial 877-407-0782 (domestic) or 201-689-8567 (international) or visit FederatedInvestors.com for real-time Internet access. To listen via the Internet, go to the About Federated section of the website at least 15 minutes prior to register." (Note that Federated's Chris Donahue is also scheduled to keynote Crane's Money Fund Symposium in Pittsburgh later this year, June 20, 2012.)
Finally, the Wells Fargo Advantage Funds have scheduled a "Money Market Update Call" for Wednesday, January 25, 2012, at 2:00 p.m. ET (Call-in number: 1-866-394-0583 Conference ID: 40566541). The announcement says, "Wells Fargo Advantage Funds offers a comprehensive roster of Rule 2a-7 money market funds to meet the varying liquidity management needs of investors. For more than two decades, we have been providing comprehensive services to meet our clients' cash management needs, and in an ever changing market environment, these services take on greater value. David Sylvester, manager of our money market funds since 1987 and Matthew Grimes, Managing Director for Taxable Money Market Credit Research will be on hand to provide a current market perspective and will discuss how our seasoned portfolio management team manages our funds in the current market environment."
The Investment Company Institute's latest "Month-End Portfolio Holdings of Taxable Money Market Funds data series shows that Repurchase Agreements (or Repo) fortified their position as the largest holding among money market mutual funds while Treasury securities surpassed Certificates of Deposit (CDs) to become the second largest segment in November. Repo holdings now account for $539.7 billion, or 22.8%, of the $2.369 trillion in Taxable money fund assets tracked by ICI; repo grew by $34.5 billion, or 6.8%, in November. Treasury Bills and Other Treasury Securities combined totalled $431.3 billion, or 18.2%. Treasuries increased by $18.7 billion, or 4.5%, moving them into the second largest holding spot ahead of CDs, which decreased by $14.0 billion to $423.1 billion, or 17.9%.
Year-to-date through November, CD holdings have decreased by a massive $147.8 billion, or 26.2%, while Treasury holdings in Taxable MMFs jumped by $89.2 billion, or 26.8%. Of course, a major portion of this shift was due to institutional investors' reallocation out of Prime money funds and into Treasury and Government funds. Through Nov. 30, Prime MMFs lost $185.6 billion, or 12.2% of assets while Treasury MMFs gained $82.9 billion, or 24.9%. Prime money funds shrunk from 65.3% of taxable assets at the start of the year to 60.3% last month, while Treasury MMFs grew from 14.3% to 18.7% of taxable assets.
U.S. Government Agency Securities ranked fourth among funds' portfolio compositions with a modest increase of $7.1 billion to $384.3 billion, or 16.2%, while Commercial Paper, the fifth-largest segment (and the largest prior to Nov. 2008), remained steady in November at $366.3 billion, or 15.5%. Notes, including Bank Notes ($34.9 billion) and Corporate Notes ($94.8 billion), totalled $129.6 billion, or 5.5% of assets while the Other category totals $90.1 billion (3.8%).
ICI's Holdings report also shows `Weighted Average Maturities (WAM) continuing to gradually extend, increasing to 42 days from 39 days two months ago. The Number of Accounts Outstanding in taxable money funds continues to wither, dropping to 26.667 million in November from 27.436 at the start of 2011. Watch for Crane Data's Dec. 31 Portfolio Composition and our new Maturity Breakout statistics in the pending January 2012 issue of our monthly Money Fund Intelligence XLS, which is scheduled to go out on Monday morning, and watch for our Dec. 31 Money Fund Portfolio Holdings reports, which are scheduled to be released to subscribers on Jan. 13.
Yesterday, Bloomberg wrote an article entitled, "Money Funds Future May Hinge on Former Invesco Executive Aguilar," which says, "The future of the $2.6 trillion U.S. money-market fund industry may hinge on Luis A. Aguilar, a Democrat on the U.S. Securities and Exchange Commission whose colleagues are evenly split over whether to impose new rules in 2012. Aguilar, a former general counsel at money-management firm Invesco Ltd., hasn't revealed his views on the proposal most likely to reach a final rulemaking vote this year, said four people who discussed the topic with commissioners and agency staff. The plan, which would require funds to build capital cushions, has support from SEC Chairman Mary Schapiro and Elisse B. Walter, a Democrat appointee, and is opposed by Republicans Daniel M. Gallagher and Troy A. Paredes, said the people, who asked not to be identified because the information is private." (See also Crane Data's Dec. 16 News "More Money Fund Regs Premature, Unnecessary Says SEC's Gallagher".)
The Bloomberg piece explains, "New rules would hit the industry as it faces its biggest challenges since money funds first appeared four decades ago. Treasury yields near zero have forced some money-fund managers to cut fees, and Europe's sovereign-debt crisis has further reduced an already shrinking supply of available debt the funds can purchase. Assets have shrunk 30 percent since the end of 2008 and money funds charge 54 percent less on every dollar managed."
It continues, "Regulators have debated how to make the funds more stable since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run that helped freeze global credit markets. The run abated only after the Treasury Department temporarily guaranteed money-fund shareholders against losses and the Federal Reserve began buying fund assets at face value to help them meet redemptions. The SEC enacted new rules in 2010 -- including liquidity requirements, shorter maturity limits and enhanced disclosure requirements -- in an attempt to prevent future runs and government bailouts."
Bloomberg writes, "Schapiro said in a Nov. 7 policy speech that additional steps were needed to address the funds' vulnerability to runs. She said SEC staff had narrowed prospective reforms to capital cushions and a plan that would eliminate the traditional $1 share price, the so-called stable net-asset value. Schapiro didn't discuss the speech with all the commissioners before delivering it, according to three other people familiar with the situation, who asked not to be identified because the matter isn't public. The SEC staff may offer separate proposals for a floating share price and capital cushions. When one or both reach the final rulemaking stage, Aguilar may cast the deciding vote."
The article quotes SEC Commissioner Aguilar, "My own consideration of how money markets have performed, which includes conversations with the industry, leads me to conclude that the reforms that we did make have in fact worked as we wanted them to work."
The piece also says, "The people familiar with the SEC's deliberations said the capital cushion plan had a significantly better chance to gain the three necessary votes for final approval than the so-called floating NAV. One person said discussions between industry representatives and commissioners focused almost exclusively on capital cushions without serious consideration of a floating NAV. The capital buffer concept would require fund providers to build a reserve of cash to cover losses in the event of a credit default. The buffer could be accumulated by drawing money out of shareholder returns, or through a direct infusion of cash from the companies, or a combination of the two."
It adds, "The people familiar with deliberations said the SEC staff hadn't settled on exactly how to build the cushion and how big it should be. Money fund providers are split over the proposal. The people said the staff's eventual proposal would also likely grant fund managers the ability to limit the pace of withdrawals by shareholders during a crisis. In her November speech, Schapiro said "much of the staff's energy" was focused on developing a capital buffer plan combined with redemption restrictions.
Paul Schott Stevens, President & CEO of the Investment Company Institute recently wrote an "ICI Letter on FSOC Proposal Regarding "SIFI" Designations to the Financial Stability Oversight Council. The letter, which is labelled "Re: Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies (RIN 4030-AA00)," says, "The Investment Company Institute appreciates the opportunity to comment on the Financial Stability Oversight Council's revised notice of proposed rulemaking and proposed interpretive guidance regarding the designation of certain nonbank financial companies for consolidated supervision and regulation by the Federal Reserve Board. As both issuers of securities and large investors in U.S. and international financial markets, ICI's registered investment company members are keenly interested in the Council's efforts to identify and address potential risks to U.S. financial system stability."
Stevens explains, "In two prior comment letters, ICI has discussed in detail how the FSOC should use its authority under Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act to designate particular companies as so-called systemically important financial institutions ("SIFIs"). Those letters (see www.ici.org/pdf/24696.pdf and www.ici.org/pdf/24994.pdf) -- which continue to reflect ICI's views in this area -- emphasized the following: The Dodd-Frank Act, by design, provides regulators with an array of new tools to address abuses and excessive risk taking by financial market participants, and to detect new buildups of risk in the financial system. The broad scope of those authorities should allow the FSOC to reserve SIFI designation for those circumstances in which other regulatory actions clearly would be inadequate to address or limit the perceived risks to the financial system.... Registered investment companies are at the "less risky" end of the spectrum when considering the potential for systemic risk. In addition, a registered fund is a separate legal entity, whose assets are owned pro rata by its shareholders. Accordingly, a registered fund's assets should not be attributed to the registered investment adviser that manages those assets. SIFI designation is an inappropriate regulatory tool for further strengthening the resilience of money market funds to severe market distress."
He continues, "In this letter, we provide our views with regard to the Proposed Rule and Proposed Guidance. In particular, we recommend that the Proposed Guidance (once finalized) not be materially changed unless the Council first provides notice and the opportunity for public comment on such changes. We further recommend that the Council strengthen the confidentiality provisions in the Proposed Rule. The letter also comments on statements in the Release regarding the FSOC's intention to conduct further analysis into what threats to financial stability, if any, arise from asset management companies and how any such threats are best addressed. We urge the Council to make clear that it will refrain from evaluating asset management companies under the Proposed Rule and Proposed Guidance until (1) its further analysis of asset management companies has been completed and (2) the Council provides the public with some indication of its findings and conclusions. It is our belief that this review will lead the FSOC to conclude, at the very least, that neither investment advisers to registered funds, nor the funds themselves, present the risks that SIFI designation was intended to address."
The ICI's comments to FSOC also say, "At the outset, we wish to acknowledge the Council's efforts to address the various concerns raised by ICI and other interested parties in the two prior comment periods. Chief among these concerns had been the lack of specificity about how the FSOC would select nonbank financial companies for evaluation and how it would apply the criteria and determination standards set forth in Section 113 of the Dodd Frank Act. In issuing the Release, the Council has provided much needed insight into how it views the Section 113 criteria and standards and how it intends to exercise its SIFI designation authority. Importantly, the Release also acknowledges that SIFI designation is just one of the tools available to regulators to address potential systemic risk."
Stevens comments, "We are pleased that the Release includes the proposed quantitative thresholds by which the FSOC intends to identify nonbank financial companies for further evaluation, as well as the proposed metrics the FSOC may use in applying the six-category analytical framework to each company selected for evaluation. It is critical for financial market participants to have the opportunity to consider the proposed thresholds and metrics, and provide input to inform the Council as to their appropriateness. As ICI previously has advised, the Council'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, and one that should be used with great care. Market participants can and should be called upon to offer their expertise and, in so doing, help the FSOC to properly delineate its SIFI designation process."
He adds, "The Release states that the FSOC, its member agencies and the OFR will undertake a further analysis to consider what threats to financial stability -- if any -- arise from asset management companies and whether such threats can be mitigated by SIFI regulation or better addressed through other regulatory measures. We welcome this development, as it suggests that the FSOC recognizes the different risk profile of asset management companies and is committed to exercising its SIFI designation authority in a careful and thoughtful manner. In addition, we believe this review will lead the FSOC to conclude, at the very least, that neither investment advisers to registered funds, nor the funds themselves, present the risks that SIFI designation was intended to address."
Finally, Stevens writes, "We urge the Council to make clear that it will refrain from evaluating asset management companies under the Proposed Rule and Proposed Guidance until (1) its further analysis of asset management companies has been completed and (2) the Council provides the public with some indication of its findings and conclusions. Our recommendation is based on the fact that, for asset management companies, the Release raises more questions than it answers about the determination process. These include such fundamental questions as how the FSOC would apply the total consolidated assets threshold in "Stage 1" to an asset manager and what is meant by the FSOC's intention to "take into account ... assets under management in a manner that recognizes [their] unique and distinct nature." As to the former question, ICI reiterates its view that a registered fund's assets should not be attributed to that fund's investment adviser. Until the FSOC fully answers these questions, however, the financial markets and market participants are left with exactly the sort of uncertainty that the Council intended the Release to minimize. Moreover, leaving these issues open to speculation is at odds with the FSOC's stated "commit[ment] to fostering transparency with respect to the Designation Process." ICI and its members stand ready to assist the Council in its further work on this rulemaking."