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What do mutual fund boards of directors need to know about the SEC's money market reform rules? There are several provisions that directly impact fund boards, particularly with regard to fees and gates and stress testing. According to the new SEC rules concerning fees and gates, fund boards are charged with determining whether or not to impose fees and gates on prime MMFs under certain circumstances. States the SEC's final rules, "Today's amendments will allow a money market fund to impose a liquidity fee of up to 2%, or temporarily suspend redemptions (also known as "gate") for up to 10 business days in a 90-day period, if the fund's weekly liquid assets fall below 30% of its total assets and the fund's board of directors (including a majority of its independent directors) determines that imposing a fee or gate is in the fund's best interests. Additionally, under today's amendments, a money market fund will be required to impose a liquidity fee of 1% on all redemptions if its weekly liquid assets fall below 10% of its total assets, unless the board of directors of the fund (including a majority of its independent directors) determines that imposing such a fee would not be in the best interests of the fund." It continues, "In addition, under our proposal, a fund's board (including a majority of independent directors) could have determined not to impose the liquidity fee or to impose a lower fee."

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The European Securities and Markets Authority issued an amendment last Friday, August 22, that would tweak the Committee of European Securities Regulators' guidelines on the Common Definition of European Money Market Funds. The key change by ESMA says all references to credit ratings in guidelines and recommendations must be removed. Specifically, "Article 5(b)(1) of the CRA Regulation -- as amended by the CRA3 Regulation -- states: [ESMA, EBA and EIOPA], shall not refer to credit ratings in their guidelines, recommendations and draft technical standards where such references have the potential to trigger sole or mechanistic reliance on credit ratings by the competent authorities, the sectorial competent authorities, the entities referred to in the first subparagraph of Article 4(1) of the CRA Regulation or other financial market participants. Accordingly, EBA, EIOPA and ESMA shall review and remove, where appropriate, all such references to credit ratings in existing guidelines and recommendations by 31 December 2013." (Note: For those interested in more on European money market fund regulations, our European Money Fund Symposium, which is Sept. 22-23 in London, is still accepting registrations.)

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Jackson Hole, Wyoming was the center of the economic universe Friday as Federal Reserve Chair Janet Yellen was the featured speaker at the annual Economic Policy Symposium, sponsored by the Kansas City Federal Reserve. Interest rates were a hot topic, but there was also some discussion of the Fed's reverse repo program by St. Louis Fed President James Bullard during an interview with Bloomberg. In her keynote speech Friday morning, Chair Yellen said the Fed is waiting for further recovery in the job market before moving on interest rates. "At the FOMC's most recent meeting, the Committee judged, based on a range of labor market indicators, that "labor market conditions improved." Indeed, as I noted earlier, they have improved more rapidly than the Committee had anticipated. Nevertheless, the Committee judged that underutilization of labor resources still remains significant. Given this assessment and the Committee's expectation that inflation will gradually move up toward its longer-run objective, the Committee reaffirmed its view "that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after our current asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.""

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ICI economists Sean Collins and Chris Plantier issued a rebuttal to NY Federal Reserve economists -- (see our August 19 "Link of the Day", "NY Fed Blog on Gates, Fees, and Runs") – in which they argue that the SEC's adoption of gates and fees on MMFs could increase run risk. In their August 20 column, "Preemptive Runs and Money Market Gates and Fees: Theory Meets Practice," Collins and Plantier disagree. They write, "A recent post on the blog of the Federal Reserve Bank of New York discusses the possibility that new rules by the Securities and Exchange Commission allowing money market funds to temporarily impose fees or gates during times of market instability could increase the risk of preemptive runs on such funds during times of stress, rather than helping to limit destabilizing withdrawals, as the SEC intended. Although the Fed's blog post provides an interesting theoretical insight, the discussion brings to mind the quote by Yogi Berra that "In theory, there is no difference between theory and practice. But in practice, there is." In "Gates, Fees, and Preemptive Runs," the authors -- Fed economists Marco Cipriani, Antoine Martin, Patrick McCabe, and Bruno Parigi -- note that the academic literature on banks has traditionally seen "suspension of convertibility" (preventing the exchange of deposits at par for cash) as a means of preventing damaging bank runs. For example, by requiring a bank that cannot meet all depositors' withdrawals to temporarily close its doors, regulators might prevent further and potentially destabilizing withdrawals."

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The Federal Reserve Board of Governors released minutes from its July 29 Federal Open Markets Committee Meeting on August 20. While there was no major change in interest rate policy (see our July 31 Link of the Day), the minutes offer some insight into the boards' deliberations on interest rates. They also talk about the impact of the Fed's reverse repo program on money market funds. On monetary policy, it says: "Meeting participants continued their discussion of issues associated with the eventual normalization of the stance and conduct of monetary policy, consistent with the Committee's intention to provide additional information to the public later this year, well before most participants anticipate the first steps in reducing policy accommodation to become appropriate. The staff detailed a possible approach for implementing and communicating monetary policy once the Committee begins to tighten the stance of policy. The approach reflected the Committee's discussion of normalization strategies and policy tools during the previous two meetings. Participants expressed general support for the normalization approach outlined by the staff, though some noted reservations about one or more of its features. Almost all participants agreed that it would be appropriate to retain the federal funds rate as the key policy rate, and they supported continuing to target a range of 25 basis points for this rate at the time of liftoff and for some time thereafter. However, one participant preferred to use the range for the federal funds rate as a communication tool rather than as a hard target, and another preferred that policy communications during the normalization period focus on the rate of interest on excess reserves (IOER) and the ON RRP rate in addition to the federal funds rate. Participants agreed that adjustments in the IOER rate would be the primary tool used ...

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While much of the focus of the SEC's recent Money Market Fund Reforms has been on institutional MMFs, the final rules also establish new guidelines -- and definitions -- for government and retail money market funds. We take a look at the key rules changes around government and retail MMFs below. On page 202 of the final rules (which were recently published in the Federal Register), it explains how the definition of government MMFs has changed, particularly with respect to the non-government basket. "The fees and gates and floating NAV reforms included in today's Release will not apply to government money market funds, which are defined as a money market fund that invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are "collateralized fully" (i.e., collateralized by cash or government securities). In addition, under today's amendments, government money market funds may invest a de minimis amount (up to 0.5%) in non-government assets, unlike our proposal and under current rule 2a-7, which permits government money market funds to invest up to 20% of total assets in non-government assets." [Note: Though "government" money funds are currently allowed to buy up to 20% in non-govt assets, none do.]

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The Investment Company Institute released its latest "Money Market Fund Holdings" report, which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds (as of July 31, 2014). ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 23.2% as of July 31, 2014, down from 24.2% on June 30. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 19.0% (vs. 19.7% last month) and "Other treasury securities," which added 4.2% (vs. 4.5% last month). Prime funds' Weekly liquid assets totaled 37.9% (vs. 36.1% last month), which was made up of "All securities maturing within 5 days" (31.6% vs. 30.0% in June), Other treasury securities (4.2% vs. 4.4% in June), and Other agency securities (2.1% vs. 1.7% a month ago).

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Citi's Vikram Rai writes in their latest "Short Duration Strategy" a piece entitled, "Why it is NOT "Prognosis Negative" for money funds. He says, "As the money fund industry continues to absorb the newly minted SEC reform rules there is significant dispersion in opinion among market participants regarding the impact of these changes on the overall money fund industry and specifically on the institutional prime money fund sector. Speculation regarding outflows from institutional prime MMFs (which have about $950 billion in AUM) has ranged from $50-$450 billion. While we might witness higher yields for commercial paper as the compliance date for rules comes nearer, which will act as a countervailing factor against outflows from institutional prime funds (as we discuss in more detail below), the yields increase is unlikely to be sufficient to clog the CP markets."

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Crane Data published its latest Money Fund Intelligence Family & Global Rankings yesterday, which ranks the asset totals and market share of managers of money funds in the U.S. and globally. The August edition, with data as of July 31, shows continued moderate asset decreases for the majority of money fund complexes in the latest month, and over the past three months, but assets have been virually flat over the past year. (These "Family" rankings are available to our Money Fund Wisdom subscribers.) Schwab, Northern, Franklin, and BofA were some of the few that showed gains in July, rising by $1.4 billion, $1.4 billion, $1.3 billion, and $1.3 billion respectively, while Goldman Sachs, BofA Funds, Morgan Stanley, Wells Fargo and SSgA led the increases over the 3 months through July 31, 2014, rising by $6.6B, $4.3B, $2.5B, $1.9B, and $1.8B, respectively. Money fund assets overall decreased by $21.8 billion in July, decreased by $29.5 billion over the last three months, but fell by just $2.4 billion over the past 12 months (according to our Money Fund Intelligence XLS).

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The Federal Reserve continued its crusade to blame the Great Recession on everyone except banks with another set of speeches (and a conference) on the evils of "wholesale funding". The Federal Reserve Bank of Boston and the Federal Reserve Bank of New York hosted a "Workshop on the Risks of Wholesale Funding" yesterday, which featured academics but no market participants. NY Fed President & CEO William Dudley gave the "Welcoming Remarks at Workshop on the Risks of Wholesale Funding" while Boston Fed President Eric Rosengren gave the keynote, "Broker-Dealer Finance and Financial Stability." The conference Overview explains, "Wholesale funding refers to a firm's use of deposits and other liabilities from institutions such as pension funds, money market mutual funds and other financial intermediaries. When a firm relies on short-term wholesale funds to support long-term illiquid assets, it becomes vulnerable to runs by its wholesale creditors. This risk manifested itself during the recent financial crisis, when many firms experienced an outflow of wholesale funds following the failure of Lehman Brothers. The resulting need to dispose of illiquid assets led to "fire sales" and the transmission of shocks throughout the financial system. The purpose of this workshop is to promote a better understanding of the risks posed by wholesale funding, and to explore policy options for minimizing these risks." (Note: The Federal Register version of the SEC's Money Fund Reform has been published; see today's "Link of the Day" for details.)

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Preparations are being made for our 2nd annual Crane's European Money Fund Symposium, which will be held Sept. 22-23, 2014 at the Hilton London Tower Bridge in London, England. Crane Data has attracted 20 sponsors for the event so far, and we expect our second "offshore" money fund conference to again be the largest gathering of money fund professionals outside the U.S. European Money Fund Symposium features an unmatched speaking faculty, including many of the world's foremost authorities on money funds in Europe and worldwide. We review the latest conference agenda and details below. (Visit www.euromfs.com to register, or contact us to request the PDF brochure or for more details.)

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Crane Data released its August Money Fund Portfolio Holdings Monday, and our latest collection of taxable money market securities, with data as of July 31, 2014, shows a plunge in Repos, a drop in Treasuries, and a jump in Other securities (Time Deposits), Agencies and CDs. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) decreased by $6.2 billion in July to $2.364 trillion. Portfolio assets decreased by $18.0 billion in June, $3.7 billion in May, $39.1 billion in April, and $43.0 billion in March. CDs again surpassed Repo as the largest portfolio composition segment among taxable money funds, followed by CP, then Treasuries, Agencies, Other (Time Deposits), and VRDNs. Money funds' European-affiliated holdings jumped to 30.0% of holdings (up sharply from 23.5% last month), primarily due to a plunge in holdings of the NY Fed's RRP (repo) program (which replace dealer repo and TDs at quarter-ends). Below, we review our latest Money Fund Portfolio Holdings statistics.

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