Money fund assets jumped for the third straight month in October, rising by $25.5 billion month-to-date through Oct. 29, according to Crane's Money Fund Intelligence Daily, after rising by $28.0 billion in September and $34.0 billion in August. Since the SEC passed its latest Money Fund Reforms in July, assets have increased by $79.0 billion, though October will likely be the first month that Prime Institutional assets represented the bulk of the gains. ICI's latest "Trends in Mutual Fund Investing, September 2014" shows that total money fund assets increased by $22.7 billion in September to $2.604 trillion. (ICI's monthly statistics show that MMF assets increased by $34.0 billion in August, decreased by $16.1 billion in July, and dropped $17 billion in June.) Year-to-date through 9/30/14, ICI's monthly series shows money fund assets down by $74.7 billion, or 2.8%. Below, we review recent asset flows, ICI's latest Trends report, and ICI's monthly Portfolio Composition figures.
The Federal Reserve Board's FOMC meeting today didn't offer anything new on the projected path of interest rate hikes, but it did officially end its asset purchase program. We review the latest FOMC Statement below, but we also excerpt from a recent Fidelity report entitled, "Money Markets: Both Doves and Hawks Find Fed Support." Fidelity writes, "The Federal Reserve's post-FOMC (Federal Open Market Committee) meeting press conference in September included comments that supported the outlooks of doves and hawks alike. Doves noted the ongoing use of the words "considerable time" in the Fed's statement, referring to the period in which federal funds will likely remain in their current range after the asset purchase program ends. Investors have generally defined the term to mean a period of "at least six months" before the first interest rate hike, basing their belief on comments made by Chair Janet Yellen earlier this year."
The clock is now officially ticking on the countdown to money market reforms as the Securities and Exchange Commission's proposal reached its "effective date" on October 14. That means that money market funds may now begin to start complying with the new rules before they take effect, explained the attorneys at Stroock & Stroock & Lavan, in the most recent issue of the Stroock Bulletin, entitled, "Effective Date for Money Market Fund Reforms Arrives: Implications for Funds, their Boards and Advisers." Stroock Partner and former SEC Associate Director of the Division of Investment Management Robert Plaze, and Partner Nicole Runyan, write, "It is imperative for sponsors and boards of money market funds to utilize this compliance period to develop an operational and oversight process to transition money market funds to the new regulatory regime."
Only one comment letter has been posted so far in response to the Treasury and IRS's Proposed Rule on "Money Market Funds: Method of Accounting for Gains and Losses on Shares and Broker Returns with Respect to Sales of Shares," which accompanied the SEC's July Money Fund Reforms. A letter from the Investment Company Institute is the only post so far, though the deadline was Monday, Oct. 27 (so we could see more posted in coming days). The proposal by the U.S. Department Treasury and IRS to allow floating NAV money market fund investors to use a simplified tax accounting method to track gains and losses and provide relief from the "wash sale" rules for any losses on shares of a floating NAV money market fund. As we wrote in our July 30 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal," this proposal sealed the deal for the passage of money market reform as SEC Commissioner Daniel Gallagher, who turned out to be the swing vote, said he would not have voted in favor without this assurance from the Treasury and IRS. (Gallagher commented at the time, "I have consistently, loudly, and publicly stated that my vote for a floating NAV was contingent on the resolution of the tax and accounting-related issues arising from the move away from a constant NAV.")
On Federated Investors' Third Quarter 2014 Earnings Call Friday morning, Chris Donahue, Federated's president and CEO, discussed some of the new products that the company is considering as it prepares for the money market reforms to kick in starting in October 2016. "We, of course, are working on various projects related to the SEC rules that were issued in July," said Donahue. "We expect to have products in place to meet the needs of all of our money fund clients -- these are likely to include prime and municipal money market funds modified to meet the new requirements, government money funds, separate accounts, and offshore money funds. We're also working on developing privately placed funds that will likely mirror existing Federated money market funds to serve the needs of groups of qualified investors unable to use the money funds that have been modified by the new rules."
Post-reforms, the money market fund industry will certainly look different than it does now. In a recent webinar called "Investment Policy Decisions and Amendments, Post Money Fund Reform," a panel of experts discussed what some of those changes might look like. The webinar was hosted by StoneCastle Cash Management with support from Fitch Ratings, PIMCO, and iTreasurer. It was moderated by Ted Howard, managing editor, iTreasurer, and featured presentations by Roger Merritt, Managing Director, and Greg Fayvilevich, Director, Fitch Ratings; Brandon Semilof, Managing Director, StoneCastle; and Brian Leach, Product Manager, PIMCO. We review the webinar below, and we also mention some recent merger and consolidation news. (Note: Monday, Oct. 27 is also the deadline for comments on the Treasury and IRS's Proposed Rule, "Money Market Funds: Method of Accounting for Gains and Losses on Shares and Broker Returns with Respect to Sales of Shares," which accompanied the SEC's recent Money Fund Reforms. See our July 30 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal". No comments have been posted to date, but we will review these if and when they are released.)
Crane Data has released the preliminary agenda for its fifth annual Money Fund University conference, which will be held at The Stamford Marriott in Stamford, CT, January 22-23, 2015. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. But the event also focuses on hot topics like money market reforms and other recent industry trends. The conference features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers. MFU offers attendees an affordable ($500) and comprehensive one and a half day, "basic training" course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, money market instruments such as commercial paper, CDs and repo, plus portfolio construction and credit analysis. At our Stamford event, we will also take a deep dive into the SEC's new money market reforms, with several sessions on the topic.
In 2012, the New York Fed released a report on Tri Party Repo Reform to address potential systemic risk concerns associated with the infrastructure supporting the tri-party repo market. The roadmap to reform's goals were to substantially reduce the amount of intraday liquidity needed to facilitate settlement, and foster improvements in market participants' liquidity and credit risk management practices. In a new post on its Liberty Street Economics blog entitled, "Don't Be Late! The Importance of Timely Settlement of Tri-Party Repo Contracts," the NY Fed gives a status update on reforms and explains "cash investors' role in the settlement process, and highlight how their current practice of sending principal payments late in the day disrupts the timely settlement of tri-party repo contracts." The piece was written by Adam Copeland, research officer in the NY Fed's Research and Statistics Group, and Ira Selig, senior associate in the Financial Institutions Supervisory Group.
On Friday, we featured the major comment letters from money fund managers written in response to the SEC's proposal on the "Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule." (See Crane Data's Oct. 17 News, "Fund Cos. Have Concerns on SEC's Removal of Credit Ratings Proposal.") Today, we focus on comments from industry organizations like the Investment Company Institute and the Securities Industry and Financial Markets Association. The proposal, which is part of the SEC's money market reform package, would remove references to credit ratings of nationally recognized statistical rating organizations (NRSROs) from Rule 2a-7. Below are some excerpts with links to the full comment letters.
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 Sept. 30, 2014). ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 25.4% as of September 30, 2014, down from 26.1% on August 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 21.4% (vs. 21.9% last month) and "Other treasury securities," which added 4.0% (down from 4.2% last month). Prime funds' Weekly liquid assets totaled 37.3% (vs. 39.2% last month), which was made up of "All securities maturing within 5 days" (31.5% vs. 32.4% in August), Other treasury securities (4.0% vs. 4.1% in August), and Other agency securities (1.9% vs. 2.7% a month ago). (See our previous Oct. 10 News, "October Money Fund Portfolio Holdings Show Spike in Fed Repo, T-Bills".)
A host of letters were submitted on the SEC's proposal on the "Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule" right at the October 14 comment period deadline. Many of these letters have now been posted, and most of the largest managers in the money market space, including Fidelity, Vanguard, BlackRock, Dreyfus, Invesco, and Schwab, expressed some concerns on the proposed changes as part of MMF reforms. Currently, to ensure that these funds are invested in high quality short-term securities, Rule 2a-7 requires that money market funds invest only in securities that have received one of the two highest short-term ratings ("first tier" or "second tier"). The SEC's re-proposed amendments would eliminate the credit ratings requirements for money market funds. Instead, a fund could invest in a security only if the fund's board of directors (or its delegate) determines that it presents minimal credit risks, and that determination would require the board of directors to find that the security's issuer has an exceptionally strong capacity to meet its short-term obligations. (See our Aug. 5 News, "SEC Proposal to Remove Credit Ratings Eliminates First, Second Tier".)
U.K.-based corporate treasurers have been hoarding increasing amounts of cash since the financial crisis, according to a survey, "Corporate Cash and Liquid Investments," released by the London-based Association of Corporate Treasurers. In the U.K., private non-financials companies hold about L500 billion in cash compared to about $2 trillion in the US, and E2 trillion in the Eurozone. In all three regions, cash holdings have a little more than doubled since 2000. In the US, UK, and throughout most of Europe, cash holdings represent about 20% of market capitalization. Why? The report says, "Risk and concerns about access to finance clearly increase during a financial crisis. That UK corporate cash has increased by about 25% since Q1 2008 is, then, little surprise. The crisis has emphasized to companies that banks may not be willing (or able) to lend just when the company needs it -- or at all. And, of course, availability of market based finance (from bonds, for example) can never be assumed, depending as it does on investor demand." (Note: For more on recent corporate cash surveys, see our Sept. 25 News, "GT News Survey Reveals Corporate Treasurers Attitudes on Cash Mgmt" and our July 15 News "AFP Liquidity Survey: Corps Hold More Cash, Concern Over MMF Reform." Note too that the Association for Financial Professionals, or AFP will hold its 2014 Annual Meeting Nov. 2-5 in Washington.)Archives »