BlackRock posted a primer in its "Cash Academy" entitled, "Floating Net Asset Value: A Surmountable Shift." It reads, "One of the more significant changes to come out of U.S. money market fund reform is the requirement for Prime and Municipal Institutional Money market funds to adopt a floating rate net asset value (with measurement to the fourth rather than the second decimal place) by October 2016.... While this represents a shift from current constant net asset value practices, we believe the ultimate impact for investors will generally be relatively small." Under Key Takeaways, it says, "We expect the change to an FNAV is not likely to result in sudden material swings in the net asset value (NAV) for Prime Institutional funds. We expect financial consequences from the implementation of FNAV accounting to be minimal, even in a rising rate environment. We recommend Cash investors evaluate their Investment Policy Statements for language." BlackRock writes on the Tax and Accounting Impact, "The U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued a proposal for simplified tax accounting for FNAV MMFs. View the proposal here. Look for more information as the proposals are finalized. The Securities and Exchange Commission, which has authority to set accounting standards, clarified that FNAV MMFs will be treated as cash equivalents. The IRS issued a revenue procedure that exempts shareholders of FNAV MMFs from the wash sale rule." In other news, Moody's issued a release, "US dollar-denominated money market funds to see significant outflows in Q2 2016." It states, "Up to 50% of remaining investor assets will likely leave US prime money market funds ahead of major regulatory reforms in October, says Moody's Investors Service. However, demand for euro prime funds is expected to be resilient despite record low yields. Total assets in the ten largest Moody's-rated offshore US Dollar prime funds fell 10% in 1Q 2016 as investors sought out higher yielding opportunities for their cash following year-end. "We expect US prime fund managers to limit investments in securities with maturities past October as they proceed cautiously in anticipation of the switch to floating net asset values," says Rory Callagy, a Vice President -- Senior Credit Officer at Moody's. "However, demand for euro prime funds is resilient amid uncertainties around Brexit and a lack of comparable investment alternatives," adds Vanessa Robert, a Vice President -- Senior Credit Officer.... Investors will likely continue to use euro-denominated MMFs as higher-yielding liquid vehicles with greater diversification than bank deposits. To date, this dynamic has kept euro CNAV MMFs' collective assets under management (AUM) from falling much below EUR70 billion. In anticipation of the Brexit referendum in June, Moody's expects euro and sterling portfolio managers to increase their funds' liquidity and exposure to government and agency securities, a positive for the funds' credit quality and market risk profiles. The rating agency also expects these funds to be a safe haven ahead of the Brexit vote.... Collectively, the Sterling prime money market funds' AUM increased to GBP156 billion at the end of Q1 from GBP151 billion at the end of the year, while the Moody's rated funds experienced GBP877 million outflows to GBP102 billion during Q1."
The Financial Times published, "US money market fund reform: an explainer." It says, "What do the rules require and what are regulators trying to do? Since April 14, the websites of a number of money market funds have looked different. Requirements for increased disclosure has led to more data being published for investors. Over the next six months, funds will continue to prepare for October 14, when full implementation of the rules is required. At that point, prime funds will be required to publish [rather, transact on] net asset values based on the current value of the assets they hold. That is a big departure for an industry that historically has touted its ability to preserve the value of its investments at $1 a share, and will mean a fund's price will fluctuate along with market conditions. Also from October, if the fund's assets that can be liquidated within one week fall below 30 per cent the fund can impose a fee of up to 2 per cent on redemptions. If that falls below 10 per cent they can impose a fee of 1 per cent. The fund could also prevent redemptions completely for up to 10 days if the 30 per cent threshold is breached." The FT adds, "How much money has so far left prime funds? As a result of the reform more than $200bn has shifted from prime to government funds. The bulk of this has come through prime funds reclassifying to become government funds.... Why are prime funds reclassifying? Although there is been some suggestion that investors are unwilling to adopt floating NAVs, fund providers say the vast majority of money has shifted for fear of the ability to take money out of prime funds being suspended. This is of particular concern for large institutions, such as broker dealers, that manage retail money. At the end of each business day, money left over from the activities of each individual account is "swept" into money market funds to pick up additional yield. "Fidelity alone is sitting on hundreds of billions of dollars," says Peter Crane at Crane Data, a money mark[et] fund data company. "They can't afford for that to lock up. It would freeze up the economy." It continues, "Will there be further impact and what is the significance of the reform? As the October deadline approaches, focus will sharpen on institutional investors who will have to weigh up whether the extra yield available by sticking in prime funds offsets the drag of the new rules. Prime funds are braced for further outflows and are building up large liquidity buffers to avoid falling beneath the 30 per cent threshold. Some fund managers also say that funds will begin to limit investment in longer dated assets that extend beyond the October 14 deadline.... It could begin to impact the market for commercial paper that many banks use to raise short-term funding.... "Now that we are six months away the market for commercial paper is thinning out," Mr. Crane says. "Everyone is bracing for outflows and preparing to have huge liquidity war chests ahead of the October deadline.""
SEI filed with the SEC to change the sub-adviser for its money market funds -- Money Market, Prime Obligations, Government, Government II, Ultra-Short Duration Bond, Short Duration Government, and GNMA funds -- from BofA to BlackRock. It says, "Under the heading titled "The-Sub-Advisers," under the section titled "The Adviser and Sub-Advisers," the text relating to BofA Advisors, LLC is hereby deleted and replaced with the following: Blackrock Advisors, LLC -- BlackRock Advisors, LLC ("BAL") serves as a Sub-Adviser to a portion of the assets of each of the Money Market, Prime Obligation, Government, Government II, Treasury and Treasury II Funds.” However, as we reported in our March 29 News, "Another Two Bite the Dust: SEI Liquidates Prime; Wilmington Goes Govt," SEI is liquidating both Prime Obligations and Money Market Fund on June 24. (See the SEC filing for details.) In related news, a press release entitled, "Moody's Affirms Aaa-mf Ratings of Four BlackRock Money Market Funds Following Merger with BofA Funds," says, "Moody's Investors Service today affirmed the Aaa-mf ratings of the following four money market funds managed by BlackRock Asset Management: BlackRock TempFund, BlackRock FedFund, BlackRock T-Fund, BlackRock Federal Trust Fund. Moody's also withdrew the Aaa-mf ratings of the following four money market funds managed by BofA Global Capital Management: Government Plus Reserves, Government Reserves, Money Market Reserves and Treasury Reserves, which merged into the aforementioned BlackRock Funds. The rating action follows BlackRock's 18 April 2016 announcement of the funds' mergers and the reorganization of its fund lineup. The rating affirmations reflect Moody's expectation that, following the fund mergers, the surviving fund portfolios will continue to maintain credit and stability profiles consistent with a Aaa-mf rating. The investment strategy of the surviving BlackRock Funds will remain the same as prior to the merger. The Aaa-mf ratings reflect Moody's view that the funds will have a very strong ability to meet the dual objectives of providing liquidity and preserving capital. The fund reorganizations were approved by both fund boards, fund shareholders and regulators. BofA Funds's shareholders were requested to elect between redeeming their shares of the BofA Funds or receiving new shares in the BlackRock Funds. On 18 April 2016, the net assets of the BofA Funds were merged into the BlackRock Funds, and the BofA Funds closed. The total amount of the net assets transferred from the BofA Funds to the BlackRock Funds was $39 billion. BofA Cash Reserves ($7.6B) and BofA Money Market Reserves ($15.9B) merged into BlackRock TempFund ($55.5B); BofA Government Plus Reserves ($1.8B) merged into BlackRock FedFund ($13.5B); BofA Government Reserves ($3.8B) merged into BlackRock Federal Trust Fund ($314M); and, BofA Treasury Reserves ($9.8B) merged into BlackRock T-Fund ($21.6B). All figures are as of 15 April 2016."
Fidelity posted an update in its Leadership Series called "Institutional and Muni Money Market Funds Begin Publishing Flow and NAV Data." Authors Michael Morin, Director of Institutional Portfolio Management and Kerry Pope, Institutional PM, write, "Money market fund flows continued to suggest an investor preference for government MMFs in light of the rapidly approaching 2a-7 reforms. From February 29 to March 31, assets in these funds rose from $1,245 billion to $1,268 billion, a $23 billion increase. We continue to believe government MMF assets are likely to continue their trend higher as, given the enhanced bank regulations, large banks cost-justify their deposits. Fidelity's prime MMFs continued to be well positioned for potentially increased flow volatility associated with regulation reform. MMFs have had plenty of supply in the short end of the yield curve thanks to increases in repurchase agreements and agencies." They add, "As we outlined in our March 2016 Money Market Commentary "Money Markets: Data-Dependent Fed Holds Rates Steady," beginning in April 2016, institutional prime and institutional municipal MMFs are required to publish market-value NAVs. In accordance with this requirement, Fidelity began providing data for the following categories: Daily and Weekly Liquidity (weekly only for municipal MMFs); Daily Net Shareholder Flows; Fees & Distribution (Pricing); and Daily Market Value (NAV)."
A press release entitled, "Moody's assigns Aaa-mf ratings to Four New UBS Government Money Market Funds," says, "Moody's Investors Service has assigned Aaa-mf ratings to the Master Trust - Government Master Fund and three of its feeder funds: UBS Select Government Preferred Fund, UBS Select Government Institutional Fund, and UBS Select Government Investor Fund. These are new funds managed by UBS Asset Management (Americas) Inc. The ratings reflect Moody's view that the funds will have a very strong ability to meet the dual objectives of providing liquidity and preserving capital. This view is supported by the funds' high scores across all key rating factors, which include (i) credit quality, (ii) asset profile, (iii) liquidity and (iv) market risk exposure. We expect the investments held in the funds' portfolios will be of high credit quality, as evidenced by the model portfolios average weighted credit quality of Aaa. The portfolio will be comprised only of securities issued or guaranteed by the United States, including US Treasury securities and US Government agencies or repurchase agreements fully collateralized by United States obligations. The rating benefits from the funds' short weighted average maturity and low asset concentration, each of which results in a score of '1' for our assessment of the fund's asset profile under Moody's Revised Money Market Fund Rating Methodology.... While the funds' shareholder bases are likely to exhibit some lumpiness as the funds ramp up, our expectation is that the funds will maintain strong liquidity profiles supported by high levels of overnight and near-term liquidity, based on the nature of the investments and management's risk management protocol.... We expect the funds' sensitivity to market risk to remain low due to the high quality of the Master fund's investment portfolio." (The new UBS Select Government Funds hasn't gone live yet, but will be added to Crane Data's collections as soon as it does.) Also, PIMCO posted a video, "Understanding Money Market Fund Reform: A Conversation with Jerome Schneider and Paul Reisz."
We learned from the website Better Regulation that a Council of the European Parliament "published a presidency compromise on the proposal for a Regulation on Money Market Funds (MMF)" on April 14, which could mean changes for European-domiciled money funds are imminent. The site explains, "Money Market Funds (MMFs) are an important source of short-term financing for financial institutions, corporates and governments. Money market instruments traditionally include treasury bills, commercial paper or certificates of deposit. MMFs hold almost 40% of short-term debt issued by the banking sector and represent a crucial link bringing together demand and offer for short-term money." Better Regulation adds, "The financial crisis demonstrated that money market funds, although seen as relatively stable investment vehicles, could in fact pose a systemic risk not only due to their size but also their interconnectedness with the banking sector on the one hand and with corporate and government finance, on the other. On 4 September 2013, along with a "Roadmap" within a Communication for initiatives regarding shadow banking reforms, the European Commission proposed a new European framework designed for Money Market Funds (MMFs). The Proposed Regulation introduces new rules aimed at making MMFs more resilient to future financial crisis and at the same time securing their financing role for the economy. The objective of the proposal being to preserve the integrity and stability of the internal market, ensuring an increased protection of investors in MMFs." They add, "The latest changes to the compromise text are denoted by bold underline for additions, and bold strikethrough for deletions." Watch for more details on the EU MMF Regulatory compromise, as well as a review of "International" money funds in Tuesday's News. At first glance, it looks like the EU has allowed a LNAV or low-volatility NAV version of money funds to continue to use CNAV (without the previous sunset clause), but the remainder of the regulations continue to look pretty ugly (they include a ban on sponsor support). We're also unclear on whether this means passage of the new regulations, which have a 24-month implementation date, is imminent.
Crane Data, money fund providers, and various segments of the cash marketplace are preparing for a number of conferences over the coming weeks and months. Below, we review and list several that we'll be speaking at, attending, or hosting. First on our agenda is the SIFMA AMA Roundtable, which takes place May 1-3 in Miami, Fla. Our Peter Crane will speak on "Money Fund Trends & Lineup Shifts and he'll host a "Cash Sweeps & MM Products" panel, which will feature Kevin Bannerton from Total Bank Solutions, Tom Nelson from Reich & Tang and Doug Pagliaro from UMB. The SIFMA AMA Roundtable involves Brokerage product and sweep professionals and is run in conjunction with the SIFMA Ops Conference. (Contact Crane Data or SIFMA's Charles DeSimone to ask about attending or to see the agenda.) We won't be attending this year, but next on the conference calendar is New England AFP's Annual Conference, which is May 2-4 at Mohegan Sun in Connecticut. Crane Data will be exhibiting at this year's ICI General Membership Meeting, which isn't expected to have much money fund content. But fund industry heavyweights will all be there, and we'll be discussing fund issues and pushing our new Bond Fund Intelligence product line. In early June, the New York Cash Exchange takes place (June 1-3 in NYC), and then our big show, Money Fund Symposium takes place June 22-24 at the Philadelphia Marriott. (We encourage attendees to make their hotel reservations and to register soon. The hotel always sells out.) We'll also be hosting our next European Money Fund Symposium, Sept. 20-21, 2016 in London, and the biggest show for corporate treasurers and money fund salespeople, the AFP Annual Conference will be Oct. 23-25 in Orlando, Fla. Finally, mark your calendars (and watch for the websites to go live in coming months) for Crane's Money Fund University 2017, Jan. 19-20, 2017 in Jersey City, NJ. and for Crane's Bond Fund Symposium, March 23-24, 2017 at the Hyatt Regency Boston.
Bank of America Merrill Lynch Rates Strategist Mark Cabana published a brief entitled, "Prime money funds: liquidity vs yield," which discusses how "Prime money funds have been shortening the tenor of their holdings to increase liquidity and meet potential outflows" and how this "challenges prime fund ability to generate yield sufficient to keep investors in the product after full money fund reform." Cabana explains, "Ahead of full implementation for money fund reform in October prime money funds have been shortening the tenor of their holdings in order to increase liquidity and meet potential outflows. This has likely provided some upward pressure on commercial paper and LIBOR-OIS spreads, including around the 6-month tenor which now rolls into the money fund reform window.... According to Crane Data, prime money fund holdings of financial CP (commercial paper) and CD (certificates of deposit) with final maturities of greater than 6 months have declined from around 15% at the end of September to 7% at the end of March. Across prime funds, maturities with over 180 days now comprise less than 5% of total assets and this has challenged their ability to generate return." A section, "Sacrificing yield for liquidity to meet potential outflows," explains, "Prime funds find themselves in a bit of a "catch-22" ahead of October. Prime fund managers need to take duration risk to generate yields that are sufficiently attractive for investors to remain in the product, but have received very little clarity from investors about how much cash will remain invested after the implementation date. Given this uncertainty and the potential for redemptions, prime fund managers have needed to shorten duration to stay liquid. This has caused prime funds to increase their amounts of daily and weekly liquidity while also shortening their weighted average maturities and weighted average lives.... Declining duration and increased liquidity makes it challenging for prime funds to generate sufficient yield such that investors feel compensated for the risk of a potential liquidity fee or redemption gate.... The current 7-day yield spread between prime and government funds is 16bps according to Crane, so some additional yield pickup could be required." Finally, he adds, "Given the uncertainty around investor behavior and subsequent need to stay liquid, there will likely be additional flows out of prime money funds ahead of full implementation date. When taken in the context of the $230 billion in prime fund outflows since the start of 2015 and the nearly $300 billion in announced prime to government conversions (with roughly $75 billion yet to fully convert), we now believe flows out of prime funds could total $600 to $800 billion.... We believe that risks skew towards the high end of this range but continue to acknowledge uncertainty around our estimate. We also continue to believe outflows will likely increase over the summer and into the fall. Shifts out of prime funds should result in a further increase in LIBOR-OIS spreads and a widening of shorter-dated swap spreads."
The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of March. 31, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 30.6% as of March 31, up from 30.5% on Feb. 29. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 24.9% (vs. 25.4% last month) and "Other treasury securities," which totaled 5.7% (up from 5.1% last month). Prime funds' Weekly liquid assets totaled 42.2% (vs. 41.1% last month), which was made up of "All securities maturing within 5 days" (35.0% vs. 34.8% in February), Other treasury securities (5.6% vs. 5.1% in February), and Other agency securities (1.6% vs. 1.2% a month ago). The report shows that Government Money Market Funds' Daily liquid assets totaled 59.3% as of March 31 vs. 57.7% the previous month. All securities maturing within 1 day totaled 23.3% vs. 23.3% last month. Other treasury securities added 36.1% (vs. 34.4% in February). Weekly liquid assets for Govt MMFs totaled 75.6% (vs. 77.5%), which was comprised of All securities maturing within 5 days (31.9% vs. 33.5%), Other treasury securities (34.4% vs. 32.7%), and Other agency securities (9.3% vs. 11.3%). ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 46.2% in the Americas (vs. 39.2% last month), 19.0% in Asia Pacific (vs. 18.9%), 34.2% in Europe (vs. 41.5%), and 0.2% in Other and Supranational (vs. 0.0% last month). Government Money Market Funds held 91.8% in the Americas (vs. 84.2% last month), 0.9% in Asia Pacific (vs. 1.4%), 7.3% in Europe (vs. 14.5%), and 0.0% in Supranational (vs. 0.0%). The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 35 days as of March 31, down from 36 days last month. WALs were at 54 days, down from 57 days last month. Government MMFs' WAMs was at 42 days, up from 41 days last month, while Government fund WALs was at 96 days, up from 93 days. The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for June covers funds holding 94 percent of taxable money market fund assets." (Note: ICI publishes aggregates but doesn't publish individual fund holdings.)
Website MoneyRates.com recently posted the piece, "Do money market accounts have FDIC insurance coverage?" It asks, "Q: Are money market accounts insured by the FDIC? A: That depends on what you mean by "money market accounts." It is important to distinguish between money market savings and money market funds when determining FDIC insurance coverage." On "Money market savings accounts vs. money market funds," the basics article says, "The two names are very similar: money market deposit accounts, and money market funds. They are both liquid assets offering similar (generally relatively low) interest rates. However, for all the similarities, there is a critical difference. Money market savings accounts held at participating FDIC-insured institutions are covered. Money market funds, on the other hand, are a form of mutual fund and as such they are not covered by FDIC insurance.... This lack of insurance for money market funds does more than open up the possibility of losses in those investments. A couple years ago the U.S. Security and Exchange Commission adopted reforms (inspired by the 2008 financial crisis) that could restrict the liquidity of money market funds." MoneyRates explains, "For one thing, the SEC changed accounting rules for money market funds so that their market values can now vary. Therefore, if a fund is trading below what you paid for it, you cannot count on getting all of your original value back when you need it. Also, to prevent runs on money market funds in times of financial stress, the SEC also now allows fund companies to restrict withdrawals under certain circumstances, or impose a fee for those withdrawals. Either of these could impact the availability of your money. So, generally speaking, both money market deposit accounts and money market funds provide stability and liquidity. However, if you want absolute stability and liquidity, you should look at money market deposit accounts."
The Charles Schwab Corp. released record first quarter earnings Friday, driven by reductions in money fund fee waivers. Schwab's release says, "CFO Joe Martinetto commented, "The ongoing effect of the Fed's initial interest rate hike in December has provided a glimpse of Schwab's earnings power as rates normalize, with our diversified revenue streams generating strong first quarter revenue growth and our steady expense discipline continuing. Asset management and administration fees rose 9% year-over-year – boosted by a $61 million sequential improvement in money market fund revenue due to higher short-term rates and higher balances, but limited by market valuations that persisted below year-end levels for much of the quarter. Net interest revenue jumped 31% year-over-year, reflecting robust interest-earning asset growth during the past several quarters, and the firm's greater sensitivity to the rise in short rates relative to the decline in the long end of the curve.... Altogether, revenues grew approximately 16% from the prior year to a quarterly record of $1.8 billion." Martinetto continued, "During the first quarter, we continued working to migrate more client cash to our balance sheet while maintaining healthy capital levels. The company issued $750 million of non-cumulative perpetual preferred stock at a rate of 5.95%. Proceeds will help support the transfer of approximately $6 billion in balances relating to money fund regulatory reform, primarily in the July to September timeframe. In addition, we expect to support approximately $3 billion of incremental Schwab Bank deposit growth throughout the second half of the year, as the Bank is now the default sweep option for all new accounts. We also completed a $1.4 billion bulk transfer of client sweep cash from the broker-dealer to Schwab Bank in March." Schwab had $97 million in fee waivers in Q1 '16 compared to $184 million in Q1 '15. In other earnings news, BlackRock Chief Financial Officer Gary Shedlin told analysts on BlackRock's Q1 earnings call that the deal to buy BofA's money fund business would close later this month. (It closes Monday; watch for more Crane Data News coverage Tuesday a.m.) The transcript from Seekingalpha.com states, "In line with that commitment, we anticipate closing the Bank of America Global Capital Management transaction later this month, assuming investment management responsibilities for approximately $87 billion of related cash and liquidity AUM."
Money fund assets dropped $7.7 billion last week, with all of it coming from Government funds, according to the ICI. Their latest "Money Market Fund Assets" release says, "Total money market fund assets1 decreased by $7.69 billion to $2.73 trillion for the week ended Wednesday, April 13, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $7.18 billion and prime funds increased by $2.77 billion. Tax-exempt money market funds decreased by $3.29 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.288 trillion, while Prime assets are at $1.221 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion of $214 billion of Prime funds to Govt funds to date. (Another $75.6 billion is scheduled to switch over before the October 14 MMF Reform deadline.) ICI's report continues, "Assets of retail money market funds decreased by $8.87 billion to $988.87 billion. Among retail funds, government money market fund assets decreased by $890 million to $381.84 billion, prime money market fund assets decreased by $6.21 billion to $434.76 billion, and tax-exempt fund assets decreased by $1.77 billion to $172.27 billion." It adds, "Assets of institutional money market funds increased by $1.18 billion to $1.74 trillion. Among institutional funds, government money market fund assets decreased by $6.29 billion to $906.16 billion, prime money market fund assets increased by $8.98 billion to $786.13 billion, and tax-exempt fund assets decreased by $1.51 billion to $49.95 billion." Year-to-date through April 13, MMF assets are down $28 billion with Inst assets down $78 billion and Retail assets up $50 billion. (We've seen a number of reclassifications from Inst to Retail too.) A Footnote to ICI's release adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." This week, the $111 million Schwab MM Portfolio converted into Schwab Govt MM Portfolio on April 14; the $824 million UBS Liquid Assets will convert into UBS Liquid Assets Govt Fund on April 15; and $316 million Goldman Sachs VIT MMF will convert into Goldman Sachs Govt MMF on April 15. We expect large outflows over the next several weeks due to the April 15 income tax filing deadline (April 18 this year due to the Evacuation Day holiday in Washington).Archives »