Measuring money... faster, cheaper, cleaner

Link of The Day

Archives »

Federated Investors' CIO of Global Money Markets, Deborah Cunningham writes in her latest "Month in Cash" "How times have changed." She says, "The incessant buzz surrounding whether the Federal Reserve will or won't initiate liftoff in September (put me in the "will" camp) got me thinking about just how much times have changed. I can recall a meeting years ago in the board room on the 27th floor of our Downtown office building. It was with members of the New York Federal Reserve Bank, and the discussion centered on the possibility the target funds rate, 1% at the time, could be lowered another 25 basis points to 0.75% ... 0.75%! We thought that was madness; now, we'd be jumping for joy over such a rate! And, frankly, we believe we will get to 0.75% at some point next year, likely in the first half of 2016. We also think the Fed will initiate its first increase in the funds rate in nine years at its meeting next month, the noise surrounding its late July post-meeting statement notwithstanding. If you strip that statement down, there were less than 10 word changes, with a lot of consternation focused on the addition of the word "some," as in policymakers to need to see "some" further improvement in the labor markets to justify a rate hike. Honestly, this all sounds like word sniffing to me." Cunningham continues, "We do think the Fed will tread very gingerly once it begins to move. Our scenario sees a rate hike of 25 basis points or so every second or third meeting, starting with September as opposed to December, as some are currently suggesting. Given the cash-flow complications and all the funding and window-dressing moves that occur in the money market toward the end of every year, to toss in the beginning of a policy of raising rates when they've effectively been a zero for seven years wouldn't make a lot of sense from our perspective. That said, we wouldn't be surprised if the Fed only makes one move this year; its first meeting in 2016 is in late January, so skipping December wouldn't be such a big deal. Our expectation is the Fed will nudge the target rate to 1% and then pause to make an assessment.... With the cash market starting to price in a move, we've been able to find value in floaters -- floating-rate instruments that reset periodically and generally benefit in a rising-rate environment -- and further out on the cash yield curve. This has resulted in unique circumstance in our portfolios -- the weighted average life of our holdings has extended by about 10 days over the past month as we moved out on the curve, but the weighted average maturity hasn't budged, reflecting a big increase in holdings of floaters that reset monthly." In other news, StoneCastle Cash Management, which "amalgamates" FDIC insured deposits, issued a press release saying it posted record asset and account levels in 2Q. Business highlights include: "Increasing balances by 20% year to date, with FICA and ICA balances up over 30%; Exceeding 1,000 total institutional accounts; Successfully launching the new Institutional Cash Account, a non-insured, large balance bank deposit solution. "It is not coincidental that as firms deal with the impact of regulatory reform, SCCM and its FICA offering are reaching historic asset levels. We continue to see strong growth in assets as treasurers seek out proven cash management solutions," said StoneCastle's Brandon Semilof.

Dale Albright, head of money market portfolio management at BofA Global Capital Management, recently co-authored a white paper called, "Variable NAV Prime Money Market Funds: Risks and Rewards." Albright and co-author Jeremy Harman, Senior Institutional Sales Representative at BofA, write, "Prime money market funds have been used for decades because they have offered the potential for attractive yields, daily liquidity, diversification and principal stability. The evolving interest rate environment and sweeping regulatory reforms represent changes whose impact investors should understand as they use VNAV money market funds. The sponsors of institutional prime money market funds have time to implement the VNAV reform, and investors have time to consider the impact of the change in the context of their risk tolerance, return objectives and liquidity requirements. While some investors may not have the appetite for even a few basis points of NAV deviation, others might view such NAV movement as they would transaction fees on bank, sweep or custody accounts -- a cost of doing business justified by the risk/return profile and overall benefits of the investment. Investors' make this trade-off today. Most investment policies state that preservation of principal is the primary objective, yet most short-duration investors do not limit themselves to U.S. Treasuries. They use institutional prime money market funds knowing there is no guarantee that the funds' NAVs will remain stable at $1.00 because they believe the additional yield potential institutional prime money market funds have offered adequately compensates them for the additional risk. So, while principal preservation is, and should be, liquidity investors' primary objective, yield and return are considerations today and will be in the future. Absent large and unpredictable dislocations in the short-term debt markets, the advent of a floating NAV for institutional prime money market funds is unlikely, in our view, to negate the benefits offered by this category of funds. Under normal circumstances, the potential impacts of a shift to a floating NAV are likely to be small, and they are, in many ways, quantifiable (and thus manageable). Moreover, investors understand that market dislocations, such as the global financial crisis, threaten principal preservation whether a fund's NAV is pegged at $1.00 or floats. We believe that in a normal operating environment, a VNAV structure would not, by itself, undermine principal stability. Investors might choose to use VNAV prime money market funds differently in the future (using them for reserve cash instead of operating cash, for example), but we believe institutional prime funds will remain a valuable component of a diversified liquidity-management program even after these funds adopt the variable NAV in October 2016."

ICI's latest "Money Market Mutual Fund Assets" report shows assets down slightly in the latest week. It says, "Total money market fund assets decreased by $580 million to $2.65 trillion for the week ended Wednesday, July 29, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $9.62 billion and prime funds decreased by $9.74 billion. Tax-exempt money market funds decreased by $460 million. Assets of retail money market funds increased by $90 million to $871.24 billion. Among retail funds, Treasury money market fund assets increased by $920 million to $196.80 billion, prime money market fund assets decreased by $180 million to $496.45 billion, and tax-exempt fund assets decreased by $650 million to $177.99 billion. Assets of institutional money market funds decreased by $670 million to $1.78 trillion. Among institutional funds, Treasury money market fund assets increased by $8.70 billion to $794.35 billion, prime money market fund assets decreased by $9.56 billion to $914.51 billion, and tax-exempt fund assets increased by $190 million to $67.90 billion." Year-to-date, money fund assets are down about $84 billion or 3.1%; month-to-date assets are up about $34 billion.

The Federal Reserve Board didn't raise interest rates at its Federal Open Market Committee meeting on July 29, but many believe signs still point to a September hike. The FOMC's statement says, "Information received since the Federal Open Market Committee met in June indicates that economic activity has been expanding moderately in recent months. Growth in household spending has been moderate and the housing sector has shown additional improvement; however, business fixed investment and net exports stayed soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished since early this year." It continues, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. The Committee is maintaining its existing policy 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. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run." The Wall Street Journal writes, "FOMC Closer to September Hike, Even If the Market Doesn't Think So." The Journal says, "As expected, the Federal Reserve's rate-setting committee didn't make any drastic action at the July meeting. It didn't make any moves, as a matter of fact. But in assessing the changes to the June statement compared to the April statement, a number of commentators concluded that the statement did in fact move the central bank closer to its first interest-rate increase in nearly a decade."

A press release entitled, "Federated Investors, Inc. Completes Transition of Shareholder Assets from Reich & Tang Money Market Funds," tells us, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today completed the transition of shareholder assets from Reich & Tang's domestic and offshore money market funds. In connection with the transition, approximately $4 billion in shareholder accounts from six Reich & Tang money market funds were transitioned into Federated funds with similar investment strategies. With approximately $242 billion in money market assets under management as of June 30, 2015, Federated offers a variety of prime, government, municipal and non-U.S. liquidity management products. Federated is among the top 3 percent of money market managers and has been an industry leader in liquidity management for more than 40 years and offers a highly defined process of portfolio construction, intense credit review and experienced investment professionals." Joe Machi, director of alliances at Federated, comments, "Our history of completing these types of transactions and our wide range of liquidity management products make Federated an ideal home for these money market assets. We continue to assess acquisition and alliance opportunities with asset managers, banks, insurance companies and broker/dealers in the United States and around the world." (See also our March 12 LOTD, "Reich & Tang Announces Liquidation of Money Market Mutual Funds," our March 17 "News", "Federated In Talks with Reich & Tang Over MMF Assets," and our March 23 LOTD, "Federated to Acquire Touchstone Ohio Tax Free Money Market Fund Assets.

The Financial Times published, "RRPs for Life?," which features an interview with New York Fed President William Dudley. The article says, "The timing of the Fed's initial rate hike and the subsequent path of future hikes are prominent unknowns on the minds of market participants and commentators. But the question of mechanics -- how the Fed will raise rates -- also matters. Our colleague Sam Fleming recently interviewed New York Fed president Bill Dudley and asked him about the possibility of the Fed's maintaining a larger balance sheet indefinitely in conjunction with the use of its reverse repo facility. His answer suggested that the central bank remained undecided. Q: Do you think in the longer-term, the new normal for the Fed balance sheet in 2020 onwards would be a larger balance sheet than in the past? A: It is really premature to say. We are going to learn a lot about running monetary policy with a large balance sheet, using the overnight RRP and interest on excess reserves as our primary tools to affect the federal funds rate target. As we learn that that will probably affect our judgment about whether it would be better to go back to a corridor system, with a very small amount of reserves in the system, or whether it would be better to have a greater amount of reserves and rely on these interest rate instruments to guide the stance of monetary policy. `My personal opinion -- not the committee's opinion -- is [the] jury's out. We are going to learn a lot. Let's learn and then decide and not make any judgments today.... And the other question is how big is big enough. I would be shocked if we wanted to run a $4.5 trillion balance sheet. The question is how much excess reserves would you want in the system if you wanted to run with a system based on interest rates being your primary instrument of policy." The piece continued, "Janet Yellen herself has been less keen on using the RRPs indefinitely than Ben Bernanke would be, as she confirmed again during her most recent press [comments].... So, with respect to -- you asked first about overnight reverse repos. And we communicated in our minutes that the Committee has an intention to make sure that they are available -- overnight repos are available in large quantity at liftoff to ensure that we have a smooth liftoff, that there will be an elevated level of provision of overnight RRP. However, it is our expectation and plan that fairly quickly after liftoff we will reduce the level of the overnight RRP facility, and we have a variety of ways in which we can do that."

On the 1-year anniversary of the SEC's MMF reforms, ICI's Jane Heinrichs and Chris Plantier posted commentary on the Investment Company Institute's "Viewpoints" blog, entitled, "Ignore the IMF’s Uninformed Call for a Third Round of Reforms to U.S. Money Market Funds." They write, "A year ago today, the U.S. Securities and Exchange Commission (SEC) voted to adopt sweeping reforms to its rule governing money market funds. The vote capped nearly six years of work to craft a rule that would address issues revealed by the financial crisis while preserving the funds' value to investors, issuers, and the economy. The 2014 reforms built on a first round of reforms adopted in 2010 -- and will fundamentally alter prime and tax-exempt institutional money market funds when they are fully implemented next fall. Yet the International Monetary Fund (IMF) seems to think that the SEC hasn't gone far enough. In its recent Financial Sector Assessment Program report on the stability of the U.S. financial system, the IMF recommends that the SEC require all money market funds -- including government funds, not just institutional prime and institutional tax-exempt funds -- to float their net asset value (NAV). Just as with many of the proclamations on the fund industry in its most recent Global Financial Stability Report, the IMF offers no credible evidence to back up its recommendation. "[E]ven this seemingly safest of all short-term assets could give rise to redemption pressures," the IMF posits in its assessment, citing "a real prospect that some Treasury securities were not going to be redeemed on their due dates" during the United States' debt-ceiling crisis in October 2013. "With investors treating their units in the funds as money-like liabilities, together with a commitment to a constant NAV and with no mechanism to manage redemption risks, the scene could again be set for an investor run, albeit under quite different circumstances than in 2008." This "analysis" fails to acknowledge four important points: 1) Thanks to their abundant liquidity (a diversified mix of U.S. Treasury obligations of various maturities up to 397 days, U.S. government agency securities, and repurchase agreements backed by Treasuries or agencies), government money market funds easily accommodated redemptions during the two weeks leading up to the 2013 debt-ceiling resolution.... 2) These redemptions had nothing to do with a constant NAV. In both instances, they instead reflected a concern that Congress would allow the U.S. government to default on some of its maturing short-term debt.... 3) Although all money market funds must hold securities with low credit risk, government securities would see credit losses only if the federal government failed to repay its maturing debt in full or if it allowed a federal agency to default on its outstanding short-term debt. Both of these events are extremely unlikely -- and even if one did materialize, it would harm far more than money market funds. 4) During other periods of market stress, investors moved into government money market funds, not out of them -- and the funds' so-called shadow NAVs, or mark-to-market price per share, tended to rise, rather than fall.... The SEC's reforms were informed by sound research and reflect a nuanced understanding of the industry. If the IMF wishes to contribute meaningfully to the regulatory discourse as the industry moves to implement the reforms, following the SEC's approach would be a good place to start."

ICI's latest "Money Market Mutual Fund Assets" report shows assets up big in the latest week. It says, "Total money market fund assets increased by $16.19 billion to $2.65 trillion for the week ended Wednesday, July 22, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $9.42 billion and prime funds increased by $7.52 billion. Tax-exempt money market funds decreased by $760 million. Assets of retail money market funds decreased by $530 million to $871.15 billion. Among retail funds, Treasury money market fund assets increased by $770 million to $195.88 billion, prime money market fund assets decreased by $1.16 billion to $496.63 billion, and tax-exempt fund assets decreased by $140 million to $178.64 billion. Assets of institutional money market funds increased by $16.72 billion to $1.78 trillion. Among institutional funds, Treasury money market fund assets increased by $8.66 billion to $785.65 billion, prime money market fund assets increased by $8.68 billion to $924.07 billion, and tax-exempt fund assets decreased by $620 million to $67.71 billion." Year-to-date, money fund assets are down $84 billion or 3.1%. Month-to-date assets are up $34 billion, and MMF assets have gone up 4 of the past 5 weeks. In other news, Federated Investors released its latest earnings and will hold its 2nd Quarter Earnings Call this morning, July 24, at 9:00 am. The release says, "President and Chief Executive Officer J. Christopher Donahue and Chief Financial Officer Thomas R. Donahue will host the call. Investors interested in listening to the conference call should dial 877-407-0782 ... or visit 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 and join the call."

JP Morgan Securities' "Prime MMF Holdings Update for June commented recently on the surprising fact that issuers continue to provide short-term paper. They say, "It is notable that banks have so far been willing to meet the shift in demand from prime MMF with shorter dated supply. We think differences in regulatory implementation across different countries plays a role in this. The Basel III LCR and NSFR are designed to discourage banks' use of short term borrowing, yet these have not proven a uniform hindrance to new issuance in recent months. Two aspects of the regulatory environment may be at work. First, on a global basis the Basel LCR and NSFR are not scheduled to be in full effect until 2019 and 2018, respectively. However, individual countries are phasing in the rules at varying paces, and these implementation variations are the second aspect that may explain why supply in 30d and less remains robust. With international banks playing by different sets of rules, many Yankee banks continue to be able to issue sizable amounts of debt maturing inside of 30 days. However, there are limits to this, as the cliff-like drop off in time deposits at quarter-ends demonstrates. The time deposit cliff is itself a function of differences in regulatory implementation." JPM's update adds, "We expect this maturity shortening trend to persist, and for prime WAMs to drift lower. Managing around a Fed lift off will be a major factor driving WAMs -- using the last tightening cycle as a reference, in the 3 months leading up to the first rate hike, prime fund WAMs fell by 10 days from 52 to 42 days. MMF reform related outflows should also play a role in the months to come as cash begins to move out of the prime complex."

First American Funds Managing Director Lisa Isaacson published commentary on Form N-CR entitled, "The First Money Market Fund Reform Deliverable." She writes, "The SEC's stated objectives when they announced money market fund reform were to increase transparency, address susceptibility to runs and preserve the benefits of money market funds. The purpose of the July deliverable is to increase transparency of material events that may befall a fund. The requirement goes live July 14 and it calls for funds to file a new material events form, called Form N-CR, in certain well-defined instances. Form N-CR will be required to be filed by funds with the SEC and prominently displayed on fund websites when specific events occur. The events which will trigger the filing of the form are detailed below, with the final one not required to be reported until that piece of the reform becomes effective: Insolvency or default of a portfolio holding. For issuers or guarantors representing 0.50% or more of a fund's holdings, a default or insolvency becomes a reportable event. Several pieces of information about the holding(s) would be disclosed in this event, including the default date, the value of the holding, the percentage of the portfolio it represents and what fund management is planning to do to address the issue.... Financial support from a sponsor. The idea of support is not new to money market funds, nor is the reporting of it. Sponsor support has historically been given to allow a fund to continue accepting redemption requests at a $1.00 NAV. Under certain circumstances, a sponsor may step in if a portfolio security has lost value or liquidity in the market has been compromised. Support can take several forms, including purchasing a distressed security from a fund at par, making a capital contribution or executing a capital support agreement on behalf of the fund. The SEC sees all of these actions as a sponsor taking steps to stabilize or increase the value or liquidity of a fund's portfolio.... Declines in a fund's shadow price. The new reform calls for a Form N-CR to be filed if a fund's shadow price falls below $0.9975 per share regardless of whether a fund will be pricing at a stable or a floating NAV come October 2016. Funds with shadow prices below $0.9975 are moving the wrong way within the current penny-rounding rules, which allow a money market fund to strike a $1.00 NAV if the value of portfolio securities is at least $0.9950 (NAVs below $0.9950 are considered to have broken the buck).... Imposition or lifting of a liquidity fee or redemption gate. Part of the ultimate reform implementation calls for fund boards to be able to assess a liquidity fee or a redemption gate if a fund's weekly liquidity falls below 30%. Should a board determine one or both of these levers is in the best interest of shareholders, the SEC has mandated that communication of such action be made public within one day through a Form N-CR filing. As part of the explanation included in these filings, a fund board will be able to provide context around why the decision was made.... It is important to note that all money market funds -- whether they are retail or institutional -- are subject to the July Form N-CR deliverable."

The New York Federal Reserve published an article on its Liberty Street Economics blog, "Have Dealers' Strategies in the GCF Repo Market Changed? where researchers examine changes in the General Collateral Finance repo market. It says, "In a previous post, "Mapping and Sizing the U.S. Repo Market," our colleagues described the structure of the U.S. repurchase agreement (repo) market. In this post, we consider whether recent regulatory changes have changed the behavior of securities broker-dealers, who play a significant role in repo markets. We focus on the General Collateral Finance (GCF) Repo market, an interdealer market primarily using U.S. Treasury and agency securities as collateral. We find that some dealers use GCF Repo as a substantial source of funding for their inventories, while others primarily use GCF Repo to fine-tune their repo positions. Recent regulatory changes, such as the supplementary leverage ratio (SLR), may be contributing to reduced lending in the GCF Repo market." It concludes, "Recent regulatory changes make repo trading more expensive," "In addition to regular Basel III risk-based capital requirements, the SLR requires BHCs with more than $700 billion in assets or $10 trillion in managed assets in the United States to hold additional capital against all assets on their balance sheets. These rules increase the total cost of maintaining a large balance sheet for broker-dealers affiliated with BHCs. In order to meet the new capital requirements some BHC-affiliated dealers might choose to reduce their repo activity. While these regulatory changes do not seem to have changed dealers' GCF Repo strategies, they do seem to have reduced the amount of activity that dealers are willing to participate in. Similarly, the introduction of the Federal Reserve's overnight reverse repo facility in 2014 may also have had a negative effect on the volume of GCF Repo activity, as it provided an alternative to dealers lending cash."

The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of June 30, 2015), which tracks 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 26.4% as of June 30, up from 25.4% on May 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 22.5% (vs. 21.2% last month) and "Other treasury securities," which added 3.9% (down from 4.3% last month). Prime funds' Weekly liquid assets totaled 39.6% (vs. 38.2% last month), which was made up of "All securities maturing within 5 days" (33.7% vs. 32.3% in May), Other treasury securities (3.6% vs. 4.2% in May), and Other agency securities (2.3% vs. 1.7% a month ago). (See also Crane Data's July 13 "News", "July MMF Portfolio Holdings Show Jump in Fed Repo, Drop in TDs, VRDNs.") The ICI holdings report says Government Money Market Funds' Daily liquid assets totaled 52.5% as of June 30 vs. 62.8% in May. All securities maturing within 1 day totaled 23.6% vs. 28.0% last month. Other treasury securities added 35.9% (vs. 34.8% in May). Weekly liquid assets totaled 82.2% (vs. 80.0%), which was comprised of All securities maturing within 5 days (40.1% vs. 39.5%), Other treasury securities (33.7% vs. 32.8%), and Other agency securities (8.4% vs. 7.7%). ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 50.6% in the Americas (vs. 41.5% last month), 20.5% in Asia Pacific (vs. 19.5%), 28.6% in Europe (vs. 38.7%), and 0.4% in Other and Supranational (vs. 0.3% last month). Government Money Market Funds held 93.9% in the Americas (vs. 85.8% last month), 0.2% in Asia Pacific (vs. 0.4%), 5.9% in Europe (vs. 13.8%), and 0.1% in Supranational (vs. 0.1%). The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 37 days as of June 30, down from 38 days last month. WALs were at 73 days, down from 75 days last month. Government MMFs' WAMs was at 39 days, down from 41 days last month, while WALs was at 75 days, down from 78 days. ICI's 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. Also, JP Morgan Securities released its "Prime MMF Holdings Update for June".

Archives »