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CFO Magazine published, "Bumpy 2015 for Money Market Funds?," which reviews Moody's "2015 Outlook" (see our Dec. 16 News "Moody's Issues Negative Outlook for Global Money Mkt Funds in 2015"). It reads, "Finance executives that steer their companies' short-term cash investing strategies take note: money market funds holding your surplus cash may be headed for a downgrade. Moody's Investors Service has revised its outlook for the money market fund (MMF) industry to negative from stable, saying the number of funds rated "Aaa" was likely to decrease in 2015. The action by Moody's promises to make next year even tougher for money market funds, which were already becoming less attractive to institutional investors and corporates because of new U.S. regulations and proposed rule changes in Europe." In other news, Reuters writes, "U.S. Fed Awards $66.42 bln Reverse Repos Friday." It says, "The U.S. Federal Reserve on Friday awarded $66.42 billion of fixed-rate reverse repurchase agreements to 27 bidders at an interest rate of 0.05 percent, the New York Federal Reserve said on its website. On Thursday, the U.S. central bank allotted $59.47 billion in overnight reverse repos to 22 bidders, including Wall Street dealers, money market mutual funds and mortgage finance agencies at an interest rate of 0.05 percent." Also, the New York Federal Reserve issued a "Statement to Revise the Time of Day of the Overnight Reverse Repurchase Agreement Operation for December 31, 2014." It says, "Regarding the overnight reverse repurchase agreement (ON RRP) operation to be conducted on Wednesday, December 31, 2014, the Desk will conduct the operation from 9:30 a.m. to 10:00 a.m. (Eastern Time), several hours earlier than usual. All other terms of the exercise will remain the same. This change only applies to the ON RRP operation conducted on December 31, 2014. The ON RRP operations conducted from Monday, December 22, to Tuesday, December 30, and those conducted on and after Friday, January 2, 2015, will be conducted at the usual time of 12:45 p.m. to 1:15 p.m. Any future changes to these operations will be announced with at least one business day's prior notice on the New York Fed's website."

The U.S. Treasury's Financial Stability Oversight Council issued a "Notice Seeking Comment on Asset Management Products and Activities," which says, "Consistent with its responsibility to identify risks to the financial stability of the United States, the Financial Stability Oversight Council (Council) is issuing this notice seeking public comment on aspects of the asset management industry (Notice), in particular whether asset management products and activities may pose potential risks to the U.S. financial system in the areas of liquidity and redemptions, leverage, operational functions, and resolution, or in other areas. The Council is inviting public comment as part of its ongoing evaluation of industry-wide products and activities associated with the asset management industry. The notice has been submitted to the Federal Register for publication. Once published, the public will have 60 days to submit comments. All comments provided to the Council will be available on www.regulations.gov. Interested persons may submit comments electronically through the `Federal eRulemaking Portal at www.regulations.gov <b:>`_." (See ICI's Paul Stevens' statement here.) Also, after 8 straight weeks of asset increases, money fund asset decreased last week. ICI released its latest weekly "Money Market Fund Assets" report, which says, "Total money market fund assets decreased by $13.41 billion to $2.69 trillion for the week ended Wednesday, December 17, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $4.05 billion and prime funds decreased by $21.01 billion. Tax-exempt money market funds increased by $3.55 billion. Assets of retail money market funds increased by $7.82 billion to $905.48 billion. Among retail funds, Treasury money market fund assets increased by $2.21 billion to $198.69 billion, prime money market fund assets increased by $3.16 billion to $518.35 billion, and tax-exempt fund assets increased by $2.45 billion to $188.45 billion. Assets of institutional money market funds decreased by $21.23 billion to $1.79 trillion. Among institutional funds, Treasury money market fund assets increased by $1.84 billion to $792.16 billion, prime money market fund assets decreased by $24.17 billion to $923.82 billion, and tax-exempt fund assets increased by $1.10 billion to $71.47 billion."

Columbia Management writes "Do you know what's in your short-term bond fund?" The article says, "Now that the Federal Reserve (the Fed) has ended its Quantitative Easing (QE) program, what is next for interest rates and fixed-income investments? Many investors expect the Fed to begin raising short rates sometime in 2015. Consequently, they are cautious in their asset allocations, maybe shying away from fixed-income investments. Regardless of the possibility of higher rates, we believe that investors should remain fully invested. At the same time, they should be wary about having too much credit and interest rate risk in their portfolio. In such an environment, short-term bond funds may be worth a closer look.... High-quality short-term bond funds can provide attractive returns for investors seeking a conservative investment option in today's uncertain interest rate environment.... Some managers take reasonable, well-diversified risks; others may be tempted to chase yield, with the results being risks that may exceed investor tolerance. In their ongoing search for yield, some investors may have missed how much interest rate risk or credit risk was driving the strong returns of their short-term bond funds. Looking under the hood of your bond fund can help shed light on the amount and kinds of risks the fund is taking. Is the fund earning its yield by investing in riskier below-investment grade bonds, through riskier sectors or longer maturity bonds? Remember, there is no free lunch. Higher yield generally means higher risk."

The Federal Reserve Bank of New York issued yet another "Statement to Revise Terms of Overnight Reverse Repurchase Agreement Operational Exercise," Friday, which says, "Beginning with the operation to be conducted on Monday, December 15, the offering rate of ON RRP operations will be decreased from ten basis points to five basis points. All other terms of the exercise will remain the same. As an operational readiness exercise, this work is a matter of prudent planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy and no inference should be drawn about the timing of any future change in the stance of monetary policy." In other news, the Washington Post writes, "Will the Fed Drop 'Considerable Time' When it Meets This Week?." The piece says, "Two words hang over this week's Federal Reserve meeting: "considerable time". That's how long the central bank has said it would wait before nudging up interest rates from the current rock-bottom zero. But with the economy accelerating, a large number of economists and market analysts are expecting the Fed to drop that formula from its guidance when its monetary policy committee meets Tuesday and Wednesday." (Watch for more Fed coverage tomorrow.)

Norm Champ, Director of the Division of Investment Management at the SEC, delivered a speech at ICI's Securities Law Development Conference on the "Top 10 Lessons Learned and Points to Remember from 2014." Here are some excerpts that related to money market funds: "9. The Division of Investment Management is Not a Regulatory Island, Nor Should it Be. The Volcker Rule is not the only recent example of regulatory coordination that required thoughtful joint action. As you know, the Commission successfully adopted amendments to the rules that govern money market mutual funds in July. The adopted money market reforms are intended to make our financial system more resilient and enhance the transparency and fairness of these products for America's investors. These reforms would not have been possible without the critical assistance we received from Treasury and the IRS in addressing the tax issues related to the floating NAV reform." He also cited, "7. Data Plays an Important Role in Developing Policy and Regulations. The SEC of 2014 is an agency that increasingly relies on technology and specialized expertise. We recognize that the innovative use of data and analytical tools contributes to our ability to make better and more informed policy recommendations and enhances our investor protection efforts. The recent Money Market reforms are an excellent example of the importance of data. As you know, the failure of the Reserve Primary money market fund and the associated heavy redemptions from other money markets funds during the 2008 financial crisis prompted us to revisit the way money market funds are regulated. In 2009, the Commission proposed the first set of money market reforms, and final rule amendments were adopted in 2010. Following the adoption of these initial reforms, Commission staff continued to monitor and study money market funds. In November 2012, the SEC's Division of Economic and Risk Analysis delivered an extensive economic study to the Commission addressing a series of Commissioner questions about money market mutual funds. Less than a year later, in June of 2013, the Commission proposed additional money market fund reforms based on this study, and the additional reforms were successfully adopted in July of this year. The data-based economic studies and analysis that DERA provided throughout the rulemaking process were essential in formulating these final reforms. The Commission has also benefitted greatly from the monthly data that Form N-MFP provides us about money market fund holdings, which was the result of the 2010 money market mutual fund reforms. For example, the enforcement action against Ambassador Capital Management last year stemmed from an ongoing analysis of money market fund data by IM staff that involved a review of the gross yield of funds as a marker of risk." And, finally, Champ includes: "3. Open Communication with the Industry and the Public is Imperative. Another important avenue of communication is the public comments that we receive from investors, industry participants, and other parties in response to proposed regulatory initiatives. These comments provide invaluable information and insight, which help inform our recommendations to the Commission. In connection with the recent money market reforms, the Division received more than 1,400 comments. Division staff carefully considered the views expressed and the data put forth by all the commenters before formulating their recommendation for the final money market rule amendments and, as a result, the SEC's rulemaking process was greatly enhanced." In other news, Reuters writes, "U.S. Fed awards $50 bln 21-day Term Reverse Repos" and the Global Post writes, "U.S. Money Funds' Stake in U.S. Treasuries Fall: JP Morgan".

JP Morgan and BlackRock recently liquidated some of their smallest money market funds, according to SEC Filings. J.P. Morgan liquidated its JPM Michigan Municipal Money Market and the JPM Ohio Municipal Money Market funds and BlackRock liquidated its BlackRock Cash Government Money Fund. The first Prospectus Supplement, entitled, "Notice of Liquidation of the JP Morgan Michigan Municipal Money Market Fund and JP Morgan Ohio Municipal Money Market Fund," says, "The Board of Trustees of the JPMorgan Michigan Municipal Money Market Fund and JPMorgan Ohio Municipal Money Market Fund (the "Funds") has approved the liquidation and dissolution of each of the Funds on or about December 12, 2014 (the "Liquidation Date"). On the Liquidation Date, each Fund shall distribute pro rata to its shareholders of record all of the assets of the Fund in complete cancellation and redemption of all of the outstanding shares of beneficial interest, except for cash, bank deposits or cash equivalents in an estimated amount necessary to (i) discharge any unpaid liabilities and obligations of the Fund on that Fund's books on the Liquidation Date, including, but not limited to, income dividends and capital gains distributions, if any, payable through the Liquidation Date, and (ii) pay such contingent liabilities as the officers of each Fund deem appropriate subject to ratification by the Board. Capital gain distributions, if any, may be paid on or prior to the Liquidation Date. Effective immediately, each Fund may depart from its stated investment objective and strategies as it increases its cash holdings in preparation for its liquidation." (The funds held almost all of its assets in "repo," often a sign of pending liquidation, as of the latest month-end according to our Money Fund Portfolio Holdings data.) Also, BlackRock liquated its BlackRock Cash Funds: Government. Its filing states, "On November 19, 2014, the Board of Trustees of BlackRock Funds III (the "Trust") approved a proposal to close BlackRock Cash Funds: Government (the "Fund") to new investors and thereafter to terminate the Fund. Accordingly, effective 5:00 P.M. (Eastern time) on November 20, 2014, the Fund will no longer accept purchase orders from new investors. On or about December 19, 2014 (the "Termination Date"), the Fund will be terminated as a series of the Trust." (BlackRock also recently liquidated Select and Trust share classes of its BlackRock Cash Inst, Prime and Treasury funds too.) See our latest article on MMF liquidations in the October issue of our Money Fund Intelligence, and see our Nov. 4 "`Link of the Day" "Virtus on Liquidating MMFs" and our Sept. 25 LOTD on Williams Capital Liquidating its MMF.

Money fund assets increased for the 8th week in a row and broke back above the $2.7 trillion level for the first time since February. The Investment Company Institute released its latest weekly "Money Market Fund Assets" report, which says, "Total money market fund assets increased by $18.47 billion to $2.71 trillion for the week ended Wednesday, December 10.... Among taxable money market funds, Treasury funds (including agency and repo) increased by $8.49 billion and prime funds increased by $9.38 billion. Tax-exempt money market funds increased by $600 million. Assets of retail money market funds decreased by $2.65 billion to $897.67 billion. Among retail funds, Treasury money market fund assets decreased by $1.74 billion to $196.48 billion, prime money market fund assets decreased by $1.41 billion to $515.19 billion, and tax-exempt fund assets increased by $500 million to $186.00 billion. Assets of institutional money market funds increased by $21.12 billion to $1.81 trillion. Among institutional funds, Treasury money market fund assets increased by $10.24 billion to $790.32 billion, prime money market fund assets increased by $10.78 billion to $947.99 billion, and tax-exempt fund assets increased by $100 million to $70.37 billion." Since September 24, MMF assets have climbed $120 billion, and since July 23, when the SEC passed its Money Fund Reforms, assets have climbed $141 billion. Year-to-date, money fund assets have decreased by a mere $12 billion, or 0.5%, making 2014 the third year in a row that assets have been virtually flat.

ICI released a study entitled, "BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans," which shows trends in 401K plan investing. It says, "With $4.4 trillion in assets at the end of the second quarter of 2014, 401(k) plans have become one of the largest components of U.S. retirement assets, accounting for nearly one-fifth of all retirement assets. Equity funds accounted for the largest share of assets in 401(k) plans. In 2012, about 40 percent of assets were held in equity funds, more than 15 percent was held in balanced funds (with most of that being held in target date funds), and about 10 percent was held in bond funds. GICs and money funds accounted for 15 percent of assets.... Bond funds (mostly domestic) held 10.3 percent of assets and money funds held 3.1 percent. More than half of 401(k) plans offered money funds and more than six in 10 offered guaranteed investment contracts (GICs)." To be exact, 54% of plans offered money funds, says the study. Also, the average plan offered 1 money fund. "A little more than half of 401(k) plans offer one money fund on average, and more than six in 10 401(k) plans offer one GIC on average.... Participants in 401(k) plans with less than $1 million in plan assets had 36.6 percent of their assets invested in balanced funds and 5.4 percent in money funds, on average, compared with 12.6 percent and 3.1 percent, respectively, for participants in plans with more than $1 billion in plan assets.... Money market mutual funds had the lowest expense ratio of any of the asset classes, with an asset-weighted average expense ratio of 0.18 percent of assets in 2012 for money market mutual funds in 401(k) plans. Money market mutual funds experienced the largest decline in expenses, falling from 0.31 percent of assets in 2009 to 0.18 percent in 2012.... Some of the decline in money market mutual fund asset-weighted average expenses may be attributable to fee waivers, which increased substantially in money market funds due to the low interest rate environment following the market turmoil of 2008.... Money market mutual fund expenses fell by 12 basis points, from 0.29 percent in 2009 to 0.17 percent in 2012."

Pensions & Investments published a piece Monday, "Firms Prepare for Money Market Changes." It states, "Managers such as BlackRock, Vanguard Group Inc., J.P. Morgan Asset Management, Goldman Sachs Asset Management and RBC Global Asset Management Inc. are retooling their cash management businesses in advance of changing regulations on net asset value for institutional prime money market funds. Some firms are adding investment and/or distribution staffers; others are augmenting their short-duration fixed-income strategies; and still others are doing a combination of both." The article explains, "BlackRock, New York, is already seeing demand, said Thomas Callahan, managing director and co-head of global cash management. In response, company officials are adding standard short-duration mutual funds, short-duration exchange-traded funds and separate accounts. "The demand for short-duration products is directly related to money market reform," Mr. Callahan said. He said the money management giant might launch a municipal short-duration ETF "in the near future." Noting he is seeing a migration out of money market funds into separately managed accounts, Mr. Callahan added: "As we get closer to implementation in October 2016 we think that trend will continue.... Cash was something clients didn't have to think about; it was pretty much auto-pilot," said Mr. Callahan. "Now the auto-pilot's been switched off." In late November, Vanguard, Malvern, Pa., filed a registration statement with the SEC to launch an actively managed ultra-short-term bond fund as an alternative to prime money market funds." The P&I piece adds, "John Donohue, managing director and head of global liquidity in JPMAM's global fixed-income and liquidity group in New York, said his team is talking to clients about their liquidity needs. "We launched a few floating NAV products a few years ago in anticipation of these regulatory changes," said Mr. Donohue. "They haven't had a lot of traction, but as that (October 2016) date approaches, we may see some movement into that space." It goes on, "JPMAM also launched a short-duration high-yield fund last year. In addition to separately managed accounts, Mr. Donohue added he expects to see money flowing into government money market funds, since they're exempt from the new SEC regulation. GSAM is another manager that's preparing for the impending regulation change. "Our clients have been interested in stability, liquidity and yield. Money market funds used to bring you all three, but money market reform is changing that a bit," said David Fishman, managing director and co-head of GSAM's global liquidity management business, New York. "You can't get all three at once in today's market, so you need to decide what's more important and what will yield you two out of those three." James McCarthy, managing director and co-head of that business, said, "We continue to explore other strategies. Bespoke separately managed portfolios are something we can already offer today. In addition, we're considering other types of mutual funds and even ETFs." Mr. McCarthy said GSAM launched in February "a limited maturity obligation fund. It's longer than a money market fund but less volatile than a traditional short-duration fund." Officials at RBC Global Asset Management, Minneapolis, launched a short-duration fixed-income mutual fund and an ultra-short fixed-income mutual fund at the beginning of 2014. "We think separately managed accounts will capture a good portion of the money we think will be in motion," said Brandon T. Swensen, vice president and co-head of U.S. fixed income."

Goldman Sachs Asset Management published a paper this week on "Liquidity Investment Challenges." It says, "For many years prior to the financial crisis that began in 2008, money market funds offered investors three main benefits: high credit quality, liquidity and yield. However, in the years since the crisis, liquidity investing has been at the nexus of massive changes in regulation. On one side, stricter banking regulation has significantly reduced the ability and willingness of financial institutions' to participate in money markets. On the other side, money market funds are subject to new regulations in the US and pending regulatory changes in Europe that are transforming the market. Regulatory changes and other factors have contributed to significant imbalance in the supply/demand dynamics of liquidity investing. This imbalance has played an important role in pushing yields on many traditional money market investments into negative territory. As a result, investors in today's markets will find it increasingly challenging to achieve all three traditional benefits of the money markets. Maintaining liquidity and credit quality now comes at a cost, in the form of negative yields." It continues, "Banking regulations are becoming both stricter and more encompassing, with new regulations being applied across all financial institutions in all areas.... Basel III introduced two key measures designed to ensure that financial institutions have adequate amounts of liquidity. In addition, certain US banks must adhere to a Supplementary Leverage Ratio (SLR), which raises the cost of low margin business and low risk assets. After many years, we finally have clarity regarding the new requirements for money market funds and a specific implementation timeline in the US, while money market reform remains on the legislative agenda in Europe. In some respect, this event is momentous in that it follows a long period of anticipation and debate. In other respects, it is just another step in the evolution of liquidity markets that have been changing over the past several years.... With the increased regulation of the short-term markets, we believe that liquidity investors looking for stability, liquidity, and yield will have to choose the relative priority of those goals and assess their liquidity needs in light of an expanding set of investment solutions. One important goal of stricter banking regulation is to ensure that a financial institution can overcome any short-term liquidity disruption. However, in money markets, this has had the effect of sharply reducing the available supply. Since financial institutions are required to hold a certain level of highly-liquid assets, they are less able to lend out short-term debt, thus decreasing the supply of Commercial Paper, Time Deposits and Repurchase agreements -- securities that form the bedrock of money market fund investing. While the supply of short dated assets has declined, the same cannot be said about the demand for these assets."

The Association for Financial Professionals published an article, "Money market Reform, Why Treasury’s Mindset Must Change." It says, "The issuers of products that money market funds (MMFs) typically purchase will feel the impact of the new MMF regulations by the Securities and Exchange Commission (SEC) nearly as much as the funds themselves. In a recent AFP roundtable in Seattle, the treasurer of a home loan bank expressed concern that fewer funds will mean the purchase of fewer discount notes. Of greater concern to treasurers is issuing commercial paper, which is a staple of debt and a big investment for MMFs. Bankers at the roundtable said the new MMF rules would not immediately impact commercial paper, but admitted they would have a negative impact over the long term. "Big issuers may have to pay more," one practitioner predicted. In the future, companies may purchase commercial paper directly from issuers instead. "We're already seeing companies do their own counterparty risk analysis on financial institutions," said Craig Martin, executive director of the Corporate Treasurers Council. Martin has already seen companies bring investment in-house and invest in high-grade, short-term corporate bonds. From a cost/benefit standpoint, that makes sense. "On a relative basis, you're paying hedge fund fees for MMFs," said one roundtable participant. "If I were running a treasurer's office, I'd look at investing directly in the commercial paper of issuers like Chinese banks," one banker suggested. With money market funds less appealing, treasurers will need to change their mindset, roundtable participants said. "We have become a nation of idle cash sitting in the bank," said one practitioner. The problem, practitioners and bankers agreed, is the existing mindset that the board will not tolerate any losses. While corporate treasury groups are earning nothing on their investments, organizations like endowments are earning much more with relatively little risk. "The mindset of treasury professionals needs to change beyond just supporting security and liquidity," he said. "If you're not buying back shares or paying dividends, treasury should become more of an investment arm."" The piece concludes with a list of action items for treasurers. In other news, Businessweek did a piece on "Shadow Banking: Post-Crisis, Risks Remain." It reads, "Shadow banking isn't shadowy like the illicit, underground economy. It's shadowy like Me and My Shadow -- attached to regular banking at the heels and doing all of the same things at the same time. Want to borrow money? You can get a loan from a bank -- or you can do it the shadow way in the "repo" market by selling some Treasury bonds and promising to buy them back in a week for a slightly higher price, which represents the interest. Want to save money? You can deposit your cash in a bank -- or you can do it the shadow way by, say, investing in a money-market mutual fund or taking the other side of one of those repo transactions."

Money fund assets increased for the 7th week in a row and have risen by $78.6 billion since Oct. 15. ICI released its latest weekly "Money Market Fund Assets" report, which says, "Total money market fund assets increased by $25.58 billion to $2.69 trillion for the eight-day period ended Wednesday, December 3, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $5.82 billion and prime funds increased by $16.42 billion. Tax-exempt money market funds increased by $3.34 billion. Assets of retail money market funds increased by $3.20 billion to $900.32 billion. Among retail funds, Treasury money market fund assets decreased by $280 million to $198.22 billion, prime money market fund assets increased by $2.01 billion to $516.59 billion, and tax-exempt fund assets increased by $1.47 billion to $185.50 billion. Assets of institutional money market funds increased by $22.38 billion to $1.79 trillion. Among institutional funds, Treasury money market fund assets increased by $6.09 billion to $780.09 billion, prime money market fund assets increased by $14.41 billion to $937.21 billion, and tax-exempt fund assets increased by $1.87 billion to $70.27 billion." year-to-date, money fund assets have decreased by $31 billion, or 1.1%. In other news, KraneShares issued a press release announcing a new Commercial Paper ETF. It says, "KraneShares, a New York based ETF company, and E Fund Management, one of China's largest asset managers, launched the KraneShares E Fund China Commercial Paper ETF (NYSE: KCNY) today. KCNY seeks to deliver yields from investment-grade commercial paper issued in Mainland China by companies headquartered in China. We believe the Fund can be an alternative to U.S. investors' money market fund and/or bank deposit program investments. It is the first commercial paper ETF in the United States."

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