The Bank for International Settlements (BIS) published its latest "March 2014 Quarterly Review", which features a piece entitled, "Non-US banks' claims on the Federal Reserve." It summary says, "Non-US banks' affiliates in the United States took up about half of the claims on the Fed that it created to pay for its large-scale bond purchases. They did so largely through uninsured branches unaffected by a new FDIC charge on wholesale funding payable by US-chartered banks. Robert McCauley and Patrick McGuire (BIS) find that these branches raised dollars from their affiliates abroad in order to deposit these funds at the Fed. On a consolidated basis, non-US banks raised dollars by swapping other currencies for dollars and increasing dollar liabilities. At the same time, they continued to increase their dollar claims outside the United States." Later, the paper adds, "The Federal Reserve is experimenting with a new operational tool -- the reverse repo -- that could substantially reduce banks' $2.5 trillion (and rising) claims on the Fed, even as the Fed continues to hold its bond portfolio. In a reverse repo, the Fed borrows overnight from a cash-rich counterparty like a money market mutual fund against the security of a bond from the Fed's portfolio, which reached $4.1 trillion on 19 February 2014. From an aggregate perspective, these operations would necessarily drain banks' holdings of balances at the Fed, in particular those in addition to those needed to meet reserve requirements ("excess reserves"). For some banks, especially US branches of non-US banks, it would reduce any profit to be made by taking in wholesale funds at 10 basis points (or less) and holding reserves at the Fed at 25 basis points. In effect, the new operations disintermediate the banks that have done this low-risk trade."
The Wall Street Journal wrote Friday and again Saturday on new online Chinese "money market" funds. Its Saturday article, "China Online Funds Pressure Deposit Ceiling, Ex-PBOC Vice Governor," says, "Online money-market funds are putting pressure on the central bank's ceiling on bank deposit rates, but regulators welcome the development, a former vice governor of the People's Bank of China said Saturday. "Regulators are pleased by this development," Wu Xiaoling told reporters on the sidelines of the annual session of China's parliament. "Internet finance has given a big boost to the nation's financial reforms." China maintains a ceiling on interest rates paid on deposits at the nation's banks but it has vowed to make interest rates more market-based. Online money-market funds, which aren't subject to the limits, have been able to offer substantially higher returns, effectively helping regulators in their deregulation efforts, though raising concerns at the nation's banks. Chinese e-commerce giant Alibaba Group Holding Ltd. launched an online money-market fund called Yu'e Bao last June, and the fund had attracted more than 400 billion yuan ($65.4 billion) as of the mid-February. Savings accounts offer a minuscule interest rate of 0.35% a year while a one-year fixed deposit can pay 3.3%. Yu'e Bao and other similar products provided by tech companies are offering about 6% a year. Experts say online money-market funds have forced banks to offer similar products, but banks are lobbying regulators to clamp down on the money-market funds before they siphon off more of their deposits. These funds are investing in the interbank market and domestic bonds. Central bank Governor Zhou Xiaochuan said this week that regulators want to refine regulations covering online funds but have no intention of cracking down on these competitors to the nation's banks." The Journal's Friday piece, "For China's Online Money Funds, the Game Changes," showed Alibaba's Yu'e Bao fund among a list of the largest money market funds worldwide.
ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $4.08 billion to $2.680 trillion for the week ending Wednesday, March 5, the Investment Company Institute reported today. Taxable government funds decreased by $13.00 billion, taxable non-government funds increased by $7.85 billion, and tax-exempt funds increased by $1.07 billion. Assets of retail money market funds increased by $170 million to $916.00 billion. Taxable government money market fund assets in the retail category decreased by $660 million to $197.54 billion, taxable non-government money market fund assets increased by $330 million to $523.77 billion, and tax-exempt fund assets increased by $500 million to $194.69 billion.... Assets of institutional money market funds decreased by $4.25 billion to $1.764 trillion. Among institutional funds, taxable government money market fund assets decreased by $12.33 billion to $738.27 billion, taxable non-government money market fund assets increased by $7.52 billion to $949.05 billion, and tax-exempt fund assets increased by $570 million to $76.23 billion."
Asia Asset Management writes "HFT is poised to roll out first RQFII money market fund". It says, "HFT Investment Management (HK) (HFTHK), a joint venture between BNP Paribas Investment Partners and Haitong Securities, is set to launch the first RQFII [Renminbi Qualified Foreign Institutional Investor] money market fund in Hong Kong after receiving approval from the Securities & Futures Commission (SFC) to go ahead with it. Jelle Vervoorn, chief executive officer of HFTHK notes the fund will be the first of its kind to primarily invest in money market instruments issued in China, enabling investors' [outside of] China to enjoy Mainland yield levels for these products. Bruno Campenon, head of BNP Paribas Securities Services Hong Kong, says BNP Paribas is very focused on helping clients expand into RQFII products as an integrated part of its global fund distribution solution for asset managers." "With our global expertise across multiple markets and international fund centres worldwide, we now provide our fund manager clients with another new channel in the RQFII space to support their business strategy, meeting the unique operational and regulatory requirements of China's fund market," he explains. The piece adds, "Lawrence Au, head of Asia Pacific with BNP Paribas Securities Services, says he is aware of the fact that some European investors are looking to launch RQFII products in Singapore, from where they can benefit from the ASEAN Collective Investment Scheme (CIS) framework to distribute their products in Thailand and Malaysia. He expects the first RQFII fund to come on line in Singapore in the next few months."
A press release entitled, "ICD AutoPay Triggers Cisco's Largest Money Market Fund Trade To Date," tells us, "Institutional Cash Distributors (ICD) today announced that Cisco Systems, Inc., the worldwide leader in Internet Technology, used ICD AutoPay, to generate Cisco's largest ever Money Market Fund trade of $8 billion. ICD AutoPay, a breakthrough technological advancement for corporate treasury departments increases efficiency by automating wire requests from approved trade orders. This eliminates the need for cash managers to login to their bank to request wires to settle purchase transactions. ICD AutoPay's key differentiator is its patent-pending TrueMark EST (Encapsulated Security Token) technology that locks in approved cash channels and requires a SWIFT message with matching bank details before wire requests are forwarded to the client's bank. ICD AutoPay mitigates the risk of cybercriminals, rogue traders and/or human error of sending funds to unapproved destinations." Roger Biscay, Vice-President, Treasurer & Global Risk Management, Cisco Systems, comments, "We have been an ICD client for over ten years. I have always been impressed with ICD's ability to go to market with products that are ahead of the competition. AutoPay enables my team to seamlessly invest around the world in a safe and secure environment through one simple execution." ICD's Tom Newton adds, "Since our inception, we've been focused on providing superior products and services. Just as our risk management application, Transparency Plus revolutionized our clients' ability to drill down into a fund's portfolio holdings, ICD's AutoPay technology now revolutionizes how clients securely wire money to settle their investments."
Federated Investor's Debbie Cunningham writes "Hurry up and wait" in her latest "Money in Cash". She explains, "The nation's sluggish recovery created a waiting game for money markets in February. Mixed economic signals, continued brutal weather and cautious monetary policy kept rates in suspended animation, with all of us waiting for some definitive positive news to move them forward and up.... We are perhaps more focused on the Fed's daily maneuvers. The Fed recast its overnight reverse repo facility from a test to an exercise, in place at least through Jan. 2015. It raised the overnight rate from 3 basis points to 5 basis points, slowly creeping up to a little bit less abysmal. The Fed continues to establish its role as the market-rate setter. Counterparties and participants were allowed to use the program up to $5 billion a night, an increase of $2 billion. Another positive in terms of supply has been the Treasuries.... If all of this leads you to think you should see substantial change in at least the overnight to 3-month section of the yield curve, think again. There actually has been very little movement. The explanation for this is that rates would have probably been closer to zero had the Fed not been in the marketplace. The end of January saw a floating-rate Treasury note come to the market for the first time. The Treasury offered $15 billion of 2-year floating rate notes resetting weekly off 90-day bills at a spread of 4.5 basis points. We are eager to watch the market develop from the standpoint of both spread and liquidity."
Barclays Joseph Abate writes in his latest "US Weekly Money Market Update" says, "Collateral rates remain stubbornly low despite the pick-up in bill issuance and heavier fixed rate reverse repo program (FRFA) participation. These low rates probably reflect the contraction in dealers' Treasury inventories. Money market funds are doing an increasing amount of Treasury repo with the Fed. Yet, non-Fed Treasury repo balances are off 9% since the end of August. Dealers have simultaneously reduced their Treasury holdings by 10% from their mid-October peak. With less to finance, dealers have less need to compete with the Fed for money fund financing. We expect the Fed to steadily ratchet up the size of its reverse repo allotments. As dealer inventories appear to have stabilized in recent weeks, additional flows into the reverse repo facility could exert more upward pressure on repo rates."
An announcement entitled, "Federal Reserve offers seven-day term deposits at 26 basis points through its term deposit facility, says, "On March 3, 2014, the Federal Reserve will conduct a fixed-rate offering of term deposits through its Term Deposit Facility (TDF). The Federal Reserve will offer seven-day term deposits with an interest rate of 0.26000 percent and a maximum tender amount of $1,250,000,000. As noted in the Federal Reserve Board's February 21, 2014, release, this operation is part of ongoing small-value operations designed to provide eligible institutions with an opportunity to gain familiarity with term deposit operations. Additional information regarding the operation is listed below; the operation will be conducted as specified in this announcement, Regulation D, and the terms and conditions of the Term Deposit Facility (http://www.frbservices.org/centralbank/term_deposit_facility.html).
While there haven't been any new "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF posted to the SEC's website over the past month, there have been some additional entries down below in the "Meetings with SEC Officials" section (page down to the bottom). A cluster of meetings were posted on Feb. 20, including: Memorandum from the Office of Legislative and Intergovernmental Affairs regarding a February 19, 2014, meeting with representatives of the Offices of Senator Edward Markey and Senator Elizabeth Warren, Memorandum from the Division of Investment Management regarding a February 10, 2014, meeting with representatives of Bloomberg ("the parties discussed Bloomberg's stress testing functionality as it relates to the Commission's proposal on money market fund reform."), Memorandum from the Division of Investment Management regarding a February 19, 2014, meeting with representatives of the Government Finance Officers Association, Memorandum from the Office of Commissioner Kara Stein regarding a February 19, 2014, meeting with representatives of the National Association of State Treasurers, and Memorandum from the Office of Commissioner Michael S. Piwowar regarding a February 6, 2014, meeting with representatives of The Boeing Company. The Market/Warren meeting notice says, "On February 19, 2014, Julie Davis, Deputy Director, talked via telephone with Justin Slaughter, General Counsel, Office of Senator Ed Markey and Bharat Ramamurti, General Counsel, Office of Senator Elizabeth Warren. Among other matters, the representatives discussed the Commission's proposal on money market fund reform."
The Federal Reserve Bank of New York issued a "Statement to Revise Terms of Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise", which says, "As noted in the September 20, 2013, Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise, the Open Market Trading Desk at the Federal Reserve Bank of New York has been conducting daily, overnight fixed-rate reverse repo operations as part of an operational readiness exercise. Beginning with the operation to be conducted on Wednesday, February 26, the fixed rate offered in these operations will be increased from four 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 advance 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 change in the stance of monetary policy in the future." In other news, see The Malaysia Star's "China banks hit back as Internet finance muscles into their business", which says, "China's brick-and-mortar banks are launching a counter-attack against the assault on their business from Alibaba and other Internet heavyweights, in a bid to staunch the outflow of bank deposits into high-yielding online investment products. In less than eight months, Alibaba Group Holding Ltd's money market fund, Yu'e Bao, has attracted 400 billion yuan (US$66bil) in assets under management, more than the customer deposits held by the five smallest listed Chinese banks. Similar online products from Baidu Inc and Tencent Holdings Ltd also contributed to a fall of one trillion yuan in traditional bank deposits in January."
Citi's Andrew Hollenhorst wrote, "Repo rates refuse to rise", Friday, which said, "Despite two weeks of close to $70 billion of positive net T-bill issuance, repo rates have remained pegged against the fixed-rate offered by the Fed's overnight reverse repo facility (ON RRP). This reflects the fact that repo rates would likely have been trading at lower levels absent the ON RRP floor.... We think the majority of positive net issuance for this tax refund season is over and that Treasury is unlikely to need additional cash management bills. This should keep repo rates below 10bp through mid-April, although they may rise a few basis points above current levels. After cash management bills mature on April 17 and 24, we expect repo rates to return to close to the ON RRP floor rate.... We think the Fed will increase allotment sizes for the ON RRP facility over the course of 2014. The Fed will likely vary the rate between 0-5bp, the currently approved range, but will not take rates above 5bp in 2014."
On Friday, SEC Chair Mary Jo White spoke at the "SEC Speaks 2014," and only mentioned money market mutual funds in passing (and didn't mention pending regulations). She said, "When I arrived, it was imperative to set an aggressive rulemaking agenda. [T]hrough the tireless work of the staff and my fellow Commissioners, we made significant progress. On the day I was sworn in as Chair, we adopted identity theft rules requiring broker-dealers, mutual funds, investment advisers.... A month after that, we proposed rules to reform and strengthen the structure of money market funds.... The SEC of 2014 is an agency that increasingly relies on technology and specialized expertise. This is particularly evident in the SEC's new risk monitoring and data analytics activities. One important example is the SEC's new focus on risk monitoring of asset managers and funds. Last year featured a very concrete success from these risk monitoring efforts when the SEC brought an enforcement case against a money market fund firm charging that it failed to comply with the risk limiting conditions of our rules. In the past year, the SEC has established a dedicated group of professionals to monitor large-firm asset managers. These professionals who include former portfolio managers, investment analysts, and examiners track investment trends, review emerging market developments, and identify outlier funds. The tools they use include analytics of data we receive, high-level engagement with asset manager executives and mutual fund boards, data-driven, risk-focused examinations, and with respect to money market funds certain stress testing results." (See also, Commissioner Kara Stein's comments, which we'll excerpt from tomorrow.)Archives »