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ICI's latest "Focus on Funds" video features a segment entitled, "SEC Changes Alter Picture for US Money Market Funds. The description says, "In the lead-up to implementation of new SEC rules governing money market funds, assets shifted from prime to government funds. Sean Collins, ICI senior director for industry research and financial analysis, tells viewers why in the December 9, 2016, edition of Focus on Funds." ICI's Director of Media Relations Stephanie Ortbals-Tibbs says, "On the heels of significant reform, how does the US money market fund industry look these days? I got some fresh data analysis from ICI's senior director for industry financial analysis, Sean Collins." Collins explains, "The most important thing we saw was that about $1 trillion flowed out of prime money market funds over the period from about November 2015 all the way up to the implementation date of October 14, 2016, and our sense is that probably all of that essentially went back into government money market funds. That's more or less what we had expected to happen. There's an almost one-for-one offset in flows from prime into government money market funds -- almost dollar for dollar. Government money market fund assets have grown very substantially. Prime money market funds have fallen very substantially. The same is true for tax-exempt money market funds -- they've seen their assets fall very substantially." He adds, "That's about the state of affairs at the moment -- it's kind of wait and see. There's not too much money moving either direction at the moment. In general, money market funds in total have been pretty stable for the last four years, at about $2.7 trillion, including through this entire transition period. We think that's representative of the fact that investors continue to like these products, demand them, and it's just the change in the slice of the pie from one type of instrument -- prime money market funds -- into government money market funds." Ortbals-Tibbs comments, "So, of course, we don't prognosticate. What we do know is that investors will probably continue to assess where they are in a particular category, but this is one of these categories where eventually we could continue to see money move around again as people continue to settle into this new regime." Collins responds, "Yeah, I think that could certainly happen. `It's possible that as people get more comfortable with floating NAVs [net asset values] for prime institutional money market funds, get comfortable with the possibility of fees and gates, you might see some money move back into prime money market funds from government. But I think that at the moment it's kind of wait and see -- people probably want to let the dust settle and get some experience, and then go from there."

Fitch Ratings published the brief, "Finalised EU MMF Reform Starts Implementation Clock - Liquidity Fees and Redemption Gates Create Uncertainty," which is subtitled, "Finalized EU MMF Reform Starts Implementation Clock Liquidity Fees and Redemption Gates Create Uncertainty." It summarizes, "An agreement has finally been reached on European money fund regulation between the EU, Parliament and Council after three years of debate.... Low-volatility net asset value (LVNAV) funds are a workable alternative to existing constant net asset value (CNAV) funds, notably as a previously proposed sunset clause has been removed and liquidity requirements have been adjusted. It will result in LVNAV co-existing with a new form of public debt CNAV funds, short-term variable NAV (VNAV) funds and standard VNAV money funds." The piece adds, "Public debt CNAV and LVNAV funds will be subject to liquidity fees and redemption gates, similar to US Prime MMFs, which suffered large outflows in the run-up to US reform implementation. It remains to be seen how European investors will react to such redemption limiting provisions. Some may turn to full VNAV funds but we expect the impact of the European reform to be smaller than in the US as investors accustomed to CNAV funds, which account for half of EU MMF assets, may be comfortable with LVNAV funds." Finally, they adds, "The regulation should come into effect by the end of 2018, given an 18-month implementation period after its enforcement, which is likely to be in 1H17. Fitch Ratings expects this period to be characterized by new fund launches and the adaptation of existing fund ranges into the new fund categories."

An update entitled, "Fitch: US Prime Money Fund Assets Consolidate Post-Reform" tell us, "Vanguard and Charles Schwab are set to exert greater influence as prime money fund investors after significant market share gains following the introduction of money market fund reforms, says Fitch Ratings. The two fund managers are likely to have greater say on market access and issuer terms among prime money fund managers, although the balance of power in the short-term markets overall has shifted away from prime money funds. As of end-October, Vanguard and Charles Schwab controlled 31% and 16% of prime money fund assets respectively, up from 11% and 5% a year earlier according to data from Crane. More than $1 trillion left prime money market funds - mostly into government funds - in the leadup to the introduction of new SEC rules on October 14." The statement continues, "Vanguard and Schwab's funds saw substantially less outflows than peers during this period. Other top 20 managers lost an average of 86% of prime assets to outflows, conversions or sales in the year leading up to end-October while Vanguard and Schwab saw declines of only 18% and 10%, respectively. Vanguard and Schwab's relative stability is likely due to their mostly retail client base and distribution models.... The combination of the overall contraction in the prime fund market with Vanguard and Schwab retaining the majority of their assets has led to substantially greater concentration in the sector. The top four managers - Vanguard, Schwab, Fidelity and BlackRock - now control 72% of prime assets versus only 49% pre-reform for the top four. Fitch believes that there will be winners and losers as the balance of power in short-term markets moves away from prime money funds to investors such as short-term bond funds, separate accounts, and corporates. Vanguard and Schwab fared the best among managers of prime money funds, with close to 50% market share. The two market leaders will be in a stronger position to influence terms and market access for short-term debt issuers like banks, corporates, and asset-backed commercial paper conduits that remain reliant on funding from money market funds. However, the shift may reverse later on if assets come back to other prime funds and rebalance the market."

The just-released Investment Company Institute's "2016 Annual Report" just briefly mentions money market mutual funds in a couple of places. An update from Marty Burns, ICI's Chief Industry Operations Officer, about "new regulations for money market funds, which came into effect in October," says, "This has been a huge, multiyear effort involving hundreds of people: member representatives on four working committees, staff from across the Institute in almost every discipline -- operations, research, legal, government affairs, communications -- and outside stakeholders, such as broker-dealers, service providers, and transfer agents. This reform is a fundamental change to how money markets are administered and processed. Very broad in scope, it forced changes to how shareholders can invest in money funds, the systems used to manage the business, and the interaction with business partners -- in essence, it affected every aspect of the money market industry. And our efforts have extended beyond October 14, the compliance date -- we're continuing to monitor the situation and look for areas where we can improve practices and find further efficiencies." The report also comments on, "Money Market Fund Reform Tax Issues: The Internal Revenue Service," explaining, "[The] (IRS) and the Treasury Department issued several important pieces of guidance regarding the tax implications of the SEC's money market fund rule for investors and funds. The guidance responds to several requests made by ICI. First, the IRS provided an alternative diversification requirement for variable insurance product funds that become government money market funds, alleviating concerns that such funds would not be able to satisfy existing tax requirements. Second, the IRS issued guidance addressing the tax treatment of adviser contributions made to money market funds in preparation for compliance with the new money market fund rule. Third, the IRS and Treasury finalized regulations on use of a simplified method of tax accounting, called the net asset value (NAV) method, by investors in floating NAV money market funds. The final regulations also include several other changes recommended by ICI, including extending the NAV method to investors in stable NAV funds that charge a liquidity fee and clarifying the use of the NAV method by regulated investment companies for excise tax purposes."

Though the SEC's Money Fund Reforms have been live for over a month and a half now, we continue to find money market fund filings that we missed in the flurry of changes ahead of the October 14 deadline. One we missed was the 495 million John Hancock Money Market Fund, which said in an earlier filing about its "Conversion to Government Money Market Fund," "On December 10, 2015, the Board of Trustees approved the conversion of the fund to a government money market fund as defined under Rule 2a-7 under the Investment Company Act of 1940, effective April 6, 2016 (the "Conversion Date"). In connection with this conversion, effective on the Conversion Date, the Principal Investment Strategies of the fund are amended and restated as follows: The fund operates as a "government money market fund" in accordance with Rule 2a-7 under the Investment Company Act of 1940 and is managed in the following manner: under normal market conditions, the fund invests at least 99.5% of its total assets in cash, U.S. Government securities and/or repurchase agreements that are fully collateralized by U.S. Government securities or cash....; the fund seeks to maintain a stable net asset value ("NAV") of $1.00 per share and its portfolio is valued using the amortized cost method as permitted by Rule 2a-7; the fund invests only in U.S. dollar-denominated securities; the fund buys securities that have remaining maturities of 397 days or less (as calculated pursuant to Rule 2a-7); the fund maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life to maturity of 120 days or less the fund must meet certain other criteria, including those relating to maturity, liquidity and credit quality as a government money market fund, the fund is not subject to liquidity fees or redemption gates, although the Board may elect to impose such fees or gates in the future."

The Wall Street Journal writes "Investors Tiptoed Back Into Prime Money-Market Funds, Then Left." It explains, "Investors put money back into prime money-market funds in the first three weeks of November, putting them on track for their first monthly inflow since February, but the final week of the month may have dashed those hopes. Investors put $353 million into prime money-market funds last month through Nov. 29, according to data provider iMoneyNet, stanching a yearlong hemorrhage. The additions held the promise of a turning point for prime funds that shed more than two-thirds of their assets over the past year, traders and analysts said, as the industry raced to adjust to new money-fund rules. The funds benefited from three consecutive inflows in the three weeks ended Nov. 22." The Journal says, "But money-fund tracker Crane Data showed a $1.4 billion decline in the final days of November, as money flowed out of institutional prime funds. The iMoneyNet data for the full period of November will not be released until next week. Prime money funds now hold about $375 billion, and the funds that survived are now offering higher yields than comparable short-term investments in funds dedicated to government debt, in a shift that analysts say may lead to further gains." Finally, it adds, "All told, investors have withdrawn $1.1 trillion from prime money funds since the last week of October 2015, according to Peter Crane, president of Crane Data. That was just before Fidelity Investments converted its $115 billion Cash Reserves fund, the world's largest money-market fund, to focusing on government debt."

Treasury Today writes "European MMF reform: change is on the horizon?" It says, "After much delay, European lawmakers have announced a breakthrough agreement regarding European money market reforms. The European Parliament have announced that there has been a breakthrough agreement between MEPs and the Slovak Presidency of the Council of the EU around the controversial topic of European money market reform. The agreement comes following lengthy and rancorous deliberation, more than three years since the European Commission published the original proposal." The article adds, "The headline news, as many expected, is that Low Volatility NAV (LVNAV) funds will be introduced in Europe. Sitting somewhere between CNAV Government funds priced to two decimal places and VNAV funds that use mark-to-market or mark-to-model pricing to four decimal places, LVNAV funds seek to provide many of the key attributes that compel corporates to use CNAV MMFs but with the extra safety sought from the EU lawmakers.... Will this have an impact on how asset managers operate these funds? According to Beccy Milchem, Head of Corporate Sales at Blackrock, it will, but not substantially." "We anticipate that we would likely run the LVNAV portfolios more conservatively than we run our Prime CNAV funds today, but we do not believe that we will need to change our investment or credit process," she tells Treasury Today. The piece adds, "It is important to note that despite this most recent announcement, the final text is yet to be completely finalised -- although what this text will contain is becoming clearer. And even once finalised change will not happen immediately. A transition period of around two years will be initiated with the regulations most likely coming into effect in late 2018 or early 2019."

A recent paper posted on the Federal Reserve Board's "FEDS Notes" research page, entitled, "Front-End Term Premiums in Federal Funds Futures Rates and Implied Probabilities of Future Rate Hikes," discusses "term premiums" and Fed funds rates. It explains, "A few recent market commentaries have proposed simple rules of thumb that describe term premiums in money market futures and forward rates in the current interest rate environment as a linear function of horizon with a slope of about minus 1 to minus 2 basis points per month. Such term premiums can have significant effect on inferences regarding the market-implied probability of future monetary policy actions at the next few FOMC meetings, but solid empirical evidence on term premiums at such horizons has been lacking. In this note, we examine empirical evidence on term premiums at the very front end, utilizing federal funds futures data as well as responses to the Desk's sell-side survey (Survey of Primary Dealers, or PD survey) and buy-side survey (Survey of Market Participants), and discuss plausible front-end term premium assumptions that one can use to extract probabilities of a rate hike at upcoming meetings from market quotes." Authors Don Kim and Hiroatsu Tanaka continue, "We find that, for horizons over the next two to three FOMC meetings, a simple assumption that term premiums are zero produces a good agreement between federal funds futures data and the Desk survey data on the distribution of the timing of the next rate hike, while an assumption of significantly negative term premiums suggested by some market commentaries produces futures-implied probabilities of near-term rate hikes that appear generally much higher compared with those from the surveys. In addition, Desk survey responses on the distribution of the federal funds rate at year-ends are also consistent with the assessment that term premiums are small in magnitude at two-to-three-meeting horizons while more sizable (negative) further out; however, even at somewhat longer horizons of about six months, estimated term premiums are generally smaller in magnitude than some of the numbers proposed in recent commentaries. Overall, it appears that term premiums are nonlinear with respect to horizons at the front end."

Preparations continue and the agenda is now complete for Crane Data's next "basic training" event, Money Fund University. Our seventh annual MFU will be held at the Westin Jersey City Newport, Jersey City, NJ, January 19-20, 2017. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market regulations, money fund alternatives, offshore markets, and other recent industry trends. The affordable ($500) educational conference (see the latest agenda here or e-mail us to request our brochure) features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers. Money Fund University offers attendees a 2-day course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, money market instruments such as commercial paper, CDs and repo, plus portfolio construction and credit analysis. At our Jersey City event, we will also take a look at some remaining issues involving regulations, and we'll have a mini "Bond Fund University" segment on ultra-short bond funds. Crane Data also continues to work on a preliminary agenda and plans for its new Bond Fund Symposium (March 23-24, 2017, at the Boston Hyatt Regency), and our annual "big show," Money Fund Symposium, will be held June 21-23, 2017, at the Atlanta Hyatt Regency.

Wells Fargo Securities Garret Sloan writes, "After taking a wild ride over the past few months, the SIFMA 7-day index appears to be finding an equilibrium level in the mid-50s. In December, the index remained relatively uncorrelated with the movement of the Fed funds rate, remaining pinned at 1 basis point for another three months before moving in response to tax-related outflows in March. Previous rate cycles have seen SIFMA move more quickly, though not in a 1-for-1 relationship. In 2004 the SIFMA index rose in relative lockstep with the Fed funds rate, though the magnitude of the increases did not follow the Fed funds market. At the beginning of the tightening cycle of 2004 the SIFMA 7-day rate and the Fed funds target rate were close to being equivalent, but by the peak of the tightening cycle in 2006, the SIFMA Index lagged the Fed funds rate by almost 200 basis points." RBC Capital Markets' Michael Cloherty adds, "SIFMA stopped falling after it reversed about 2/3 of the widening from early July to MMF reform (richer prices are causing the nontraditional buyers to exit). Another 2.5bp tightening in LIBOR/OIS would put the LIBOR improvement on the same footing as SIFMA, but we think year-end will cause the LIBOR tightening to pause. What makes us cautious about the front end is concern that year-end RP costs may rise as we see what happens on Nov 30th, making the carry on spread longs suffer."

The Boston Globe writes about the recent news of Fidelity Investments Chairman Edward "Ned" Johnson retiring and Johnson's invention of check-writing for money market funds in a piece entitled, "Fidelity's Peter Lynch reflects on Ned Johnson." The article says, "On Johnson's 1974 decision to let Fidelity customers write checks from their money market mutual funds, a convenience that eventually became an industry standard; previously, customers had to go through a more complicated "redemption" process to access that money. It also paved the way for Fidelity to expand beyond asset management and into other financial services. "I remember so vividly that we all thought it was scary. I remember saying to Ned, 'People told me we can lose tens of millions of dollars on this [due to the cost of setting up the untested business],' and Ned said, 'You're right. We could lose lots of money on this, and everyone else has the same opinion, so they're not going to get into it. But if it works we could make lots of money. We have a huge potential winner here and it's worth it.' Everyone, including people in the company, were second-guessing him, and everybody else was afraid to do it and said it was a big mistake. And he said, 'That's true,' but still did it." See also, The Boston Globe's "'Ned' Johnson stepping down as Fidelity chairman."

ICI's latest "Money Market Fund Assets" report shows yet another increase in Prime money fund assets, their third week in a row (and their first increases since July 13), while Tax Exempt MMFs rose for the 6th week in a row. Assets broke back above $2.7 trillion for the first time since August; year-to-date they're down $54 billion, or 1.9%. The release says, "Total money market fund assets increased by $18.76 billion to $2.71 trillion for the six-day period ended Tuesday, November 22, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $18.43 billion and prime funds increased by $170 million. Tax-exempt money market funds increased by $150 million." It explains, "Assets of retail money market funds increased by $1.66 billion to $974.38 billion. Among retail funds, government money market fund assets increased by $2.10 billion to $595.97 billion, prime money market fund assets decreased by $450 million to $252.89 billion, and tax-exempt fund assets were unchanged at $125.51 billion.... Assets of institutional money market funds increased by $17.10 billion to $1.73 trillion. Among institutional funds, government money market fund assets increased by $16.33 billion to $1.60 trillion, prime money market fund assets increased by $620 million to $124.17 billion, and tax-exempt fund assets increased by $140 million to $4.62 billion." Prior to the past 3 weeks' worth of (admittedly modest) inflows ($4.3 billion in total), prime MMFs had declined by 16 weeks in a row, dropping by $663.1 billion. YTD, Prime MMF assets have declined by $906.7 billion, or 70.6%, and they've declined by $1.081 trillion, or 74.1%, since 10/31/15. Government money funds have also gained $22.5 billion over the past 3 weeks, and they increased by $679.6 billion over the 16 weeks prior. Govt MMFs are up by $977.2 billion YTD (80.0%) and they're up by $1.185 trillion (116.9%) since 10/31/15. Tax Exempt MMFs have risen for 6 weeks in a row, up $2.6 billion. after falling by $68.5 billion the previous 14 weeks. Tax Exempt MMFs are down by $124.3 billion YTD (-48.8%) and they're down by $114.8 billion (-46.9%) since 10/31/15.

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