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Moody's issued a report last week entitled, "Money Funds' Supply and Yield Will Suffer Further Amid Drop in Short-Term Issuance by Banks Due to Basel III." It said, "Euro and Sterling money market funds have significantly reduced their exposure to financial institutions in recent years, offsetting the reduction mainly with government securities and reverse repurchase agreements (repos), says Moody's Investors Service. "With regulators pushing banks to reduce short-term wholesale funding, and bank credit quality deteriorating due to the depressed global economic environment between 2009 and 2012, money funds have had to find alternative sources of investments," says Marina Cremonese, a Moody's assistant vice president and co-author of the report. Euro MMFs' direct exposure to financial institutions has fallen to 54% of funds' assets under management in June 2014 from 75% in June 2010, while investments in government securities and repos have increased by 13% and 7%, respectively. Sterling MMFs have reduced their exposure to financial institutions to 72% in June 2014 from 82% in June 2010. For US MMFs, investments in financial institutions are roughly flat from four years ago. The shrinking investment supply has had a lesser impact on US MMFs as they started off with a lower exposure to financial institutions compared to Euro and Sterling MMFs, and they also benefited from the Fed's reverse repo facility. Moody's expects a further squeeze in the issuance of short-term bank securities when Basel III rules are actually implemented starting in January 2015. As a consequence of the worsening supply/demand imbalance, MMF managers will have to give up a few basis points of return in order to preserve diversification and the short maturity profile of their funds." In other news, on Friday the European Central Bank released the "Results of the Euro Money Market Survey 2014." The release explains, "The European Central Bank (ECB) is publishing the results of the "Euro Money Market Survey 2014", which highlights the main developments in the euro money market in the second quarter of 2014, comparing them with those in the second quarter of 2013."

Sunday's Boston Globe writes "Fidelity fought Washington over money market funds -- and won". The article says of Fidelity CEO Abigail Johnson, "Her trip to meet with the SEC chief in June 2012 was part of an epic and unusually harsh lobbying battle waged by Fidelity and a handful of allies in the mutual fund industry. Their mission: stop the Obama administration's move in the aftermath of the financial crisis to rein in a huge and highly profitable part of their business, money market funds.... The SEC faced withering criticism as it tried to fortify money market funds -- which emerged as a surprising threat to the economy at the height of the crisis -- against future investor runs and potentially calamitous failures.... The story also offers a window into the public policy agenda of one of Boston's richest corporate sectors. Among mutual funds, Fidelity had the most to lose.... Ned Johnson made Fidelity an early pioneer in money market funds, which are low-risk investments that offer small gains but are supposed to provide a stable and convenient place to park cash. He invented the concept of check-writing for the funds in the 1970s, helping them become hugely popular with mom-and-pop investors across America. Today Fidelity manages by far the largest amount of assets in money market funds in the world, with $410 billion. By charging just a tiny fraction of that massive sum in fees, it reaps about $650 million in annual revenue.... Five years of trench warfare lurched to a close this year, in July, when the SEC issued final rules. It was billed as a compromise, but reformers said industry got the best of the deal. The "floating" share price will be required, but only for funds that serve large institutional investors -- the category that experienced the biggest runs in 2008. The fixed $1 share price will remain in place for funds open to small-time, retail investors and for funds that invest in government and municipal debt. For Fidelity and others, it represented "a qualified victory," said Marcus Stanley, policy director for Americans for Financial Reform, a nonprofit advocacy group that sought tougher action. "They fought off a bunch of things that were much more problematic for them." At the time of passage, Mary Jo White, the former federal prosecutor and SEC chairwoman who replaced Schapiro, hailed the new rules as a "strong reform package" that will reduce the risk of runs. `Fidelity's head of fixed-income, Nancy Prior, said the SEC struck "a reasonable balance.""

Money fund assets broke a 3-week streak of big asset gains as they dropped sharply in the latest week. ICI released its latest "Money Market Fund Assets" report, which showed total money market fund assets decreased by $21.95 billion to $2.61 trillion for the week ended October 15. The release says, "Among taxable money market funds, Treasury funds (including agency and repo) decreased by $2.20 billion and prime funds decreased by $18.06 billion. Tax-exempt money market funds decreased by $1.69 billion. Assets of retail money market funds decreased by $620 million to $908.56 billion. Among retail funds, Treasury money market fund assets decreased by $330 million to $202.34 billion, prime money market fund assets decreased by $40 million to $520.96 billion, and tax-exempt fund assets decreased by $250 million to $185.25 billion. Assets of institutional money market funds decreased by $21.33 billion to $1.70 trillion. Among institutional funds, Treasury money market fund assets decreased by $1.87 billion to $755.20 billion, prime money market fund assets decreased by $18.02 billion to $874.90 billion, and tax-exempt fund assets decreased by $1.44 billion to $70.45 billion." In other news, the Financial Times wrote "Investors Pour Billions into Money Funds in “Dash for Cash." It says, "Ever since Mario Draghi introduced a negative deposit rate -- in effect charging banks who park their surplus funds at the European Central Bank -- it has been a tough time to be a money market fund manager.... But, while logic suggests return-starved investors should shun assets that offer nil, or even sub-zero, yields, MMFs now face a different conundrum: how to invest the billions flowing their way. Last week saw a record $23.46bn flow into European MMFs in spite of fears that rock-bottom ECB rates would make it harder for them to make money, according to EPFR, the data provider."

FDIC-insurance "amalgamator" StoneCastle Cash Management is hosting a webinar on "Investment Policy Considerations & Amendments Post MMF Reform" Thursday (10/16) at 3:00pm (EDT). "The question every treasurer seems to be asking is, how will the recent SEC money fund rulings and pending impact of Basel III impact my short term cash strategy? More specifically, what steps should treasurers take now to ensure their Investment Policy Statement (IPS) takes into consideration the new rules while providing flexibility to use other potential vehicles/strategies. Potential topics for discussion include the current state of the market, an update on pending reform and timetable for implementation, implications of new regulations and what they mean for your Investment Policy Statement (IPS), identification of potential, necessary amendments such as how do you account for a variable NAV money fund & how to introduce new cash-management options on your IPS. Ted Howard of iTreasurer will moderate the webinar. Greg Fayvilevich of Fitch Ratings will offer insights from his report, "Why Money Fund Reform will have uneven Impact on Corporations," provide insights on the need for financial professionals to review/update their investment policies, and introduce questions which every financial professional should be asking/discussing in light of recent reforms. Brandon Semilof of StoneCastle will offer insights from financial professionals since announced reforms, what steps are being considered and potential strategies being discussed. Brian Leach of Pimco will offer insights on potential outlook for rates from the minds of PIMCO and introduce potential strategies and approaches for organizations' strategic/longer term cash balances. The Panel discussion will be followed by a live Q&A." Click here to register. In other news, Financial Sciences Corp., issued a press release "New Release of ATOM from Financial Sciences Delivers Enhanced Business Intelligence Tools and Expanded Functionality." It says, "ATOM, Financial Sciences' integrated treasury management system (TMS), brings together all aspects of global treasury operations, financial risk management, governance and compliance into one integrated web-based solution.... This release offers enhanced business intelligence tools for complete visibility into cash and risk by providing a powerful set of management reporting dashboards, including charts, maps and tables with transaction level drilldown."

The Financial Stability Board issued a press release Tuesday announcing a new "Regulatory Framework for Haircuts on Non-centrally Cleared Securities Financing Transactions." It says, "The Financial Stability Board (FSB) is publishing today a "Regulatory Framework for Haircuts on Non-centrally Cleared Securities Financing Transaction." This Framework is a key part of the FSB's policy recommendations to address shadow banking risks in relation to securities financing transactions, and takes into account public responses received on the consultative proposals issued on 29 August 2013 as well as the results of a two-stage quantitative impact study (QIS). In revising the Framework, the FSB has decided to raise the levels of numerical haircut floors based on the QIS results, existing market and central bank haircuts, and data on historical price volatility of different asset classes. It has also decided to propose applying the numerical haircut floors to non-bank-to-non-bank transactions so as to ensure shadow banking activities are fully covered, to reduce the risk of regulatory arbitrage, and to maintain a level-playing field.... The FSB will complete its work on the application of numerical haircut floors to non-bank-to-non-bank transactions and set out details of how it will monitor implementation by the second quarter of 2015. FSB member authorities will implement the Framework, including the numerical haircut floors, by the end of 2017." It continues, "Mark Carney, Chairman of the FSB, stated that "The regulatory framework for haircuts on securities financing transactions issued by the FSB today addresses important sources of leverage and the level of risk-taking in the core funding markets. It has been carefully developed, finalised after rounds of public consultation and impact studies, and marks a big step forward in the FSB's overall work programme to transform shadow banking into resilient market-based financing conducted on a sound basis." Daniel Tarullo, Chairman of the FSB Standing Committee on Supervisory and Regulatory Cooperation stated that "Securities financing transactions such as repos are important funding tools for a wide range of market participants, including non-bank financial firms. The implementation of the numerical haircut floors on securities financing transactions will reduce the build-up of excessive leverage and liquidity risk by non-banks during peaks in the credit and economic cycle. It will be important for the FSB to monitor the impact of the framework following the implementation to help ensure that it achieves these objectives." Bloomberg writes in "Repo Traders Face FSB Collateral Rule in Shadow Bank Push," "Traders are facing new global rules on how they determine the value of collateral in repo transactions as regulators seek to prevent panic writedowns that are seen fueling future financial crises. The Financial Stability Board, a global group that brings together central bankers and government officials from the Group of 20 nations, today published a set of guidelines on discounts applied to collateral handed over as part of repurchase-agreement trades and other securities-financing transactions that aren't processed through clearing houses. It also set minimum standards for some types of trades." Also, the FT writes, "Terms Laid Down for Taming Shadow Bank Risk."

The deadline to comment on the SEC's Proposed Rule, "Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule," is Wednesday, October 14. (We covered the proposal in our August 5 "News", "SEC Proposal to Remove Credit Ratings Eliminates First, Second Tier.") Just one substantial recent comment has been posted so far (there are plenty from 2011, when removing ratings from Rule 2a-7 was first proposed). The new letter is from Amy Lancellota, managing director, Independent Directors Council. Lancellotta writes, "The Independent Directors Council appreciates the opportunity to provide comments on the Securities and Exchange Commission's re-proposal to remove certain references to credit ratings in the money market fund rule. Although IDC had previously urged the Commission to retain the references to credit ratings, we recognize that the Commission is implementing a Congressional directive in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).... Given this mandate, IDC is generally supportive of the approach taken in the re-proposal, which reflects comments raised by IDC and others on the initial proposal. Our specific comments are provided below." She continues, "Under the Commission's initial proposal, in place of the requirement that eligible securities be rated or of comparable quality, a fund board (or its delegate) would have been required to: (1) determine whether securities are eligible securities based on minimal credit risks; and (2) distinguish between first and second tier securities based on subjective standards (e.g., "highest capacity to meet its short-term financial obligations" for a first tier security). IDC and others expressed concern about the proposed approach and recommended eliminating the first and second tier categories and subjecting eligible securities to one uniform, very high standard. IDC and others also stated concern about the "highest capacity" standard, which does not seem to contemplate a range of ratings. The re-proposal responds to these concerns by eliminating the distinction between first and second tier securities and using the "exceptionally strong capacity" standard. We support this approach."

Money market mutual fund assets have been on a tear the past two and a half months and past three weeks, rising by $54.8 billion the past 3 weeks and by $76.9 billion since July 30. They appear to be repeating their 2012 and 2013 pattern of rising sharply in the second half of the year after falling in the first half. ICI's latest "Money Market Fund Assets" release says, "Total money market fund assets1 increased by $16.97 billion to $2.63 trillion for the week ended Wednesday, October 8, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $1.36 billion and prime funds increased by $13.74 billion. Tax-exempt money market funds increased by $1.87 billion." It explains, "Assets of retail money market funds increased by $6.07 billion to $909.18 billion. Among retail funds, Treasury money market fund assets increased by $2.36 billion to $202.67 billion, prime money market fund assets increased by $2.65 billion to $521.01 billion, and tax-exempt fund assets increased by $1.06 billion to $185.51 billion. Assets of institutional money market funds increased by $10.90 billion to $1.72 trillion. Among institutional funds, Treasury money market fund assets decreased by $1.00 billion to $757.07 billion, prime money market fund assets increased by $11.09 billion to $892.91 billion, and tax-exempt fund assets increased by $810 million to $71.89 billion." Year-to-date, money fund assets have declined by $88 billion, or 3.2%.

Simon Potter, executive vice president of the Federal Reserve Bank of New York spoke Tuesday on "Interest Rate Control during Normalization," and recent changes to the Overnight RRP test exercise. He said, "To further examine how ON RRPs might best be structured to supplement IOER in controlling the fed funds rate while limiting the potential for unintended effects in financial markets, the FOMC recently directed the Desk to make several changes to the design of its ON RRP operations. In particular, as of September 22, the maximum bid limit per counterparty was raised from $10 billion to $30 billion, an overall size limit of $300 billion per operation was imposed, and an auction process was introduced to determine the interest rate on the operation and allocate take-up when the sum of bids exceeds the new $300 billion limit. The $30 billion individual bid limit was informed by evidence on the desired investments of counterparties that had bid at the previous maximum of $10 billion, and it took into account the size of assets under management of our counterparties. For almost all counterparties, the $30 billion limit is unlikely to be binding in any circumstances. The $300 billion overall limit was above total demand observed over the first year of testing, with the exception of the operation conducted at the end of the second quarter of this year." He continued, "So what are the benefits of moving from a structure with individual caps alone to one with an aggregate cap as well? One benefit is that, in limiting the overall take-up but not individual take-up, an aggregate cap should produce a more efficient allocation of usage among counterparties than would a system of individual caps. Further, an aggregate cap should better balance efficient control of money market rates under normal conditions with the risk of a destabilizing surge in use of the facility in times of stress. The reduced risk of a surge in use in a system with an aggregate cap comes from the fact that take-up across counterparties is not perfectly correlated. As a result, an aggregate cap that binds at some frequency can be set below the sum of individual caps that would bind for at least one of the counterparties at the same frequency.... The Federal Reserve has been closely analyzing the results of the ON RRP operations conducted under these new testing parameters in order to further its understanding of how an ON RRP facility should be structured during the normalization process. As many market participants anticipated the aggregate cap did bind on quarter end. The auction procedure went smoothly and while rates did trade soft on the quarter end, this was only a temporary phenomenon and there was no evidence of market disruption from the unfilled bids at the auction." The Wall Street Journal also covered his speech in, "N.Y. Fed's Simon Potter: Reverse Repos Effective in Setting Rate Floor." Finally, the Fed released the Minutes from its Sept. 16-17 FOMC meeting, saying, "Participants agreed to consider potential additional revisions to the ON RRP exercise at future FOMC meetings."

On Wall Street wrote Tuesday, "Repo Pullback Impacts Money Market Funds." The article says, "New capital and liquidity rules are forcing banks to pull back from a vibrant market that has allowed them access to inexpensive overnight funding. With the decline in funding volumes come potential outcomes that impact the $2.591 trillion market for money market mutual funds. "There are ripple effects," says Joseph Abate, a money market strategist at Barclays PLC in New York. "The first ripple effect is there is a significant shortage of safe assets for cash-long investors to buy." During the past two years, banks have been steadily reducing the volume of repurchase agreements, known as repos, that have served as a significant source of liquidity but which regulators see as an unreliable funding source for banks during crisis periods. In this situation, money market funds may find themselves scrambling to find enough repo, which forces the funds to use an overnight reverse repo facility run by the Fed. This also keeps interest rates down on bills and other short-duration instruments as well. "That may or may not be a bad thing. However, it does create a disconnect in the market," says Abate." The piece continues, "It's been a long, steady and substantial 20% slide in repo activity from the recent peak of $2.18 trillion in the collateral value of repos in November 2012 to $1.74 trillion in July 2014, according to the Federal Reserve Bank of New York -- with more likely to come. The implementation of new Basel III regulations is expected to put further downward pressure on the repo market. Since the regulators first proposed a supplemental leverage ratio for the largest banks last summer, the repo market has declined by $750 billion as of July 2014, according to estimates from Goldman Sachs. Though the new leverage ratio will not go into effect until January 2018, Tier 1 leverage capital becomes a binding constraint under the Fed's annual stress tests of major banks beginning next year. As a result, the drawback from the repo market by banks is likely to be permanent, according to a research note published in April by Goldman Sachs."

The Financial Times published, "SEC's New Rules Gives US Money Market Funds a Floating Feeling," a basic overview of new MMF regulations written by Robert Pozen and Theresa Hammacher. It reads, "The rules will have the biggest impact on money market funds serving institutional investors, which will have to move from a constant to a floating net asset value. The rules will also put pressure on most institutional and retail money market funds to impose liquidity fees and suspend redemptions during financial crises. But neither set of rules will apply to money market funds holding 99.5 per cent or more of government securities. Thus, the two critical questions are what constitutes a government security, and what differentiates an institutional from a retail money market fund? The rules narrowly define governmental securities to include cash, US Treasuries and securities issued by US federal agencies. Notably, for this purpose, government securities do not include securities issued by state or city governments -- the assets held by most tax-exempt money market funds." It continues, "In short, the new rules are likely to reduce the chances of runs on money market funds in times of financial crisis. But it remains to be seen whether these tougher requirements will diminish the appeal of the funds relative to bank deposits for short-term investors." In other news, Federated CIO Debbie Cunningham released her monthly commentary. "A little over two months ago, cash management in this country was hindered by new rules that the Securities and Exchange Commission issued for institutional prime and institutional municipal money-market funds. Last month, it was the Federal Reserve's turn.... But only a few months into that process, the Fed announced that it was changing one of its programs that has actually been helpful to the cash-management industry. Since September 2013, the New York Fed has run an overnight reverse repo program for certain large counterparties, with Treasuries as collateral. After some experimentation, since early 2014 it had settled on offering five basis points daily to fund this facility. While not much, at least it provided a floor to money-market trading. As the majority of the market was focused on tightening and tapering in the Federal Open Market Committee release mid-September, we were also dealing with different news. The New York Fed simultaneously announced that the entire ON RRP would be restricted to $300 billion nightly and that a five basis point floor would no longer be guaranteed -- essentially destroying its main goal of helping money funds in this time of its extraordinary accommodative policy. The new process could hardly be more needlessly complicated."

Fitch Ratings wrote Friday, "U.S. Money Funds Well-Positioned for Gradual or Sharp Interest Rate Rises." The brief says, "U.S. money market funds are well-positioned to manage risks associated with rising interest rates, either a modest rise or a sharper rise accompanied by weaker economic conditions, according to Fitch Ratings. As noted in a recent report on interest rates, Fitch's base case scenario assumes the completion of the Fed's tapering program, strengthening world economic growth over 2014-2016 and a gradual tightening of monetary policy over the next 12 months. Fitch's stress case scenario involves a sharper hike of interest rates amid weakening or stagnant economic growth, among other factors. U.S. money funds have recently begun adjusting their portfolios in anticipation of rising interest rates, with prime funds lowering their weighted-average maturities (WAM) to an average of 42 days. Regulatory rules and Fitch's rating criteria constrain money funds' WAMs to limit exposure to interest rate risk. The current limit means that a money fund portfolio with a 60 day WAM can withstand an instantaneous 3% interest rate increase before 'breaking the buck', all else being equal. Fitch notes that there is considerable variability among funds with regard to their current WAM positioning and portfolio strategies in a rising rate environment. Approximately 36% of money funds have WAMs between 41 and 50 days, while only 17% of funds operate with WAMs greater than 50 days. The full report is available at This is part of a series of reports by Fitch looking at interest rate sensitivities across various U.S. analytical sectors." In other news, see Reuters published "Money market inflows jump in latest week - Lipper", which says the large amount of inflows into money market funds last week may be partly attributable to investors fleeing PIMCO bond funds for MMFs. Writes Lipper, "Investors in U.S.-based funds poured a net $18.9 billion into money market funds in the latest week, double the previous week's amount, amid record withdrawals from Pimco's flagship fund previously run by Bill Gross.... Much of that cash surge is likely money that rushed out of Pimco after the Gross shock, said Patrick Keon, a research analyst with Lipper. "I think that the money markets category is a good bet for the bulk of that money" coming out of Pimco, he said. It's possible that investors are "parking the money in money market funds until they do more research," he said." (Note: Crane Data doesn't believe that PIMCO flows were a major factor in last week's asset jump, since the money fund increases.)

The ICI released its latest "Money Market Fund Assets" report, which says, "Total money market fund assets increased by $22.8 billion to $2.61 trillion for the week ended October 1." This was the largest increase of 2014 and the first time assets have been above $2.6 trillion since early April 2014. ICI's release explains, "Among taxable money market funds, Treasury funds (including agency and repo) increased by $28.56 billion and prime funds decreased by $6.52 billion. Tax-exempt money market funds increased by $810 million. Assets of retail money market funds increased by $2.41 billion to $903.11 billion. Among retail funds, Treasury money market fund assets increased by $740 million to $200.31 billion, prime money market fund assets increased by $2.14 billion to $518.35 billion, and tax-exempt fund assets decreased by $470 million to $184.44 billion. Assets of institutional money market funds increased by $20.42 billion to $1.71 trillion. Among institutional funds, Treasury money market fund assets increased by $27.82 billion to $758.07 billion, prime money market fund assets decreased by $8.67 billion to $881.82 billion, and tax-exempt fund assets increased by $1.28 billion to $71.09 billion." In other news, the International Monetary Fund (IMF) published a report entitled, "Shadow Banking Is Boon, Bane for Financial System." It says, "Shadow banks act similarly to regular banks by taking money from investors and lending it to borrowers, but are not governed by the same rules or supervised. Shadow banks can include financial institutions such as money market mutual funds, hedge funds, finance companies, and broker/dealers, among others. The IMF's latest Global Financial Stability Report analyzes the growth in shadow banking in recent years in both advanced and emerging market economies and the risks involved. According to the report, shadow banking amounts to between 15 and 25 trillion dollars in the United States, between 13.5 and 22.5 trillion in the euro area, and between 2.5 and 6 trillion in Japan. "We found that the same factors often seem to drive the growth of shadow banking across countries," says Gaston Gelos, chief of the Global Financial Analysis Division at the IMF. "Shadow banking tends to take off when strict banking regulations are in place, which leads to circumvention of regulations. It also grows when real interest rates and yield spreads are low and investors are searching for higher returns, and when there is a large institutional demand for 'safe assets,' for example from insurance companies and pension funds." As the global financial crisis has shown, there are also risks associated with shadow banking due to their reliance on short-term funding, which can lead to forced asset sales and downward price spirals when investors want their money back at short notice."

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