Measuring money... faster, cheaper, cleaner

Link of The Day

Archives »

The Financial Times wrote, "Alibaba in Talks for HK Version of Yu'E Bao Money Market Fund." The piece says, "Alibaba is looking to start a Hong Kong version of its enormously popular Chinese money market fund, which pays higher rates on renminbi deposits than are available on conventional accounts. Its Alipay financial unit is in talks with the Hong Kong Monetary Authority about securing authorisation to offer a local version of its Yu'E Bao money market fund, which launched in June last year and had already attracted more than Rmb574bn ($94bn) a year later. The move underscores Alibaba's determination to take its template to the world beyond China, now that it has completed its record $25bn initial public offering in New York. If Alibaba receives approval from both Hong Kong and China, the funds would be invested in the mainland in order to achieve higher returns. The group says it believes it could offer 4 per cent returns, compared with the 1 per cent currently available. "We are hoping to introduce it by early next year," said Ming Shu, who is responsible for micro finance and SME finance for Alipay, which is also China's largest online payments provider.... Currently the main channel through which fund companies can invest offshore renminbi in mainland capital markets is the Renminbi Qualified Foreign Institutional Investor programme. Regulators have not so far approved a money market fund under RQFII, which mainly consists of bond funds and equity exchange traded funds." The FT also published a story on "Fed 'Repo' Tests Drive Scramble for Safety," which reads, "Investors are scrambling for safe assets ahead of the end of the financial quarter, with the scrum for securities exacerbated by the Federal Reserve's testing of a key financing tool for an eventual tightening of policy. Yields on short-term Treasury bills, viewed as ultra-safe securities, have dipped below zero as the assets attracted heavy buying in the run-up to the end of the third quarter. Negative yields on the securities mean that money market funds and other big investors are effectively willing to pay the US government for holding their cash over the end of the financial period."

The Financial Times writes "EU to revisit money market fund reforms". It says, "The European parliament's new rapporteur charged with overseeing money market fund reform has said she does not want to "destroy" the industry. The European Commission proposed last year that so-called "constant net asset value" funds, which maintain a fixed E1-a-share except in extreme circumstances, should be forced to hold a cash buffer equal to 3 per cent of their assets to help avert a repeat of the "runs" some funds suffered during the financial crisis. Industry figures say this would be uneconomic and would effectively kill off the E450bn sector.... Neena Gill, a UK Labour MEP, who will now attempt to broker a deal on money market these reforms in the new parliament, said: "I want to ensure there is a format there that enables these funds to continue to exist. I do not think it's the job of the parliament to define what sort of investments you have or not." ... She is proposing to hold a roundtable to help find potential solutions in November, with a vote likely to be held in January." In other news, Treasury Today published a story titled, "EMEA Cash Reserves Approach E1 trillion." It reads, "Cash reserves held by corporates in Europe, Middle East and Africa (EMEA) have reached a new high of nearly E1 trillion, according to research published last week. In its 'Cash to Growth: Pivot Point' research report, professional services firm Deloitte found that the 1,200 listed companies in the region have built up their cash reserves by E47 billion over the past year, bringing total cash reserves to E963 billion. This represents an increase of around E250 billion on the reserves recorded in 2007." It adds, "Almost 60% of those surveyed said they intended to invest part of their cash reserves in the coming year. Of these corporates, 54% said growth would be the main focus of their investment strategy over the next year. The research also suggests that corporates in EMEA are looking to invest cash reserves primarily in their home markets. Thirty-five percent of those surveyed said they would make investments within the EU over the next year, while 27% said they would in North America, and 21% in China. However, despite the recent boom in interest in emerging markets, respondents showed relatively little enthusiasm for investing in these markets. 13% of the companies surveyed said they planned to invest in Brazil, 8% in India and 4% in Russia."

USA Today featured a piece Friday entitled, "Investing: Market Timing is for the Birds." John Waggoner writes, "If you're terrified of a stock downturn, your best bet is to reduce your stock holdings until you're no longer terrified. Your best bet now is a money market fund, despite the fact that the average money fund yields just 0.01%. After inflation and taxes, your returns will be smaller than a hummingbird's navel. But money funds are the one investment you can be fairly confident that will be more valuable in a year than they are now. With interest rates this low, it's a good bet that the Federal Reserve will start to push up rates in the next few months, and that means higher money market yields. It's a scary world. There's a war on. Europe is teetering on recession and deflation -- a period of falling prices like the Great Depression. Stocks aren't cheap. Interest rates could rise. But the world has always been scary. The stock market has survived world wars, a Great Depression, a Great Recession, oil embargoes and enormous one-day crashes. If you need your money soon, take some chips off the table so Mr. Market isn't deciding your fate. But if you're a long-term investor, worrying about the market is for the birds." In other news, Sibos, the giant global banking conference run by SWIFT, the European banking consortium, starts today at the Boston Convention Center and runs through Wednesday. (Some money fund companies will be exhibiting, though not many.)

ICI released its latest "Money Market Fund Assets" report, which showed money fund assets increasing sharply on the week. It says, "Total money market fund assets increased by $15.08 billion to $2.59 trillion for the week ended Wednesday, September 24, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $5.96 billion and prime funds increased by $11.10 billion. Tax-exempt money market funds decreased by $1.98 billion." The release continues, "Assets of retail money market funds decreased by $2.11 billion to $900.69 billion. Among retail funds, Treasury money market fund assets decreased by $800 million to $199.57 billion, prime money market fund assets decreased by $310 million to $516.21 billion, and tax-exempt fund assets decreased by $990 million to $184.91 billion. Assets of institutional money market funds increased by $17.19 billion to $1.69 trillion. Among institutional funds, Treasury money market fund assets increased by $6.76 billion to $730.31 billion, prime money market fund assets increased by $11.41 billion to $890.49 billion, and tax-exempt fund assets decreased by $980 million to $69.81 billion."

Fitch Ratings wrote Tuesday, "Fitch Ratings has withdrawn the 'AAAmmf' rating for the Williams Capital Government Money Market Fund (the Fund) managed by Williams Capital. Williams Capital will be outsourcing the management of its money market fund strategies to Northern Trust and at shareholder option funds may be transferred to into new share classes of the Prime Obligations Fund or the U.S. Government Select Fund. On September 4, 2014, the Board of Trustees of Williams Capital Management Trust, on behalf of the Fund, approved a proposal to mandatorily redeem all the shareholders of the Fund at a net asset value per share of $1.00 and thereafter to liquidate the Fund. The mandatory redemption date has been set as September 22, 2014 and the liquidation date has been set for September 29, 2014. The Fund had $202 million of total assets under management as of Sept. 16, 2014." We wrote about this in our Sept. 15 News story, "TCG Launches Govt MMFs With FDIC Insured Blocks; Williams Outsources". In other news, Trefis writes, "How BlackRock Is Dealing With Negative Interest Rates in Europe"." It says, "Earlier this month, the European Central Bank announced its decision to cut benchmark interest rates further, in what is the latest attempt by the regulator to improve economic conditions in the Eurozone.... BlackRock was the first asset manager to react to this change, with the firm announcing its intention to activate a mechanism that will help it maintain a stable share price for one of its money-market funds -- the ICS Europe Government Liquidity Fund. While the fund, with E1.4 billion ($1.8 billion) in assets under management, is a fraction of the $268.4 billion in money-market assets managed by BlackRock at the end of Q2 2014, the decision to switch to a Reverse Distribution Mechanism could extend to its larger Institutional Euro Government Liquidity Fund, and is likely to result in similar changes by competitors over coming weeks.... While banks are affected the most by a negative deposit rate, the impact on asset management firms is also noticeable -- particularly for those with a strong presence in the cash management market. As the largest asset manager in the world with $4.6 trillion in assets under management, BlackRock is clearly affected by the ECB's move. The chart ... shows the size of assets under management in money market funds for BlackRock globally. The negative deposit rate makes it very likely that yields on government securities will turn negative on certain trading days -- resulting in unwanted fluctuations in the net asset value (NAV) of funds that hold these securities. BlackRock's proposed switch to a Reverse Distribution Mechanism seeks to avoid this problem by canceling out shares in proportion to the reduction in value over a day in which returns were negative. This way, the NAV remains constant while the negative returns are absorbed by a reduction in the number of fund units. Negative returns will drag down the fees for BlackRock's cash management business as shown in the chart.... You can see how a reduction in these fees impacts the company's share value by making changes to this chart."

Fitch Ratings placed six South African funds' National Fund Credit Ratings on Rating Watch Negative (RWN). They are: Absa Money Market Fund; Investec Money Market Fund; Investec STeFI Plus Fund; Nedgroup Investments Core Income Fund; Nedgroup Investments Money Market Fund; and STANLIB Extra Income Fund. The brief says, "The RWN is driven by these funds' exposure to African Bank (unrated) following the bank's receipt of emergency support on 10 August 2014 from the South African Reserve Bank. As a result holders of senior and wholesale debt instruments issued by African Bank have had their holdings written down to 90% of face value while subordinated instruments have been written down to zero. The RWN reflects both the realised write-down on African Bank debt instruments and the potential for further credit deterioration or negative effects on instrument prices. It also affords Fitch time to determine the most appropriate way to incorporate African Bank's evolving credit risk profile into its rating analysis. The downgrade of the Absa Money Market Fund reflects the impact of the write-down of the fund's African Bank exposure on its price and income. Of the money market funds (MMFs) rated by Fitch in South Africa, Absa Money Market Fund has the highest, longest-dated exposure to African Bank. The fund recognised a capital loss because of its application of regulatory guidance on the treatment of African Bank exposures. Fitch considers the level of loss incurred inconsistent with a highly rated, stable unit value, MMF." In other news, The New York Fed, which held a workshop on the risks of wholesale funding last month, had a summary post on their Liberty Street Economics blog. It says, "The Federal Reserve Banks of Boston and New York recently cosponsored a workshop on the risks of wholesale funding. Wholesale funding refers to firm financing via deposits and other liabilities from pension funds, money market mutual funds, and other financial intermediaries. Compared with stable retail funding, the supply of wholesale funding is volatile, especially during financial crises."

Last Friday, the NY Federal Reserve Bank issued a release to "Revise the Time of Day of the Overnight Reverse Repurchase Agreement Operation for September 30, 2014." It says, "The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (FOMC). Regarding the operation to be conducted on Tuesday, September 30, 2014, the Desk will conduct the operation several hours earlier than usual, from 8:00 to 8:30 a.m. All other terms of the exercise will remain the same. This change only applies to the operation conducted on September 30, 2014. The operations conducted from Monday, September 22, to Monday, September 29, and those conducted on and after Wednesday, October 1, will be conducted at the previous time of 12:45 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. 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."

Bloomberg published a story on Friday entitled, "Money Funds Look at Loophole to Preserve $1 Share Price." Dave Michaels and Christopher Condon write, "Don't mourn the stable $1-per-share money-market mutual fund just yet. Firms including Federated are suggesting that fund companies can avoid new U.S. Securities and Exchange Commission requirements to show share-price variations by limiting holdings to very short-term corporate debt. Fund sponsors warned after the SEC adopted rules for institutional prime funds that a floating price would put off corporations such as Boeing Inc. that use the products to manage billions in spare cash. Two months later, Joseph Lynagh, head of money markets and short cash funds at Baltimore-based T. Rowe Price, is saying some fund companies will absolutely roll out products to take advantage of the loophole. T. Rowe Price, he said, isn't planning any such products. "You may see stuff engineered that camps out on that border," said Peter Crane, president of money-market researcher Crane Data LLC. "There could be a market for it." ... One aspect of the rules received little public notice. It left intact a longstanding provision that mutual funds can value debt that matures within 60 days at original cost, instead of at market prices. As a result, a fund invested exclusively in 60-day debt probably wouldn't see its share price vary from $1. The exemption "has always been there but now it takes on significance," said Jay Baris, chairman of law firm Morrison & Foerster LLP's investment management practice. "Now, if you are an institutional fund and you want to maintain a steady net-asset value, you can do it provided all your portfolio securities are under 60 days." While limiting a fund to shorter debt maturities makes it safer, a 60-day cut-off wouldn't have saved the Reserve Primary Fund. Most of the $785 million of Lehman debt it held when the bank failed was within 60 days of maturing.... Limiting investments to debt that matures in 60 days or less would require funds to give up the higher return earned by longer-term investments. With rates low, many funds use a "barbell" strategy balancing very short-term investments with longer-term debt that earns a higher yield, Crane said. The weighted average life of all prime money funds is currently 78 days, according to the Investment Company Institute, the lobbying group for mutual funds. "They have got to get out there and do six-month trades just to get some yield," Crane said.... Some prime funds already operate with short maturities. Invesco's STIC Prime Portfolio, which manages $2.8 billion, only invests in securities that mature in 60 days or less. In periods with interest rates higher than today's, the fund will "tend to have a better yield than Treasury and agency funds" though not as high as a fund that holds securities with the maximum maturity of 397 days, said Bill Hensel, an Invesco spokesman <b:>`_. Chris Donahue, chief executive officer at Pittsburgh-based Federated, which manages $240 billion in money-fund assets, doesn't offer such a fund. He said the product might grow more attractive in coming years. "In a different rate environment, that would work," Donahue said during a July 25 earnings call. "And its economics would be very comparable to the current fund." ... Corporations that park cash in money funds will eventually divide it into ones maintaining a stable $1 share price and those whose share prices float but earn a higher yield by investing in riskier corporate debt, Lynagh said. "This is where the industry will begin to differentiate itself," he said.

Bloomberg writes, "EU's Money Market Cash-Buffer Plan Faces Irish Opposition". The article says, "Ireland, home to almost a third of the European Union's E1 trillion money-markets industry, is set to oppose EU plans to make funds build up cash buffers against future crises. The proposal could force European funds, an important source of short-term financing for banks, companies and governments, to shut down, said Finance Minister of State Simon Harris. Ireland seeks support from other EU states against the plan to enforce "crude" cash buffers, which may have "horrendous" unintended consequences, he said. "Ireland shares the EU view and the commission's view that we have to better regulate shadow banking," Mr. Harris said. "To go ahead with a capital buffer structure as a regulatory instrument would damage the industry here, but also throughout the EU, and could lead to an outflow of investment from Europe." The EU money-market fund industry is concentrated in France, Ireland and Luxembourg. Funds domiciled in these three countries account for more than 95% of the EU market, according to European Commission data.... Almost E273bn of CNAV funds are domiciled in Ireland, making it the main base in the EU for such assets under management, according to EU data published last year." In other news, The New York Times published "Post-Lehman, Money Market Fund Protections Still Weak." Author Jennifer Taub, professor at Vermont Law School looks at the industry since the Lehman Brothers bankruptcy 6 years ago. "Filed before dawn on Sept. 15, 2008, the bankruptcy of Lehman Brothers Holdings Inc. spread panic through the financial system. Within hours of the filing that Monday morning, what should have been the contained demise of a venerable investment house turned into a widespread financial crisis. That part is old news. But what still deserves attention are these questions: What actually precipitated Lehman's collapse, how did the contagion spread from the firm to the credit markets and broader economy, and has this problem been fixed? A direct cause of Lehman's failure, and its spread to the credit markets, was money market funds.... Let's recall. One week before it failed, Lehman owed an astonishing $200 billion in overnight "repo" loans. Some large money market funds and other wholesale lenders, nervous about the mortgage-linked collateral backing those loans, demanded their cash. Short of a government-backed rescue, Lehman was done for. Unlike those fast-acting repo lenders that protected themselves (and their own investors) by bringing Lehman to its knees, other short-term creditors that did not run on Lehman were infected. These included the Reserve Primary Fund. Reserve Primary held about $785 million in short-term "repo" loans [sic] and other debt issued by Lehman, all worthless after Lehman's failure. Though that was a small percentage of Reserve Primary's total $62 billion portfolio, its panicked investors pulled $40 billion from the money market fund in the two days after Lehman went under. After the market closed on Tuesday, Sept. 16, the sponsor announced that Reserve Primary "broke the buck" and was now valued at 97 cents a share. The failure of Reserve Primary inspired a huge run on other money market funds.... Nervous investors redeemed $300 billion in cash that week aloneā€¦To stop the run on the money market funds, the government stepped in on the Thursday of Lehman week.... Today, the problems remain unsolved. Giant banks and broker dealers are still vulnerable to the sudden withdrawal of short-term financing by money market funds and other wholesale lenders. And despite two sets of new rules by the Securities and Exchange Commission -- one in 2010 and the other in 2014 -- investors in money market funds still have reasons to run with their cash at the first hint of trouble." Finally, see ICI's "Money Market Mutual Fund Assets", which says, "Total money market fund assets1 decreased by $16.72 billion to $2.58 trillion for the week ended Wednesday, September 17." Note that Sept. 15 is a corporate tax payment date.

The New York Fed issued a "Statement to Revise the Terms of the Overnight Reverse Repurchase Agreements," which states, "As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (FOMC). The Federal Reserve continues to enhance operational readiness and increase its understanding of the impact of RRPs through technical exercises. In further support of its objectives, the FOMC instructed the Desk to change the design of these RRP operations. Effective Monday, September 22, 2014, each eligible counterparty will be limited to one bid of up to $30 billion per day, an increase from the current $10 billion per-counterparty maximum bid limit, and each operation will be subject to an overall size limit of $300 billion. Each submitted request must include a rate of interest, subject to a specified maximum, which would apply only in the event that the total amount of offers received by the New York Fed exceeds the overall size limit of the operation. If the sum of the bids received is less than or equal to the overall size limit, awards will be made at the specified offering rate to all submitters. If the sum of the bids received is greater than the overall size limit, awards will be allocated using a single-price auction based on the "stopout" rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stopout rate and all bids at this rate awarded on a pro rata basis at the stopout rate. The stopout rate will be determined by evaluating all bids in ascending order by submitted rate up to the point at which the total quantity of offers equals the overall size limit. The offering rate will be set at 0.05 percent (five basis points)." It continues, "The operations will be open to all eligible RRP counterparties, will use Treasury collateral, will settle same-day, and will have an overnight tenor." In other news, the Federal Reserve Board's Federal Open Market Committee met on September 16-17, discussing interest rates and winding down the asset purchase program <i:>`_. "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress -- both realized and expected--toward its objectives of maximum employment and 2 percent inflation. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

A press release from S&P says, "Standard & Poor's Ratings Services is in the process of reviewing its criteria for rating fixed-income funds, primarily money market funds, whose principal stability is the focus of its analysis, according to [its] "Advance Notice Of Proposed Criteria Change: Principal Stability Fund Ratings." It explains, "In our review, we will primarily focus on criteria we apply to ratings on such funds in Australia and New Zealand.... As part of this effort, we plan to publish a request for comment outlining our proposed criteria for rating funds in Australia and New Zealand, as well as our proposed and related changes to the criteria we apply globally. This follows the release of our updated rating criteria for global principal stability fund ratings on June 8, 2011. Before publishing our final criteria, we will consider all market feedback received as part of this process. We have three objectives for our proposed criteria: to enhance the transparency of our criteria and the rating process; to help market participants better understand our approach to assigning ratings on funds seeking to maintain principal stability; and to support continued, improved global consistency in our approach to principal stability fund ratings." It continues, "Under the proposed criteria, we plan to retire the regionally specific criteria applied to the ratings on funds in Australia and New Zealand and instead apply the global criteria. This would result in applying our global criteria to assessments of management, credit quality, investment maturity, liquidity, portfolio diversification, index and spread risk, and security-specific risks for those funds in Australia and New Zealand. More specifically, the proposal would include changes from the criteria we used to rate those funds so they will be in line with our global criteria. In conjunction with the review of the criteria we apply to principal stability funds in Australia and New Zealand, our proposal to update the global criteria includes changes to certain diversification thresholds for lower rated funds, among other changes."

Yesterday, Sept. 15, was the sixth anniversary of the Lehman Brothers bankruptcy, and six years ago today, September 16, the money market industry was rocked when the Reserve Fund "broke the buck," only the second fund ever to decline below $1.00. We covered it extensively in the days that followed, including this article "Reserve Primary Fund "Breaks the Buck" Following Run on Assets." We wrote, "In just the second case of a money market mutual fund "breaking the buck," or dropping below the $1.00 a share level, in history, The Reserve's Primary Fund cut its NAV to $0.97 cents.... The top-ranked fund, which held $785 million in Lehman Brothers CP and MTNs, was besieged by redemptions over the past two days. Assets of the total portfolio, which is largely institutional but which includes some retail assets, declined a massive $27.3 billion Monday and Tuesday to $35.3 billion. The next day, Sept. 17, 2008, Crane Data wrote "Ugly All Over: Putnam Inst Closes: Lehman AAA on Warning, Outflows." We wrote, "`Things have gone from bad to extremely ugly in the money market fund world over the past two and a half days since The Reserve's Primary fund "broke the buck." Putnam just announced that it is closing its Putnam Prime Money Market Fund effective today, Moody's has put Lehman Brothers AAA-rated money funds on review for downgrade, and asset outflows, while not as bad as some suggest, were ugly through yesterday. Money fund assets declined by $78.7 billion yesterday, though the Reserve run accounted for $32.3 billion of the decline, according to our Money Fund Intelligence Daily." Read more about the tumultuous events of six years ago in our September 2008 Crane Data News Archives. Treasury Secretary Jacob Lew released a statement yesterday recognizing the 6th anniversary of the Lehman Brothers bankruptcy. It says, "Six years ago this month, our financial system was shocked to its core. The damage this crisis unleashed spread throughout our economy, and the result was massive job loss, waves of business failures, devastating home foreclosures, decimated retirement accounts and an economy on the brink of another Great Depression. It was set in motion by weaknesses in our system -- including irresponsible leverage, excessive risk-taking, reckless and too often predatory lending, and inadequate oversight. Because of the immediate crisis response, the effective policies put in place by the Federal Reserve, both presidents Bush and Obama, the resilience of the American people and the determination of our businesses, our economy is stronger today than it was when the crisis erupted."

Archives »