Link of The Day
Reuters writes "European money market funds face cash buffer rule: EU document". The article explains, "About half of the European Union's trillion euro money market funds would have to set aside a chunk of cash under a proposed EU reform to make a run on a fund in rocky markets less likely.... The draft EU law, a copy of which was obtained by Reuters, calls for a major type of fund to have a cash buffer to help keep the financial system stable. The industry is hoping for a last minute change of heart by the EU's European Commission, which is writing the draft law that will need approval from EU states and the European Parliament to take effect. A Commission spokeswoman said the proposal is likely to be published in late June. The buffer requirement would be for so-called constant net asset value funds (CNAV) whose share price shows little change over time, like the U.S. fund that broke the buck." "These CNAV funds must establish and maintain at all times a buffer amounting to at least 3 percent of the total value of their assets," Reuters quotes the EU document. The piece adds, "An EU official said on condition of anonymity the 3 percent buffer proposal is likely to remain in the final proposal but funds could be given time to reach that level. The London-based Institutional Money Market Funds Association (IMMFA), an industry body, said a requirement for a cash buffer won't improve stability of the financial system."
U.S. Treasury Secretary Jacob Lew testified before a Senate Banking Committee hearing earlier this week. He said about "Key Areas of Focus of the 2013 Annual Report" and "Wholesale Funding Markets," "The Council remains concerned that vulnerabilities in wholesale funding markets could lead to destabilizing fire sales. Specifically, run-risk vulnerabilities related to money market mutual funds (MMFs), which became apparent during the financial crisis, still remain, despite an initial set of reforms implemented in 2010. In November 2012, the Council issued proposed recommendations for public comment to implement structural reforms of MMFs to reduce the likelihood of runs. Council members should also examine whether similar reforms are warranted for other cash management vehicles. Vulnerabilities to fire sales also remain in the tri-party repo market, particularly with respect to borrowers such as securities broker-dealers. The Council's report recognizes the positive steps that have been taken in the last year to reduce the reliance on discretionary intraday credit, but recommends coordinated efforts by market participants and financial regulatory agencies to address the risks associated with the tri-party repo market, notably by better preparing investors and other market participants to deal with the consequences of the distress or default of a dealer or other large borrower."
The SEC filing for a new "enhanced cash" fund, Western Asset Ultra Short Obligations, says of its objective, "The fund seeks a high level of income, consistent with liquidity and the preservation of capital." The IS class will charge 0.35% (after a 0.10% waiver), while the I class will charge 0.45% and the FI 0.70%. The Form N1-A filing explains, "The fund may invest in all types of U.S. dollar denominated short-term debt instruments, including bank obligations, commercial paper and asset-backed securities, structured instruments and repurchase agreements.... The fund may invest without limit in bank obligations, such as certificates of deposit, fixed time deposits and bankers' acceptances. The fund generally limits its investments in foreign securities to U.S. dollar denominated obligations.... Under normal circumstances, the fund will invest at least 25% of its assets in securities issued by companies in the financial services industry.... Under normal circumstances, the fund expects to maintain a dollar-weighted average effective maturity of not more than 90 days. The "average effective portfolio maturity" of the fund is a weighted average of all the maturities of the securities in the portfolio, computed by weighting each security's effective maturity, as estimated by the subadviser, by the market value of the security. In addition, the fund will not purchase a security if, at the time of purchase, the security has a remaining final maturity, taking into account demand features and any interest reset provisions, of more than 397 days."
A press release posted Friday, entitled, "Federated Investors, Inc. Earns Institutional Investor Award," says, "Federated Investors, Inc., one of the nation's largest investment managers, today announced that it has been recognized by Institutional Investor magazine in their annual U.S. Investment Management Awards. Federated was recognized in the Cash Management & Short-Term Fixed Income category. The awards, now in their fourth year, recognize U.S. institutional money managers for their innovative strategies, fiduciary savvy and impressive short- and long-term returns, as well as U.S. money managers in more than 35 asset classes and strategies who stood out in the eyes of the investor community for their exceptional performance, risk management and service. Federated's award was presented at a ceremony on Thursday, May 16, 2013." John B. Fisher, president and chief executive officer of Federated Advisory Companies, comments, "As a cash-management pioneer and leader, we are honored that Institutional Investor magazine recognized Federated for products that play a central role in client needs and capital markets. For nearly four decades, investors have turned to Federated for cash-management solutions that offer diligent credit analysis, broad diversification and daily liquidity at par."
U.S. Securities and Exchange Commission Chair Mary Jo White spoke briefly on money funds Thursday in "Testimony on Oversight of the SEC Before the U.S. House of Representatives Committee on Financial Services." She commented on "Money Market Funds," "A rule proposal pertaining to money market mutual fund reform is well underway at the SEC and has been the product of a comprehensive and collaborative process. Any proposal that results would seek to preserve many of the benefits of money market funds for investors and the short-term funding markets while lessening money market funds' susceptibility to runs; improving their ability to manage and mitigate potential contagion from high levels of redemptions; and increasing the transparency of their risks." Later, she commented, "RSFI economists also have made important contributions to pre-proposal rule development. For example, RSFI economists performed qualitative and quantitative analyses to study money market funds in order to respond to a series of questions posed by Commissioners. This analysis has assisted the Commission in its deliberations as it considers the scope of any future rulemaking relating to money market funds." Finally, the footnote accompanying the mention of the SEC study says, "See Memorandum from the Division of Risk, Strategy, and Financial Innovation, Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher (November 30, 2012)."
Bloomberg writes "BlackRock Develops Alternatives to Money Funds: Credit Markets", which says, "BlackRock Inc. and Western Asset Management Co. are offering a new twist on traditional money-market funds as regulators are set to impose sweeping changes on the $2.58 trillion industry. BlackRock, the world's biggest money manager, and Legg Mason Inc.'s Western Asset unit have started bond funds designed to work much like money funds, with a key difference. The new "ultra-short" funds have share prices that fluctuate along with the value of their holdings, rather than a fixed net asset value, or NAV, a distinguishing feature of money funds. They also have shorter maturities than similar ultra-short bond funds that ran into trouble when credit markets froze in 2008. The firms are preparing for what could be a seismic reallocation of assets by institutional investors and corporate treasurers if regulators overhaul money funds for a second time.... The BlackRock and Western Asset funds have shorter maturities and can only invest in high-quality debt. Some short-term bond funds that were touted as higher-yielding alternatives to money funds faced severe losses in 2008 as they held debt tied to mortgages. State Street Corp.'s SSgA Yield Plus Fund fell 19 percent in the first five months of 2008 before being liquidated. Charles Schwab Corp.'s YieldPlus fund fell to $1.8 billion in assets in 2008 from a peak of $13.5 billion in 2007, after it invested more than 25 percent of fund assets in private issuer mortgage-backed securities." See also, ICI's latest "Money Market Mutual Fund Assets", which says, "Total money market mutual fund assets decreased by $1.04 billion to $2.582 trillion for the week ended Wednesday, May 15, the Investment Company Institute reported today."
The Federal Reserve Bank of New York writes "Securities Loans Collateralized by Cash: Reinvestment Risk, Run Risk, and Incentive Issues." It says, "Securities loans collateralized by cash are by far the most popular form of securities-lending transaction. But when the cash collateral associated with these transactions is actively reinvested by a lender's agent, potential risks emerge. This study argues that the standard compensation scheme for securities-lending agents, which typically provides for agents to share in gains but not losses, creates incentives for them to take excessive risk. It also highlights the need for greater scrutiny and understanding of cash reinvestment practices -- especially in light of the AIG experience, which showed that risks related to cash reinvestment, by even a single participant, could have destabilizing effects."
The Treasury Management Association of New England begins its Annual Conference today in Boston. Today's sessions include: "Industry experts Tony Carfang and Peter Crane will host two back-to-back sessions on money markets and cash investing to give attendees an intensive crash course on the rash of developments in the space. Each presenter will participate in the other's session, and both will include money fund portfolio managers to weigh in on all things cash. The first session, "Money Fund Trends & Regulatory Developments," says in its description, "Crane Data's Peter Crane, UBS's Rob Sabatino and Nutter's John Hunt will discuss recent asset flows, investment trends, and other hot topics in the money markets, including recent and pending regulatory changes. The second summary says, "Corporate Cash Issues & Global Investing," is described, "Treasury Strategies' Tony Carfang will be joined by Fitch Rating's Ian Rasmussen and will review recent trends in the corporate cash investing world and recent events in the European and global money market mutual fund space." Crane Data is also among a number of money market mutual fund providers exhibiting at the event, which is being held at the Boston Marriott Copley Place Wednesday through Friday morning.
A press release says, "Fitch Ratings has released a report, "U.S. Corporate Cash Part I: Growth at an Inflection Point?, that examines trends in corporate cash accumulation from 2000 to the present for the vast majority of the U.S. universe, putting this growth into context relative to the change in business activity over this period. Also examined is the rationale for the increase. Fitch Ratings' study reveals that: Median industrial U.S. corporate cash levels increased approximately 250% since 2000 and about 60-80% since year-end 2007. Even accounting for the substantial increase in business activity over the past decade, cash has increased impressively, outpacing the growth in corporate revenues or earnings by 50%-80% since 2000, and 30%-50% since year-end 2007. While cash balances over the intermediate term has increased substantially, Median corporate cash growth rates approached zero in 2011 and 2012, with results being wide ranging. For example, within the broader universe, 25% of U.S. industrial corporates saw cash balances increase by more than 25% in 2012 vis-a-vis 2011, while another 25% of the universe saw cash balances decrease by at least 25% last year. Cash balances usually spike at the onset of increased economic uncertainty, such as the approximate 30%35% increase experienced by the median company in just one year at the height of the "great recession" and the tech bust earlier in the past decade."
Bloomberg writes "SEC Money-Fund Rule Said to Make Riskier Funds Float Share Value", saying, "U.S. securities regulators have narrowed the target of new rules for money-market funds, according to a person familiar with the matter, limiting changes to a smaller set of funds than many executives anticipated. The Securities and Exchange Commission proposal would impose a floating-share value only on funds that buy corporate debt and cater to institutional clients, said the person, who asked not to be identified because the plan isn't public.... A proposal limiting rule changes to so-called prime institutional funds would be a victory for companies, including Vanguard Group Inc. and Charles Schwab Corp., that called for exempting funds that invest only in government securities and those that serve only retail investors. Money funds are allowed to keep a stable value of $1 a share and are used as cash-equivalent accounts by individuals, institutional investors and corporations. Adopting a floating net-asset value is intended to make investors less sensitive to variations in the share price, thus limiting redemptions during times of stress. Institutional prime funds account for 35 percent of money- fund assets, which amount to $2.58 trillion, according to the Washington-based Investment Company Institute, a trade group for the mutual-fund industry."
The Investment Company Institute's latest "Money Market Mutual Fund Assets" totals rose for the first time in 5 weeks. ICI says, "Total money market mutual fund assets increased by $19.54 billion to $2.583 trillion for the week ended Wednesday, May 8, the Investment Company Institute reported today. Taxable government funds increased by $15.85 billion, taxable non-government funds increased by $3.36 billion, and tax-exempt funds increased by $330 million.... Assets of retail money market funds increased by $3.28 billion to $893.73 billion. Taxable government money market fund assets in the retail category increased by $1.59 billion to $193.16 billion, taxable non-government money market fund assets increased by $770 million to $512.95 billion, and tax-exempt fund assets increased by $910 million to $187.63 billion.... Assets of institutional money market funds increased by $16.27 billion to $1.689 trillion. Among institutional funds, taxable government money market fund assets increased by $14.26 billion to $701.69 billion, taxable non-government money market fund assets increased by $2.59 billion to $914.81 billion, and tax-exempt fund assets decreased by $580 million to $72.55 billion. ICI reports money market fund assets to the Federal Reserve each week. Revisions are due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website."
Wells Fargo Advantage Funds' latest "Overview, strategy, and outlook" comments, "The European Union (E.U.) is taking steps toward adopting a financial transaction tax (FTT) that could significantly affect U.S. dollar-denominated money markets. Broadly defined to cover all markets, instruments, and actors, the FTT is slated to become effective January 1, 2014, and has several objectives, as detailed by the European Commission. The FTT is intended to reduce the number of different approaches to national taxation; ensure the financial sector makes a fair and substantial contribution to public revenues; and support regulatory measures that encourage the financial sector to engage in more responsible activities -- those the European Commission views as geared toward supporting the real economy. Similar efforts failed at the G-20 and E.U. levels, but now 11 member states—representing two-thirds of E.U. gross domestic product (GDP) -- have indicated that they would approve the common FTT under a process called enhanced cooperation, which requires the approval of nine member states in order to move ahead.... The minimum tax applied to various transactions will be initially set at 0.10% of the amount of the transaction for shares and bonds, units of collective investment funds, money market instruments, repurchase agreements (repos), and securities lending arrangements.... As written, the FTT has significant implications for U.S. investors, including money market funds. While it does not appear that the tax would apply to new issuance, it would apply to secondary market transactions and repos.... The FTT is not a done deal. Member states and working groups may propose changes that would lessen the impact on short-term instruments, and the U.K. legal challenge is a serious threat. We do not dismiss this effort simply because it seems radical or outlandish; those do not seem to be effective criteria for assessing the likelihood of government action."
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