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The SEC's vote to adopt "Money Market Fund Reform Rules" was covered by a host of media outlets on Wednesday, including Bloomberg, which published, "Money Funds Get New Restrictions Aimed at Preventing Runs". Dave Michaels writes, "The riskiest money-market mutual funds will be required to abandon their stable, $1-share value and allow their prices to float under rules adopted by the U.S. Securities and Exchange Commission. The rules, approved today on a 3-2 vote, conclude a four-year struggle to toughen regulations after a run at one money fund during the 2008 credit crisis brought the $2.6 trillion industry to near-collapse, halted only by a federal backstop.... The rules include an agreement with the Treasury Department and Internal Revenue Service to reduce the tax burden from investing in a fund whose share price can change." The Wall Street Journal published a piece, "SEC Approves Tighter Money Fund Rules." Andrew Ackerman writes, "U.S. securities regulators on Wednesday took a long-awaited step to reduce risk in the $2.6 trillion money-market mutual-fund industry, completing rules intended to prevent a repeat of an investor stampede out of the funds during the 2008 financial crisis." The article continues, "The final rule is less ambitious than an earlier proposal considered at the SEC.... SEC commissioners Kara Stein, a Democrat, and Michael Piwowar, a Republican, voted against the changes." The New York Times wrote "S.E.C. Approves Rules on Money Market Funds", and The Financial Times wrote, "US Approves Money Market Funds Reform". USA Today published, "SEC Ends $1 a Share for Some Money Funds"; Fox Business posted, "SEC Ends Staple for Some Money Funds"; CNBC wrote "Split US SEC Adopts Long-Awaited Money Market Fund Reform"; and Reuters published "SEC Adopts Long-Awaited Reforms for Money Market Funds". Further, the AP wrote a piece called "S.E.C. Votes to End Fixed Share Price for Some Money Funds"; while Investors Business Daily ran the story, "SEC Reforms Money Market Funds, Unveils Floating NAV"." Money managers and industry organizations also chimed in. Federated Investors released a statement saying, "While Federated is disappointed that the SEC voted to adopt a floating NAV for institutional prime and institutional municipal money-market funds, Federated remains committed to providing a variety of liquidity-management solutions to our clients, including those that meet the needs of our institutional prime and institutional municipal customers. Federated will review the details contained in the SEC's voluminous rulemaking to assess their implications as we consider next steps." BlackRock said in a statement, "BlackRock supports the SECs efforts to improve the resiliency of U.S. money market funds during times of stress and appreciates the thoughtful, deliberate and consultative process the Agency has undertaken to achieve this result." Fidelity issued a statement and posted a video update from Nancy Prior, president of the fixed income division. She says, "We are well-prepared for the new rules. Where needed, we will make changes to our product offerings and fund operations to comply with these rules." ICI weighed in, too, saying, "While we may question some aspects of the rule as adopted, we strongly believe that the SEC has the long regulatory experience and deep technical expertise required to strike the proper balance, making money market funds more resilient in times of financial stress while preserving the utility and value of these funds for investors." The US Chamber of Commerce expressed disappointment with the new rules, writing, "A floating NAV does not address run risk and would severely if not irreparably harm the viability of the product, taking away a key cash management product and a primary source of funding for the commercial paper market."

USA Today featured an article recently called, "You Don't Want Surprises from Your Money Fund." It's a basic overview of money funds with commentary on potential SEC reforms by columnist John Waggoner. Writes Waggoner, "Why are they so popular? In large part, because they're convenient. Many money funds let you write checks on them, just as you would a bank checking account. If you decide to sell shares of stock, you can park your proceeds in a money fund until you decide what to do with them. And if you're a big institution, buying shares of a money fund can be more convenient than, say, purchasing money market securities on the open market." It goes on, "What, then, is so ominous about a money fund? The funds invest in short-term, high-quality IOUs, such as Treasury bills, which are short-term loans to the government, and jumbo bank CDs, which are short-term loans to the nation's largest banks. No one is particularly worried about those investments. But some funds -- known as "prime" funds -- invest in an array of other short-term loans that are normally safe. The key word here is "normally." The day after Lehman Bros. declared bankruptcy, the Reserve Fund, a large, prominent money fund, announced that it couldn't keep its share price at $1 -- it had, in Wall Street parlance, "broken the buck." The reason it had broken the buck was because it held a fair amount of short-term Lehman Bros. IOUs, called commercial paper. Those IOUs were problematic, at best. And once word had gotten out, institutional investors sold shares like they were annoyed scorpions." The piece continues, "The SEC has proposed a floating share price for institutional funds, if only to disabuse investors of the notion that money funds are risk-free. The rules wouldn't apply to retail funds, or those that simply invest in U.S. government securities. An alternative would be restrictions on withdrawing money from money funds in times of crisis -- probably a more onerous requirement, since the time you need money most is during a financial crisis. The SEC is expected to vote on the proposal on July 23, and it's by no means a lock, given the powerful mutual fund industry's vehement opposition to it. If the SEC does adapt any of the proposals, here's what you need to keep in mind: Money funds aren't insured, and they never have been. The potential loss from a money fund is small -- the Reserve Fund's share price fell to 97 cents, a 3% loss -- but it does exist. If you can't stand the possibility of a loss, invest in a federally insured bank account, and mind the limits on Federal Deposit Insurance Corp. coverage. Banks fail, too. Some day, short-term interest rates will rise again, and money market funds will look more appealing than they currently do." See also, Bloomberg's "Money Funds Get New Restrictions Aimed at Preventing Runs".

An article in today's Financial Times, "Fund Managers on Alert Over Money Market Shake-Up," says, "Fund managers are jostling to keep hold of $900bn of assets that could be shaken loose by new US rules on money markets funds due to be unveiled this week. Firms are planning new products, systems and marketing efforts to stop the money being moved to bank accounts, while at least one, Federated Investors, is considering suing the Securities and Exchange Commission to halt the regulations." (See Crane Data's July 18 news story, "Federated Letter (Again) Urges SEC Not to Impose Onerous Regulations.") The FT article continues, "Under the SEC proposal, to be published on Wednesday, certain funds would have to switch to a floating share price instead of the current fixed $1 a share cost. That will make them less like bank accounts, because investors will see their balance fluctuate. The rule is expected to be applied to funds holding about $900bn of the industry’s $2.6tn in assets, and could prompt customers to consider moving money to banks, industry executives say, or keeping it in unaffected money market funds, separate accounts, or alternative higher-yielding fixed income funds." The article adds, "In legal letters to the SEC, Federated has warned that the regulator will be acting outside its authority by imposing a floating share price. The company's chief executive, Christopher Donahue, said in 2012 that it would sue the SEC if it went ahead with the proposal." It goes on, "The company will make a decision based on what are expected to be hundreds of pages of detailed rulemaking published on Wednesday. A Federated spokesman refused to comment on a potential challenge, but said: 'We hope that good policy prevails.'" The FT piece adds, "Other big money market fund providers include Fidelity and Vanguard. They are hoping for a two-year window to upgrade systems to cope with the new rules and to educate customers about choices available. Many have launched or filed for approval for new funds, such as ultra-short duration bond funds, exchange traded funds or other cash-like products. The US Chamber of Commerce launched a last ditch bid to delay the ruling on Monday, saying it needed time to comment on proposed tax changes -- aimed at making the transition to a floating share price easier -- which are also imminent."

University of Pennsylvania Law School professor Jill Fisch published a paper last month called "The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform." In the Abstract for the 61-page paper, she writes, "Since the 2008 financial crisis, in which the Reserve Primary Fund 'broke the buck,' money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis, in part because widespread redemption demands during the days following the Lehman bankruptcy led to a freeze in the credit markets. The response has been to deem MMFs a component of the nefarious shadow banking industry and to target them for regulatory reform." She adds, "More fundamentally, pending reform proposals could substantially reduce the utility of MMFs for many investors, which could, in turn, dramatically reduce the availability of short term credit. The complexity of regulating MMFs has been exacerbated by a turf war among regulators. The Securities and Exchange Commission has battled with bank regulators both about the need for additional reforms and about the structure and timing of any such reforms. Importantly, the involvement of bank regulators has shaped the terms of the debate. To justify their demands for greater regulation, bank regulators have framed the narrative of MMF fragility using banking rhetoric. This rhetoric masks critical differences between banks and MMFs, specifically the fact that, unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. Because of this structural difference, sponsor support is not a negative for MMFs but a stability-enhancing feature. The difference between MMFs and banks provides the basis for a simple yet unprecedented regulatory solution: requiring sponsors of MMFs explicitly to guarantee a $1 share price. Taking sponsor support out of the shadows provides a mechanism for enhancing MMF stability that embraces rather than ignoring the advantage that MMFs offer over banks through asset partitioning." The author posits in the Introduction, "Specifically, this Article proposes that regulators require MMF sponsors to stand behind their MMFs by committing to maintain the stable $1 net asset value. In a time of crisis, sponsors could provide such support by buying distressed assets from the fund, reducing management fees or subsidizing the fund with other business revenues. Sponsors could also privately insure their obligation. Mandatory sponsor support offers several advantages over existing reform proposals. It would both prevent MMFs from breaking the buck and enable market discipline to limit a sponsor's incentive to take excessive risks with MMF portfolio assets. Required sponsor support would also eliminate market uncertainty about the extent to which a sponsor would voluntarily support its fund in a time of crisis -- uncertainty that contributed to the turmoil surrounding the events at the Reserve Primary Fund. Sponsor support would substitute sponsor financial stability for the need for investors to monitor the quality of MMF assets directly. Most importantly, sponsor support would address MMF fragility while allowing MMFs to continue to meet investor demand for a liquid stable value cash management option."

Money fund assets broke a 3-week streak of increases in the latest week. ICI's "Money Market Fund Assets" report says, "Total money market fund assets decreased by $10.22 billion to $2.57 trillion for the week ended Wednesday, July 16, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $670 million [to $905.5 billion, or 35.3% of all assets] and prime funds decreased by $8.87 billion [to $1.402 trillion, or 54.6% of assets]. Tax-exempt money market funds decreased by $680 million. Assets of retail money market funds decreased by $1.42 billion to $893.46 billion. Among retail funds, Treasury money market fund assets decreased by $250 million to $197.65 billion, prime money market fund assets decreased by $750 million to $509.68 billion [19.9% of the total], and tax-exempt fund assets decreased by $420 million to $186.13 billion. Assets of institutional money market funds decreased by $8.80 billion to $1.67 trillion. Among institutional funds, Treasury money market fund assets decreased by $420 million to $707.85 billion, prime money market fund assets decreased by $8.12 billion to $892.01 billion [34.8% of assets], and tax-exempt fund assets decreased by $260 million to $72.00 billion." `Year-to-date, money fund assets have declined by $153 billion, or 5.6%. In other news, The New York Times wrote yesterday, "Some Top Money Managers Push for Fed to Start Raising Interest Rates". The article explains, "The Fed is out of step with Wall Street, say some of the country's wealthiest investors. If there was one thing that hedge fund managers kept coming back to time and time again at the CNBC Delivering Alpha conference on Wednesday, it was that the Federal Reserve should start thinking about raising rates. That was the message from the financier Stanley F. Druckenmiller, who said the time had passed for the Fed to keep interest rates near record low levels to revive the economy.... [H]e said the Fed should begin raising rates, even if it meant a bear market in stocks in the short-term to avoid the kind of excesses that led to the financial crisis from recurring."

A Reuters article, "U.S. Senators Urge Treasury to Fix Money Fund Tax Concerns", says "A bipartisan group of U.S. senators is pressuring the Treasury Department to relieve money market fund investors from tax rules that will kick in if the Securities and Exchange Commission decides to force some funds to float their share price. In a series of three letters dated July 15 and seen by Reuters, Democratic Senators Bob Menendez of New Jersey and Mark Warner of Virginia and Republicans Pat Toomey of Pennsylvania and Mike Crapo of Idaho said the Treasury needs to issue quickly guidance because it will help inform both the public and the SEC." The article excerpts a comment from Toomey's letter. "Money market mutual fund investors must be given an opportunity to review and comment on the proposed solution to the tax compliance burden, and the SEC and Department of Treasury should have the benefit of those comments,' Toomey wrote in his letter. The pressure from the four senators comes at a crucial time for the SEC, which is close to finishing new reforms for money market funds." The article continues, "The primary tax concern for money funds has to do with rules that would be triggered requiring investors to track gains and losses. Today, all money funds have a stable $1 per share NAV. That makes things simple for tax purposes because a stable price does not generate gains or losses. But if the share price floats, investors will need to track tiny gains and losses. In addition, floating shares of money funds could also separately trigger "wash sale" tax rules, which bar an investor from recognizing losses from the sale of securities if the investor purchased substantially identical shares within 30 days before or after such sale.” The article goes on, quoting two senators. "'Investors could still be deterred from investing in or using money market mutual funds for cash management if they must calculate and track the small capital gains and losses resulting from frequent transactions in a fund,' wrote Menendez and Warner." (See also, Bond Buyer's "Senators Raise Tax Issues On MMF Proposals; SEC to Weigh Rules July 23".) In other news, SEC Commissioner Michael Piwowar, delivered some pointed comments Tuesday about the Financial Stability Oversight Council. "The prudential regulators on the Council have been proceeding as if they themselves are the ones who know securities markets and investment products best. The most obvious example is the Council's much-discussed hubris in releasing proposed recommendations regarding money market mutual fund reform. It would be comedic, if not in such a serious context, that it did so while publicly acknowledging that the SEC "is best positioned" to implement such reforms."

The New York Times writes "'Litmus Test' for Regulators Over Money Market Funds". It says, "All eyes are now on the Securities and Exchange Commission, which sits at the center of the battle over money market funds. The S.E.C. has the job of actually devising the overhaul for the funds, and its chairwoman, Mary Jo White, is also a member of the oversight council. The S.E.C. plans to announce and vote on its new rules for money market funds at a meeting on July 23, according to a person briefed on its plans. But the oversight council [FSOC] may be disappointed by much of what it sees." Also, the Association for Financial Professionals writes "Treasurers Weigh Options as Final MMF Vote Looms". It says, "The majority of corporate treasurers and CFOs who responded to the 2014 AFP Liquidity Survey, underwritten by RBS Citizens, indicated that their organizations would significantly alter their investment policies if money market funds receive an overhaul. They may need to start making those changes as early as next week. The Securities and Exchange Commission (SEC) is reportedly set for a final vote on money market fund rule changes as early as July 23, according to several news sources." In other news, Federal Reserve Board of Governors Chair Janet Yellen delivered her semiannual Monetary Policy Report before Congress. Said Yellen, "[W]e have maintained the target range for the federal funds rate at 0 to 1/4 percent and have continued to rely on large-scale asset purchases and forward guidance about the future path of the federal funds rate to provide the appropriate level of support for the economy.... The Committee's decisions about the path of the federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook. If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned."

The Treasury Department's Office of Financial Research Director Richard Berner gave a keynote speech last week entitled, "The Financial Industry in a Post-Crisis World Symposium." Berner spoke extensively about understanding and mitigating the risks in shadow banking. "To date, our focus has been on the risks and vulnerabilities associated with short-term wholesale funding markets, including repo and other securities financing transactions. The [financial] crisis clearly exposed key sources of contagion in wholesale funding markets, including investor runs and associated fire sales of assets. At the OFR, we've concentrated on filling gaps in three areas. First, we're working to implement and expand the funding map recommended by our advisory committee to understand vulnerabilities across the financial system. We use the map to trace (and to simulate) the paths of risk and the durability of funding through specific financial institutions during crises. We also use it to identify gaps in data needed for financial stability monitoring. Second, while much attention and research has focused on the demand for, or uses of, short-term funding, our research also includes investigating the supply or sources of those funds, especially the factors that drive preferences and portfolio allocations from money and other managed funds and institutional cash pools. Third, we seek to fill the major gaps in U.S. repo data, particularly bilateral repo, and in data on securities lending." He added, "Filling these data gaps is critical to understanding the size and leverage implicit in wholesale funding activity across the financial system, and thus in assessing the risks. In addition, more complete data on securities financing transactions should facilitate analysis of policy tools, such as minimum haircuts, that are aimed at reducing excessive reliance on short-term wholesale funding and the procyclicality it often promotes under stress. Such tools are conceptually appealing, but we need more work to evaluate them." Regarding money market funds, Berner said, "I noted earlier that the focus on the sources of short-term wholesale funding inevitably turns to money market funds. As you know, the Securities and Exchange Commission made important changes to the regulation of money market funds in 2010, and is now considering further options. As the Financial Stability Oversight Council noted in its 2014 Annual Report, however, any changes in money market fund regulation should be matched by similar regulatory changes for funds that perform similar functions under other legal frameworks. That is because other sources of short-term wholesale funding are important and growing, and may also pose risks through liquidity transformation."

Bank of America Merrill Lynch's Rates Strategist Brian Smedley wrote a piece Friday entitled, "Fed exit framework begins to take shape." Echoing comments he made at last month's Money Fund Symposium, he writes, "The June FOMC minutes provided a window into the FOMC's views on some critical questions related to the framework for managing short term rates during the eventual normalization of policy. This report discusses our thoughts on the likely evolution of the Fed's policy rate framework and market implications.... The discussion of rate management tools at the June FOMC meeting, while preliminary and set to continue at upcoming meetings, represents the clearest indication to date of the Fed's preferred framework for policy normalization. Of particular note, "most participants thought that the federal funds rate should continue to play a role in the Committee's operating framework and communications during normalization." Participants also discussed possibilities for "changing the calculation of the effective federal funds rate." Most participants "agreed that adjustments in the rate of interest on excess reserves (IOER) should play a central role during the normalization process." For its part, the O/N reverse repo facility "could play a useful supporting role by helping to firm the floor under money market rates." The appropriate spread between IOER and the O/N RRP rate was discussed, with many participants judging that a relatively wide spread -- perhaps near or above the current level of 20bp -- would be appropriate. The emerging Fed consensus around exit mechanics described above is consistent with our own views, but differs from the views of many in the market. Since testing of the RRP facility began in September 2013, many market participants have come to expect the Fed to replace the fed funds target with the RRP rate, and for the latter to be harmonized with IOER. This (revolutionary) approach was advocated in a paper published in January 2014 by the Peterson Institute for International Economics. In May we noted that a "compelling reason to maintain a wide spread between the RRP rate and IOER is to encourage trading in the fed funds market." We also wrote that "the path of least resistance seems to be maintaining the status quo." The fed funds rate will likely continue to be the FOMC's primary tool for communicating the stance of policy, though the difficulty in managing the fed effective with precision warrants the continuation of a 25bp target range. Since an increase in the fed funds target range on its own would be essentially meaningless, commensurate increases in IOER and the RRP rate will be necessary to achieve "liftoff." An appealing approach, in our view, would be for the Board of Governors to set IOER at the upper end of the fed funds target range, and for the FOMC to set the RRP rate at the lower end. This will help to ensure the primary role of banks in the implementation of monetary policy and maintain liquidity in overnight markets." See also, Gulfnews.com's "SEC considers exit fees and gates for money market funds", which says, "US regulators are close to agreeing long-delayed new rules for the $2.6 trillion (Dh9.54 trillion) money market fund industry to help avert a repeat of the "runs" some funds suffered during the financial crisis. The Securities and Exchange Commission is expected to vote this month on a proposal to force prime institutional money market funds (MMFs) used by large institutions to abandon their fixed $1 share prices and transact at a floating net asset value."

Fitch Ratings issued a release on July 9 entitled, "US Fund Managers Position Ahead of Reform; Dislocation Likely. "Money fund reform as currently proposed could lead to some dislocation in the industry, including outflows from US institutional prime money funds that cater to corporate treasurers and are particularly targeted by the SEC for reform, according to Fitch Ratings. In response, some fund managers are repositioning product offerings to capture potential outflows and take advantage of changes to how investors might approach cash management." It continues: "Potential operational difficulties stemming from the proposed reforms could also overwhelm smaller corporate investors who may sharply reduce MMFs as a cash management tool. The reform proposal would impose additional costs on investors by requiring them to upgrade systems to reflect structural changes in money funds. In addition, the proposal's accounting and tax considerations could prove a significant burden if not resolved. Money market fund flows are stable as investors wait for the final rules; Fitch expects any outflows to be gradual given the proposed long implementation period." Fitch adds, "Fund managers are taking divergent approaches to the upcoming regulatory reform, with some being proactive while others adopting a more measured stance. Some managers have instituted significant client outreach and launched alternative liquidity products, including short-term bond funds, new government money funds, and floating net asset value money funds. Managers have also encouraged clients to move cash into separately managed accounts to capture some of the potential outflows from institutional prime money funds. For example, Invesco announced last week the launch of the Conservative Income Fund, a new ultra-short bond fund that, like money funds, is focused on the short-term market but can take more credit and interest rate risk. On the other hand, some fund managers are relying on a likely long implementation period for reforms (1-3 years) to react once rules are finalized. Some money managers have told Fitch they are not launching any new products until after they have had time to review the final proposal." In other news, the latest "ICI Reports Money Market Fund Assets" says, "Total money market fund assets increased by $5.37 billion to $2.58 trillion for the week ended Wednesday, July 9, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $3.38 billion and prime funds increased by $8.88 billion. Tax-exempt money market funds decreased by $130 million."

The Wall Street Journal writes "SEC Poised to Finalize Money-Fund Rules in Coming Weeks". It says, "U.S. securities regulators are poised to finalize long-awaited rules intended to prevent a repeat of the 2008 financial crisis, when an investor stampede out of money-market mutual funds threatened to freeze corporate lending, according to people familiar with the process. The Securities and Exchange Commission is expected to vote on a plan as early as this month that would require certain money funds catering to large, institutional investors to abandon their fixed $1 share price and float in value like other mutual funds, these people said. The plan also would allow money funds to temporarily block investors from withdrawing their money in times of stress or require a fee to redeem shares. Such so-called redemption limits come over the objections of other regulators, including members of the Financial Stability Oversight Council, who have said such restrictions could spur, rather than curb, investor stampedes." Note: Less than a month ago, the Journal wrote "SEC Divided on Money-Market Fund Rules", which said it would be some time before we see new rules. Bloomberg also writes "Prime Money Funds to Float $1 Share Price Under SEC Plan", which says, "The proposal, which was issued last year, is likely to be voted on by the five-member commission on July 23, the person said. The plan would require prime institutional funds to float the value of their share price, traditionally set at a stable $1, which makes them a popular place to park cash. It also would require funds to impose a one-percent fee on redemptions and permit them to temporarily suspend withdrawals when liquidity drops well below required levels."

Asia Asset Management published an article on July 8 called, "Money Market Funds Drive Growth in China's Asset Management Business." The article states, "Money market funds continue to play a key role in the growth of mainland China's asset management industry during the first half of the year, which financial pundits partly attributed to a lack of innovative investment products available on the market. Citing figures from financial web site howbuy.com, Shanghai Morning Post reported that Beijing-based Tianhong Asset Management, which paired up with e-commerce giant Alibaba Group to launch the online fund platform Yu'e Bao, trumped conventional asset managers with total AUM of 586.1 billion RMB (US$93.88 billion) as of the end of June. The assets overseen by Tianhong considerably dwarfed its nearest rival, China Asset Management Corporation, by 270 billion RMB. Tianhong's ballooning AUM has mainly been driven by its partnership with Alibaba, through which it launched its first online MMF, the Tianhong Zenglibao Monetary Fund, in June 2013."

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