Federated Hermes filed its latest "10-K Annual Report" with the SEC Friday, and the 100-page document contains a wealth of information on money market mutual funds, including lengthy discussions on "Regulatory Matters". The report tells us, "Federated Hermes ... is a global leader in active, responsible investing with $757.6 billion in assets under management (AUM or managed assets) at Dec. 31, 2023.... Federated Hermes has been in the investment management business since 1955 and is one of the largest investment managers in the United States.... Federated Hermes provides investment advisory services to 176 Federated Hermes Funds as of Dec. 31, 2024.... Of the 176 Federated Hermes Funds, Federated Hermes' investment advisory subsidiaries managed as of December 31, 2024, 22 money market funds with $461.7 billion in AUM, 45 equity funds with $43.8 billion in AUM, 54 fixed-income funds with $45.6 billion in AUM, 50 alternative/private markets funds with $11.5 billion in AUM and five multi-asset funds with $2.8 billion in AUM. As of Dec. 31, 2024, Federated Hermes provided investment strategies to $264.3 billion in Separate Account assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit plans, corporations, trusts, foundations, endowments, sub-advised funds and other accounts or offerings owned or sponsored by third parties." (Note: Register and make hotel reservations soon for Bond Fund Symposium, Crane Data's ultra-short bond fund conference, which will take place March 27-28 in Newport Beach. We hope to see you next month in Calif.!)
It explains, "Federated Hermes, which began selling money market fund offerings to institutions in 1974, is one of the largest U.S. managers of money market assets, with $630.3 billion in AUM at Dec. 31, 2024. Federated Hermes has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated Hermes also manages retail money market offerings that are typically distributed through broker/dealers and other financial intermediary customers. At Dec. 31, 2024, Federated Hermes managed money market assets across a wide range of categories: government ($394.3 billion); prime ($219.5 billion); and municipal (or tax-exempt) ($16.5 billion)."
The filing says, "As of Dec. 31, 2024, managed assets in the U.S. financial intermediary market included $446.9 billion in money market assets, $56.1 billion in equity assets, $45.8 billion in fixed-income assets, $2.5 billion in multi-asset and $0.8 billion in alternative/private markets assets.... As of Dec. 31, 2024, managed assets in the U.S. institutional market included $164.0 billion in money market assets, $48.7 billion in fixed-income assets, $3.1 billion in equity assets, $1.1 billion in alternative/private markets assets and $0.4 billion in multi-asset.... As of Dec. 31, 2024, managed assets in the international market included $20.2 billion in equity assets, $19.4 billion in money market assets, $16.9 billion in alternative/private markets assets and $3.5 billion in fixed-income assets."
On the "Current Regulatory Environment, they write, "Regarding deregulation, the investment management industry is expected to request the SEC to repeal or modify certain regulatory requirements previously promulgated by the SEC and to adopt more investor- and industry-friendly regulatory requirements. For example, among other topics, Federated Hermes intends to discuss with the SEC's Commissioners and Staff, either directly or through an industry trade group: (1) repealing the mandatory redemption fee requirement applicable to registered institutional prime and municipal (or tax-exempt) money market funds; ... (3) permitting a new or existing registered fund to offer both mutual fund and exchange-traded share classes."
The section continues, "Federated Hermes also intends to continue efforts to have legislation introduced in Congress that, if enacted, would permit the use of amortized cost valuation by money market funds and override the floating net asset value (NAV) and certain other requirements imposed under prior money market fund rule amendments and related guidance that became effective in 2016 for institutional prime and municipal (or tax exempt) money market funds. Regarding the pace of new SEC proposals and final regulations, given the results of the Presidential election in November 2024 and the 2024 judicial decisions that overturned the Chevron Doctrine and made it easier to challenge new regulation, during the fourth quarter of 2024, the SEC did not issue any new proposed rules."
It comments, "On Dec. 6, 2024, the Financial Stability Oversight Council (FSOC) issued its 2024 Annual Report. Among other topics, the FSOC addressed in its 2024 Annual Report risks to financial services companies related to: (1) cybersecurity; (2) the use of artificial intelligence; (3) third party service providers and outsourcing; (4) crypto assets; and (5) climate change. The FSOC also addressed investment funds, including money market funds, other open-end short-term investment vehicles, private liquidity funds, local government investment pools, collective funds, and hedge funds, among others. Regarding money market funds and open-end short-term investment vehicles, specifically, the FSOC recommended in its 2024 Annual Report that the SEC and the FSOC 'should monitor the efficacy of [the SEC's money market fund reforms] to address the financial stability vulnerabilities created by [money market funds]' and 'continue to assess and monitor the vulnerabilities from other [open-end short-term investment vehicles], considering what actions may be appropriate to address potential vulnerabilities.'"
Federated writes, "While the SEC's latest money market fund reforms became fully effective in October 2024 and the SEC removed its plans to propose a final rule on open-end fund liquidity risk management programs from its 2024 SEC Fall Reg Flex Agenda, the liquidity of (and perceived vulnerabilities created by) money market funds and other open-end short-term investment funds remain a focus of the FSOC. Federated Hermes has implemented the policy, procedure and operational changes required to comply with the latest SEC money market fund reforms and continues to work with the registered domestic Federated Hermes Funds' transfer agent and fund accounting service providers to further refine the operational model to support the delivery and remittance of the mandatory redemption fee required for institutional prime and municipal (or tax-exempt) money market funds (which, as noted above, Federated Hermes intends to discuss with the SEC Commissioners and Staff repealing the mandatory redemption fee requirement)."
They state, "To address certain interpretative questions, on Jan. 8, 2025, the SEC released updated Frequently Asked Questions (FAQs) that modify, supersede, or withdraw portions of prior FAQs related to the Names Rule.... With respect to money market funds, the FAQs also confirm that funds that use the term 'money market' in their name along with another term or terms that describe a type of money market instrument (e.g., a 'Treasury Money Market Fund') must adopt an 80% Policy to invest at least 80% of the value of their assets in the type of money market instrument suggested by its name. The FAQs further explain that a generic money market fund, one where no other describing term is included in its name, would not be required to adopt an 80% Policy."
On European Regulations, the 10-K tells us, "On Nov. 21, 2024, the European Central Bank (ECB) published its Financial Stability Review (ECB Review), which included, among other things, renewed critiques of money market funds. In the ECB Review, the ECB stressed that the EU must proceed with money market fund reform to ensure the stability of short-term funding markets and to mitigate the risk of cross-border regulatory arbitrage. The ECB argued that to prevent regulatory arbitrage due to divergences in minimum standards -- which could potentially shift liquidity risk towards EU money market fund markets -- the EU should prioritize money market fund legal reforms to address risks from liquidity mismatch by increasing liquidity buffer requirements for private debt money market funds and ensuring that these buffers are more usable. Additionally, the ECB supports removing threshold effects linked to breaches of liquidity requirements. This ECB push for reform will likely influence the incoming European Commission's decision regarding whether to reopen the money market fund reform review in early 2025."
Discussing the "Risk of Federated Hermes' Money Market Offerings' Ability to Maintain a Stable Net Asset Value," they explain, "Approximately 51% of Federated Hermes' total revenue for 2024 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the FDIC or any other government agency. Federated Hermes' retail and government/public debt money market funds, and its private and collective money market funds, seek to maintain a stable or constant NAV. Federated Hermes also offers non-U.S. low volatility NAV money market funds that seek to maintain a constant NAV, but will move to a four-digit NAV if such fund's NAV falls outside of a 20-basis point collar. While stable or constant NAV money market funds seek to maintain a NAV of $1.00 per share, it is also possible to lose money by investing in these funds. Federated Hermes also offers institutional prime or municipal (or tax-exempt) money market funds which transact at a fluctuating NAV that uses four-decimal-places ($1.0000), and a short-term variable NAV non-U.S. money market fund. It is also possible to lose money by investing in these funds."
The filing continues, "Federated Hermes devotes substantial resources, such as significant credit analysis, integration of proprietary insights from fundamental investment analysis, including governance, environmental or social factors and engagement interactions (for many of its investment offerings) and attention to security valuation, in connection with the management of its offerings. However, the NAV of an institutional prime or municipal (or tax-exempt) money market fund, or variable NAV fund or, if the above described conditions are met, a low-volatility NAV money market fund, can fluctuate, and there is no guarantee that a government/public debt or retail (i.e., stable or constant NAV) money market fund will be able to preserve a stable or constant NAV in the future. Market conditions can lead to a limited supply of money market securities and severe liquidity issues and/or declines in interest rates or additional prolonged periods of low yields in money market offerings, and regulatory developments and regulatory requirements can lead to shifts in asset levels and mix, which can impact money market fund NAVs and performance. If the NAV of a Federated Hermes stable or constant NAV money market fund were to decline to less than $1.00 per share, or if the fluctuating NAV of an institutional prime or municipal (or tax-exempt) money market fund, or variable NAV money market fund or low-volatility NAV money market fund consistently or significantly declines to less than $1.0000 per share, such Federated Hermes money market fund would likely experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which can cause material adverse effects on Federated Hermes’ Financial Condition. Given U.S. money market fund reforms, significant redemptions on any day from Federated Hermes' registered institutional prime or municipal (or tax-exempt) money market funds also may result in the imposition of discretionary or mandatory redemption fees, which would likely lead to further reductions in AUM, loss of shareholder confidence, and reputational harm, and can cause additional material adverse effects on Federated Hermes' Financial Condition."
Finally, it states, "Many of Federated Hermes' offerings are designed for use by institutions such as banks, insurance companies and other corporations. A large portion of Federated Hermes' managed assets, particularly money market, fixed-income and alternative/private markets assets, are held by institutional investors. If the structure of institutional investment offerings, such as money market funds, changes or becomes disfavored by institutions, whether due to regulatory or market changes, competing offerings (such as FDIC-insured deposit products or non-transparent, actively managed ETFs) or otherwise, Federated Hermes could be unable to retain or grow market share and this can adversely affect Federated Hermes' profitability and have a material adverse effect on Federated Hermes' Financial Condition."
