As we warned last week, we could be excerpting information from the ICI's recently-released "Report of the Money Market Working Group" for weeks. Today, we take a look at the report's discussion of "Institutional Demand for Money Market Funds," which shows in a chart that "U.S. Nonfinancial Businesses' Holdings of Money Market Funds" hit a record 32 percent in 2008, up from 28 percent in 2007 and 24 percent in 2006.
Money funds' share of corporate short-term assets has almost doubled in the past 10 years, rising from 17 percent in 1998, and has grown 7 times over since 1988 (from mere 4 percent). ICI defines, "U.S. nonfinancial businesses' short-term assets consist of foreign deposits, checkable deposits, MMDAs, savings, certificates of deposit, money market funds, repurchase agreements, and commercial paper."
The MMWG report says, "Institutional investors [in money funds] ... include large corporations, securities lending operations, bank trust departments, sweep programs, securities brokers, investment managers, and state and local governments, among others. At the institutional level, money market funds compete with a range of investment options, including bank deposits, trust accounts, short-term offshore funds, local government investment pools, direct investments in money market instruments such as commercial paper and repurchase agreements, and bank sweep accounts."
ICI explains, "Institutions began to invest in money market funds during the 1970s, and their confidence in the product grew after the SEC adopted Rule 2a-7 in 1983.... [M]oney market funds have been approved as investments for national banks by the Office of the Comptroller of the Currency; for state-chartered banks by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation; and for federal credit unions by the National Credit Union Administration. They have been approved as an investment vehicle for customer funds held in custody by futures commission merchants and futures clearing organizations by the Commodity Futures Trading Commission and for margin collateral by the Clearing Corporation, the New York Mercantile Exchange, the Chicago Mercantile Exchange, and the Options Clearing Corporation. State and municipal entities also hold money market funds. In addition, the SEC has approved investment of the prefunded portion of an asset-backed issuance in money market funds."
Finally, the report says, "Accounting rules also have facilitated the use of money market funds for the investment of cash by institutional investors. Like other short-term instruments, such as Treasury bills and commercial paper, money market funds are characterized as cash equivalents for financial reporting purposes and, as a result, have a simple, clear-cut accounting treatment. Cash investments are carried at either face value (e.g., bank deposits and money market fund shares) or amortized cost (e.g., Treasury bills and commercial paper) on a firm's balance sheet, and as such are not marked to market. The reasoning is that the market value of a cash equivalent is not materially different from its face value or amortized cost. Under this accounting treatment, companies need not track realized or unrealized capital gains and losses on their cash-equivalent positions, and thus can avoid the detailed recordkeeping required when there are any changes in the balances of these investments. This treatment is especially important for the many firms that use money market funds for daily transactions."
