Last week Federated Investors posted website commentary by Executive VP and Taxable Money Market CIO Deborah Cunningham on the SEC's "Money Market Fund Reforms" Proposal and on the recent short-term interest rate environment. In a piece entitled, "Market memo: Changes make money markets stronger," Cunningham is asked, "How has the money market responded to the recent financial oversight reform ideas from the White House and the U.S. Securities and Exchange Commission?"

She writes, "Overall, I think it's been positive, though the response has been muted. We commend the SEC for doing an excellent job outlining three critical areas for money market funds -- liquidity, maturity and credit quality. The SEC's considerations could make money market funds even stronger investment vehicles for investors looking to manage their cash. As a cash management pioneer and leader for more than three decades, Federated has maintained a steadfast dedication to products that meet investor requirements for diligent credit analysis, broad diversification, competitive yields and daily liquidity at par. The SEC's considerations maintains these time-tested standards and could tighten the already strict regulatory framework in which the funds operate, ensuring greater protections for investors."

The piece also asks, "What about the suggestion to consider a floating net asset value for money market funds?" Cunningham says, "While I understand why the SEC would want to seek public comment on the topic, we don't believe this will happen since it would do far more harm than good. At Federated, our customers have made it clear to us that a stable $1 net asset value is what they want. And the reforms put forth by the White House last week specifically noted that the President's Working Group and the SEC 'should carefully consider ways to mitigate any potential adverse effects of such a strong regulatory framework' for money market funds. There are ways ... to strengthen the money market fund industry without undermining what arguably is a fundamental building block that has made money market funds a vital part of the U.S. financial markets, with nearly $4 trillion in assets."

Finally, the brief asks, "Is there anything in the SEC's considerations that could be problematic?" Cunningham responds, "The liquidity requirements that the SEC offered for consideration may be problematic because the SEC is proposing one set of liquidity thresholds for retail money market funds and another set of thresholds for institutional money market funds. The SEC did not offer a definition for 'retail' and 'institutional' money market funds, which the money market fund industry itself has struggled to define. We believe that this particular consideration by the SEC merits further comment and study."

In a separate "Month in cash" piece entitled, "Historically low cash yields may be bottoming," Cunningham comments, "Cash yields meandered lower last month [June] from already-depressed levels despite additional indications that the U.S. economy may have hit bottom during the first quarter. At one point, the economic data was so encouraging that the fed funds futures market had priced in a better-than-even chance that benchmark interest rates would begin rising by the end of the year and a nearly 100% chance of an increase by mid-2010. However, the Federal Reserve (Fed) used the occasion of its June 23-24 Federal Open Market Committee meeting to reiterate that it has no intention of tightening monetary policy any time soon, though it did acknowledge that the pace of economic contraction appeared to be slowing."

She explains, "Compared with the sharp declines in May, the drop in cash yields in June was relatively mild, with one-month London interbank offered rates (Libor) falling one basis point to 0.31%, three-month Libor declining six basis points to 0.60%, and 12-month Libor dropping five basis points to 1.55%. Treasury yields also fell slightly, with three-month, six-month, and 12-month bills fetching a modest 0.18%, 0.34%, and 0.45%, respectively, at month's end. As skimpy as those numbers were, however, the cash market actually had braced for the possibility of negative nominal interest rates on June 30 due to a new Federal Deposit Insurance Corp. (FDIC) special assessment that would charge banking institutions for deposit balances on that date, even if the cash was of the custodial variety. Fears that the move by institutions to avoid holding cash could push yields on alternative investments -- Treasury bills in particular -- below zero never materialized. Yet this same 'window dressing' issue could briefly distort market technicals on the final day of each quarter for as long as the regulation remains in place."

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