Federated Investors recently released a market update entitled, "Money Market Memo: A year after Lehman collapse, reforms loom, which says, "In the wake of the bankruptcy of Lehman Brothers that sent ripples through the money market industry a year ago, the Securities and Exchange Commission and the White House continue to work on ways to enhance investor confidence in money market funds. Deborah Cunningham, who oversees Federated's taxable money market business, shares her thoughts on what's expected and on the current state of the money market industry."
The piece asks, "What are the most significant potential changes under discussion? Cunningham says, "We would oppose two ideas that are being discussed -- replacing the stable $1 Net Asset Value (NAV) with a floating rate, and the treatment of money market funds as special-purpose banks. The money market industry is a $4 trillion business -- a critical source of short-term funding for U.S. businesses and industry. And it is built around the concept of $1 NAV, which is easy to use for record-keeping, accounting and valuation purposes. If we were to go to a floating rate, that would eliminate the simplicity and effectively create ultrashort bond funds."
Cunningham is also asked, "If the three proposals are made and eventually adopted, how would it impact the way Federated manages its money market operations? She responds, "First, we believe it's far from certain these potential solutions to illiquidity issues will come into being. But we already are operating in line with recommended changes put forth in March by the Investment Company Institute, our industry's trade group, many of which have been incorporated into the ideas being discussed by the White House and the SEC -- with one exception. We still favor allowing the potential ownership of so-called second-tier securities -- a notch below the top investment grade securities -- in up to five percent of our non-AAA taxable money funds."
She continues, "But whatever the outcome, we at Federated don't anticipate straying from our time-tested principle of operating our money market funds to preserve capital, maintain daily liquidity at par and maximize yields, using a disciplined approach that eschews speculative strategies and esoteric financial instruments. We have and always will continue to emphasize stringent credit research and experienced portfolio management, using the SEC's Rule 2a-7 standards as a starting point, not a finishing point.... We believe the credit market crisis of the past year -- really, the past two years -- has made clear that far from being plain-vanilla investments, money market funds are complex, short-term instruments that are interconnected with and crucial to the operation of other parts of the capital markets."
Finally, she is asked, "Now that the money markets have returned to normalcy, even if at low-rate levels, how do you think it will react to this week's expiration of Treasury's money market insurance program?" Cunningham responds, "We haven't really heard much discussion about the insurance program. Some customers have wanted to talk about it, but there's no indication they will be moving their money anywhere else. I think it helps that the Federal Reserve has kept in place until February two money market funding facilities -- the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) and the Commercial Paper Funding Facility (CPFF) --that have helped calm nerves and supplement activity in the commercial paper markets, where money market funds do the bulk of their trading. But even these facilities are winding down -- AMLF is now at $7 billion from a peak of $150 billion, and the CPFF is at $40 billion from a peak of $300 billion. This indicates that the pressures that were so prevalent last fall and early into this year have greatly subsided."
This morning, Federated also released the statement, "The Treasury's Temporary Guarantee Program (TGP) for money market mutual funds will expire as expected at the close of business on September 18, 2009. The TGP was established by the Treasury as a temporary measure in September 2008 to promote stability in money market funds. Over the past year the U.S. Treasury Department and the Federal Reserve (the Fed) have made extraordinary efforts designed to stabilize the economy and restore investor confidence. As conditions in the markets have improved, investors have continued to look to money market mutual funds as an important product for cash management purposes."
It continues, "While the TGP is ending as anticipated, regulatory changes designed to increase the resiliency of money market funds are on the horizon. The Securities and Exchange Commission has proposed a series of recommended changes to the regulations that govern money market fund management. This includes proposed amendments to SEC Rule 2a-7, some form of which are highly anticipated to be adopted. The Administration is expected to comment on money fund regulation before the end of 2009. These efforts, combined with the Fed's earlier announcement regarding the extension of the AMLF (Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility) and CPFF (Commercial Paper Funding Facility) programs through February 1, 2010, seek to further stabilize the financial markets and promote safety and liquidity for money market fund shareholders."
