As we mentioned in Friday's "Link of the Day," Federated Investors released its third quarter earnings late last week and hosted a conference call. As usual, a number of questions relating to money fund matters were discussed in the call's Q&A section. We excerpt from these below.
First, Michael Carrier from Deutsche Bank asked about the President's Working Group report, in particular the insurance and two-tiered system options. Federated CEO Chris Donahue replied, "On the insurance, we just don't see how it works. One of the philosophies we have that we share with many others in this industry is that socialization of credit risk is unwise.... Then, the cost and expense of it and actually having someone do it, is highly problematic. So yes it's an okay discussion. But understand that this discussion has gone on since the 70's. People have looked in and out of this question. There hasn't been a solution to date, and we are just not optimistic that's what is going to happen."
He continued, "On the two-tiered, it's interesting that our friends in Europe did a similar thing. But we don't think that really is the way to go. What they did was set in their rules, something called the money market fund that had a variable net asset value and then something called the short-term money market fund that had a one dollar net asset value. We just don't see how that is going to exactly work."
Donahue explained, "I think that you also get from the flavor of the Presidents Working Group is an understanding that if you keep the resiliency of money funds, that have been improved under 2a-7, strong, you will be able to attract the money funds into that corral where you can see what is going on. The regulators are not really that interested, at least if you read the President's Working Group, in having that money squish out into something else that doesn't have the strength associated with the money funds. So it's good that all of these things are discussed back and forth, and all of the points are analyzed. But of all of them, we think that the lead one coming out of that is ... the liquidity bank."
In response to another question, Donahue commented, "We also remain convinced that even though they will discuss and talk about ideas of capital as regards to money funds, that it is very unlikely that they will try to do something that the net effect economically kills the business, because the capital can't be sustained by the marketplace on the money funds. They make that very clear in the Presidents Working Group, simply by looking at all the ebbs and flows, positive things that money funds offer into the economy. We remain enthusiastic and positive that they are not going to put any kind of crazy capital requirements on. We think we're in a pretty good spot with cash and capital."
An analyst also asked, "Do you feel like there could be some volatility around flows as maybe investors move away from all the funds that are maybe towards the bottom end of the [new shadow NAV disclosure] range? Donahue said, "I don't really expect something like that. Now if you say bottom of the range, I don't know what that is going to be since I have not seen everybody's report. But here are a couple of factors to remember. When you look at those numbers, at least in our case, what you are going to see is three nines or three zeros after the decimal spots which you may see some numbers change in the forth sport behind the decimal. These funds are not a dollar, they are priced at a dollar, and they are a dollar. Therefore, I wouldn't expect to see much flow movement because of this. On the other hand, we think it's a good thing that this information is coming out because it reminds people that these are investment products and it is a way of showing what is going on in addition to the portfolio inside the fund."
Donahue was also asked about a recent CfTC proposal to restrict the amount FCMs (futures commodities merchants) may invest in money funds. He answered, "It's a proposal, and we have a very excellent working relationship with the staff at the CfTC. We will be commenting and working with them with these proposals, so we don't yet know what will come out. That is an important thing to remember. The next thing is that this is a two pronged proposal. One is an overall limit, the 10, and the other is by family limit of 2.... If it go to a diversification over we probably be that winners and that the current levels, we don't see how it effects the clients right now."
Finally, he responded to another question, "I think that the liquidity bank does add a feature of strengthening the resiliency of money funds. Therefore it should not surprise you that the leading purveyors of money funds, who have been working together on coming up with this, should also speak in favor of it.... So it has a certain beauty, namely that it would be capitalized by the advisors of prime funds, that it would issue securities that would be available to third-parties and others, and that it would build up capital. At the end of the day, after the 30% of cash in funds were used, it could buy high quality securities at amortized cost from funds that were having liquidity challenges. And then [they would] have access to the discount window, which would of course have attendant costs and charges. That would make it something you'd just as soon not do."
