Below, we continue excerpting from our recent profile of BlackRock, which appeared in the February issue of our Money Fund Intelligence newsletter.... Q: How about recent customer concerns? What kind of questions are you getting? Mendelson says, "On the shadow NAV front, we've prepared a paper and recently hosted a webinar. We have material for our clients, and frankly the questions have been modest. There hasn't been a lot of client focus on it. This may change after their publication, but so far it has been pretty quiet."
Hoerner adds, "On Europe and municipal securities, we really haven't heard much. We did get some questions back in the late spring and early summer on the first go around. I think our clients are very comfortable with our credit process and with our philosophy in managing the funds. There is a comfort level I believe that our clients have with our funds."
Q: In general, what is your outlook for the Fed and rates? Hoerner tells us, "We're in uncharted territory here. We've never been in a situation where the Fed is implementing large amounts of quantitative easing. It's really hard to have a view with high level of confidence on how this is going to play out and the timing of it.... Money funds seem to be shortening up a bit in their weighted average maturities (WAMs). I think part of that is reflective of uncertainty over the future course of rates. Another part of it is the new liquidity requirements and the other changes to 2a-7. The key for money fund managers, and certainly what we're doing, is trying to maintain maximum flexibility."
Q: Are there factors that could push repo down to 10 basis points instead of 20 bps? Hoerner answers, "One potential action that could result in a lower Fed funds rate is the FDIC changing how they calculate their insurance assessment, moving from assessing it on deposits to assessing it on assets of the bank. The way it's proposed right now, banks would have to pay FDIC premiums on the reserves that they hold at the Fed. That might change, but if that holds, then a bank, instead of earning 25 at the Fed but having to pay, say 14 basis points for the FDIC premiums on that, they may be able to take that money from the Fed and sell into the Fed funds market. This would drive down the Fed funds rate. But the rules aren't finalized and it's not certain that will be the case."
Q: Will you have to be a giant in the future to manage money funds? Mendelson tells MFI, "I'm not sure you have to a giant, but I think scale will matter. I think you need resources to do technology. Many of our institutional clients want some sort of technological interface and some ways to see things online. Scale will matter for having the resources to do credit work. Scale will matter because of shareholder support and frankly, for navigating regulatory change. All those things, if you have sufficient scale you can have resources dedicated to do these sorts of things. We think that being of a certain size would be useful."
Q: Do you run cash pools beyond 2a-7? Mendelson answers, "We do. We run collective pools for securities lending collateral. We run it for our internal cash. Each of those funds will be different depending on the nature of the liabilities, the nature of the likely flows and the clients. We manage each of those in a somewhat different way. So they wouldn't all look just like a prime money market fund."
Q: Any thoughts on the PWG comment letters and next steps? Mendelson says, "Over fifty comment letters were submitted to the SEC, and they contain a number of interesting ideas that are worth further investigation and discussion. We assume that the SEC is going to review the comment letters that were submitted and then maybe seek additional comments. In addition, the FSOC has indicated that they will be discussing money market funds. Given the complexity of the issues, we do not expect an immediate decision. That said, we believe there will be additional changes. But at this time it is too soon to tell what those changes will be, or how quickly a decision will be made."
Q: Can you talk a little about your response letter to the PWG report? Mendelson responds, "We made several recommendations in our letter. First, we recommended further modifications to Rule 2a-7 surrounding investor concentration. Second, we proposed that the newly established FSOC financial oversight structure be used to identify and manage potential problems in a proactive manner by encouraging dialogue between industry participants and regulators. And finally, while we are supportive of some of the ideas presented by the industry, as detailed in our comment letter, we suggested a new structural approach to the industry in which money funds would hold capital. In addition, we are supportive of changes that have already been made to strengthen the money market industry, and we encourage all parties involved to consider the cumulative impact of these changes before we make additional changes to the industry."
