The Investment Company Institute published its "2013 Investment Company Fact Book: A Review of Trends and Activities in the U.S. Investment Company Industry yesterday, which coincided with the opening of ICI's General Membership Meeting in Washington. ICI's "Fact Book writes on the "Demand for Money Market Funds," "In contrast to the sizable outflows in the previous three years, money market funds experienced only a small aggregate net outflow of $336 million for 2012. This likely was the result of fiscal cliff uncertainties near year-end. In the 10 months prior to the presidential election, money market funds had outflows of $145 billion, a somewhat faster pace than in 2011. Some of the factors that limited inflows to money market funds in 2011 -- the low short-term interest rate environment, lingering concern about the creditworthiness of some European financial institutions, and unlimited deposit insurance on non-interest-bearing checking accounts -- continued into and throughout 2012."

It continues, "In the last two months of 2012, however, money market funds received $145 billion, on net. Some investors who had sold equity mutual funds moved to cash in the face of the uncertainties regarding possible higher taxes and the effect on the financial markets in early 2013 from automatic spending cuts. In addition, some corporations paid out hefty special dividends to shareholders at the end of 2012 in advance of increases in tax rates, and part of this cash was funneled to money market funds. It is unlikely that the impending expiration of the Federal Deposit Insurance Corporation's unlimited insurance coverage on non-interest-bearing transaction accounts at yearend contributed to inflows to money market funds, as bank deposits also increased substantially in the last two months of 2012."

ICI tells us, "Owing to Federal Reserve monetary policy, short-term interest rates continued to remain near zero in 2012. Yields on money market funds, which track short-term open market instruments such as Treasury bills, also hovered near zero and remained below yields on money market deposit accounts offered by banks (Figure 2.15). Individual investors tend to withdraw cash from money market funds when the difference in interest rates between bank deposits and money market funds narrows or becomes negative. Retail money market funds, which principally are sold to individual investors, saw an outflow of a little more than $1 billion in 2012, following an outflow of $4 billion 2011 (Figure 2.14). For the first 10 months of 2012, retail money market funds had outflows of $56 billion, but had inflows of $55 billion in November and December."

They add, "Institutional money market funds -- used by businesses, pension funds, state and local governments, and other large-account investors -- had an inflow of nearly $1 billion in 2012, following an outflow of $120 billion in 2011 (Figure 2.14). Similar to retail funds, the pattern of flows at the end of 2012 was driven by fiscal cliff concerns. For the first 10 months of 2012, institutional money market funds had outflows of $89 billion, but inflows of $90 billion in November and December. U.S. nonfinancial businesses are important users of institutional money market funds. In 2012, U.S. nonfinancial businesses' portion of cash balances held in money market funds was 21 percent (Figure 2.16). This portion reached a peak of 36 percent in 2008 and fell to 22 percent by year-end 2011."

Finally, the "Fact Book" says, "In 2010, the U.S. Securities and Exchange Commission (SEC) significantly reformed Rule 2a-7, a regulation governing money market funds. Among other requirements, these reforms required money market funds to hold significant liquidity and imposed stricter maturity limits. One outcome of these provisions is that prime funds have become more like government money market funds. To a significant degree, prime funds adjusted to the SEC's 2010 amendments to Rule 2a-7 by adding to their holdings of Treasury and agency securities. They also boosted their assets in repurchase agreements (repos). A repo can be thought of as a short-term collateralized loan, such as to a bank or other financial intermediary. They are backed by collateral -- typically Treasury and agency securities -- to ensure that the loan is repaid. Prime funds’ holdings of Treasury and agency securities and repos have risen substantially as a share of the funds’ portfolios from 12 percent in May 2007 to 31 percent in December 2012 (Figure 2.17). The dip at year-end 2012 was largely driven by a decline in repo holdings by money market funds, which stemmed from a reduction in repo borrowing by brokers and dealers at year-end."

Watch for coverage of SEC Chair Mary Jo White's speech to the ICI GGMM on Friday morning, and look for excerpts of some of the Fact Book's Data Tables related to money funds in the May issue of our Money Fund Intelligence.

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