Federated Investors' President & CEO J. Christopher Donahue spoke last week at the Citi Asset Management Conference and, as he usually does, addressed a number of issues related to money market mutual funds. He commented, "In terms of money market reform, we were down at the Commission last week seeing one of the commissioners and her staff, and needless to say we asked them this question. One response we got was, "Well the casing for the sausage is not yet complete." Now you can put any type of timeframe on that you want.... [T]he chairman said that the rule would come out, quote "near term this year." The Wall Street Journal in some of their writings has indicated mid- to late-second quarter. The SEC filed a report a number of months ago that said they'd have it in by October of 2014."
Donahue continued, "When we did the 2010 amendments, it took them about 6 months from the date the comments finished to when the rule was published. These comments were finished in September. Here we are right near that [6 months]. However, this time it is a lot more complicated, a lot more controversial, so I don't think that they will make the 6 month time frame. But that's kind of setting the stage, and it remains true that Mary Jo White has indicated that she wants to wrap these things up."
When asked about the floating NAV, he commented, "Well actually I don't know where they will go. I think it is interesting that one of the newer commissioners, Piwowar, came out with a little speech saying he thinks we ought to give investors a choice -- sort of pick one from column A and pick one from column B. And by that he meant that you would have the option of having a variable that asset value money market fund with no fees and gates [or] a constant net asset value money market fund with fees and gates. I think that would be a very fine result. So far as we are concerned, anything that preserves the existence of the constant net asset value money fund is a good thing for the capital markets, the users, the shareholders, all the stakeholders, including of course Federated."
Donahue adds, "Where exactly they will go, I don't know. I know that they have not yet solved all of the challenges on tax, accounting, state law, etc., with the floating NAV. The comments that came in as of September 17 were 98% against a floating NAV, and 90% of the comments were in favor for some form of gates or fees, which were "Alternative II". So how the SEC comes out is very, very difficult for me to project. Obviously, we are in favor of maintaining and enhancing the resiliency of money funds."
On another topic, he tells us, "The Fed came up with the reverse repo, a test they have recently expanded from a few billion up to now where they will give $7 billion to each one of the funds. The rate is now 5 basis points. There is something under $100 billion in this test, but now they have announced that this is no longer a test, it's an exercise. `These kinds of words are apparently important because now this means that it will extend into 2015 so they will be an active reverse repo player. We are active in using this reverse facility and it acts as a pretty good bottom [to] the rates situation on the short side."
Donahue says, "Our people believe that there will be some steepening of the short-term yield curve in the second half of the year. Notice I did not say increased rates. Okay, no one is talking about that until sometime in 2015, and some are and some aren't. That will be helpful in terms of the rates situation with the funds. But again that's a little down the road. If you average the last two quarters of last year, they were both right around $30 million in waivers for Federated. That's waivers from operating income. We on our [earnings] call expected that we said the same number will occur in Q1. As we sit here in early March, I have no reason to go off either high or low to that number at this point."
He explains, "The way this business has evolved is that there is a lot of sharing of the gross earnings on a money market fund with the distributor. What has enabled Federated to withstand the low interest rates is the fact that we charge an administrative fee to the funds of about 7.5 basis points. We don't always collect all of that but it is what in fact allows the administration to keep going.... So that structure is the key to allow us to function in this rate environment. In terms of the sharing, as a general rule you can stipulate that our customers, who we love dearly, are always looking for a higher payout on their assets. But of course when there is no yield there is not much to fight about.... But I think the bigger picture here is, if you look at the commitment of both Federated and our distributors, to maintaining this cash management service in this kind of an environment. [F]or some of our customers, its tens of millions of dollars that have been waived, and not received, because of the low interest rates. Yet the product use continues, because it's a very important cash management vehicle for those people."
Finally, Donahue was also asked about rising rates and the impact on MMFs. He says, "When rates go up, as long as they don't go up rapidly ... we don't expect large sudden decreases [in assets]. One of the reasons we will think that situation will not happen this time is that all of the people that are interested in yield are already gone. There hasn't been any yield to speak of in these products for several years. So if they are interested in yield, they are doing something else. For example, bank deposits since '08 have doubled from $3.5 trillion to about $7 trillion. That is because some of the bigger banks are actually able to bid up against a low yield in a money fund for those assets. You have a situation where the clients in terms of yield are able to find another warm and loving home. So in effect, what it reflects on us is that our business remains strong because of its activity as a cash management service."
