The Federal Reserve's latest Z.1 "Financial Accounts of the United States" statistical release (formerly the "Flow of Funds") for the Second Quarter of 2014 was published last week, and the four tables it includes on money market mutual funds show that the Household sector remains the largest investor segment, and Credit Market Instruments is the largest investment segment. Table L.206 shows the Household sector with $1.072 trillion, or 42.5% of the $2.522 trillion held in Money Market Mutual Fund Shares as of Q2 2014. Household shares decreased by $42.2 billion in the 1st quarter. They rose by $21.3 billion during 2013. Household sector money fund assets remain well below their record level of $1.581 trillion at year-end 2008.
Nonfinancial corporate businesses were the second largest investor segment, according to the Fed's data series, with $493.4 billion, or 19.5% of the total. Nonfinancial corporate business assets in money funds decreased $3.7 billion in the quarter and increased by $40.5 billion in 2013. Funding corporations, which includes securities lenders, remained the third largest investor segment with $362.3 billion, or 14.3% of money fund shares. They decreased by $35.1 billion in the latest quarter and fell by $58.8 billion in 2013. (Funding corporations held over $906 billion in money funds at the end of 2008.)
State and local governments held 6.8% of money fund assets ($173.7 billion). Private pension funds, which held $139 billion (5.5%), moved to 5th place. The Rest of the world category was the sixth largest segment in market share among investor segments with 4.6%, or $116.3 billion, while Nonfinancial noncorporate businesses held $81.7 billion (3.2%), State and local government retirement held $44.8 billion (1.8%), Property-casualty insurance held $20 billion (0.8%), and Life insurance companies held $18.8 billion (0.7%), according to the Fed's Z.1 breakout.
The Flow of Funds Table L.120 shows Money Market Mutual Fund Assets largely invested in Credit market instruments ($1.387 trillion, or 55.0%), Security repurchase agreements ($564 billion, or 22.4%), Time and savings deposits ($508 billion, or 20.1%), and Treasury securities ($370 billion, or 14.7%). Money funds also hold large positions in Open market paper (we assume this is CP, $341 billion, or 13.5%),`Agency and GSE backed securities <b:>`_ ($328 billion, or 13.0%), and Municipal securities ($281 billion, or 11.1%). The remainder is invested in Corporate and foreign bonds ($66 billion, or 2.6%), Foreign deposits ($27 billion, or 1.1%),`Checkable deposits and currency <b:>`_ ($19 billion, or 0.7%), and Miscellaneous assets ($16 billion, or 0.6%).
During Q2, Security repos (up $58 billion), Time and Savings Deposits (up $16 billion), Agency and GSE Backed Securities (up $2 billion), Foreign Deposits (up $7 billion), and Checkable Deposits and Currency (up $3 billion) showed increases. Credit market securities (down $133 billion), Open Market Paper (down $13.2 billion), Treasury securities (down $84 billion), Corporate and foreign bonds (down $24 billion), Municipal securities (down $15 billion), and Misc. Assets (down $21 billion), showed declines. (We're not aware of a detailed definition of the Fed's various categories, so aren't sure in some cases how to map some of these figures against other data sets.)
In other news, law firm Stradley Ronon published a report called "What You Need to Know About Money Market Reform - Ratings." The report looks at what money market fund board of directors need to know about the ratings reproposal that was part of the SEC's money market reform. Authors Joan Ohlbaum Swirsky, counsel, and Jamie Gershkow, associate, write, "On July 23, the U.S. Securities and Exchange Commission (SEC) reproposed amendments removing the requirement that a money market fund (a fund) limit its investments to those rated within the top two categories by rating agencies (or to unrated securities of comparable quality). In place of that requirement, the fund's board of directors or its delegate (such as the investment adviser) must determine whether each security presents minimal credit risks."
They continue, "In making that determination, the board of directors or its delegate must find that the security's issuer has an exceptionally strong capacity to meet its short-term obligations. While the minimal credit risks determination is currently required by Rule 2a-7 (the Rule) under the Investment Company Act of 1940, as amended (the 1940 Act), the only basis for that determination is "factors pertaining to credit quality." The current limit on securities rated in the second-tier short-term rating category to three percent of the portfolio (1/2 percent in any one second-tier issuer) would be eliminated, as there would be no distinction between first-tier and second-tier securities under the Rule."
Stradley explains what needs to be done to comply. "If the Reproposal is adopted, several actions will be necessary to comply. "Advisers will need to consider whether they will excise ratings from their credit analysis or continue to consider ratings as an independent third-party viewpoint that may bring to bear expertise not otherwise readily available to each adviser. An adviser should take steps to understand the rating agencies' methodology if the adviser takes ratings into account. Funds may need to update their amortized cost and stress-testing procedures, compliance policies and systems, disclosure, and board reports."
Finally, they add, "Among other things: Funds should ensure they have written policies to keep written records of their minimal credit determination that includes the factors considered and an analysis of such factors; Funds must ensure they have written procedures requiring the fund adviser to undertake ongoing review of the credit quality of each portfolio security to determine that the security continues to present minimal credit risks; Funds may establish procedures for the adviser to notify the board should the adviser decide to keep a portfolio security that has been downgraded from second-tier status; Advisers may wish to consider whether it is necessary for them to perform additional credit analysis to satisfy the new subjective credit quality standard based on ability to meet short-term financial obligations. Funds will need to reconsider their reporting of ratings on portfolio securities on Form N-MFP." Comments on the Reproposal are due by October 14, 2014.
