It was a landmark year for money market funds in 2014 as the SEC finally adopted money fund reforms. While the long-awaited reforms featured heavily in our coverage, it was not the only big story of 2014. Below, we excerpt from what we think are the 10 biggest stories that defined 2014. We selected the most popular, as well as those that represented some of the major trends of the past year. Crane Data's Top 10 Stories of 2014 include (in chronological order): Fed Extends Reverse Repo Program a Year; Increases Limit to $5 Billion (1/30/14); FDIC Shows Deposits Keep Growing, No Impact from TAG Expiration (2/27/14); SEC Posts 4 Mini Studies: Liquidity Costs, Non-Govt, Muni Backing, Safe (3/25/14); FSOC Annual Report: Wholesale Funding, Tri-Party Repo, Money Funds (5/8/14); China Booms, Drives Worldwide MMF Growth in Q1 Says ICI; U.S. Down (7/16/14); SEC Passes Final MMF Reform Rule 3-2; Final Reforms Just Like Proposed (7/23/14); Analyzing SEC's New Definitions, Rules for Government, Retail MMFs (8/20/14); Euro Money Fund Update: Negative Yields Arrive, But Assets Jump (11/14/14); Fed Takes Baby Steps Towards Hikes; Fed Funds Headed Higher in 2015 (12/18/14); and, Crane Data Launches Bond Fund Intelligence, Focus on Ultra-Shorts (12/23/14). (See Crane Data's News Archives here.)
Our Jan. 30 News story, "Fed Extends Reverse Repo Program a Year, Increases Limit to $5 Billion," represents one of the biggest trends of the year, the Fed's RRP program. (The Fed continued to tweak the program throughout 2014.) It says, "The Federal Reserve Bank of New York released a "Statement to Revise Terms of Overnight Fixed Rate Reverse Repurchase Agreement Operational Exercise," which extended its trial repo program with money funds and cash investors by a year and which increased the allotments for investors to $5 billion from $3 billion. The NY Fed says, "RRPs are a tool that can be used for managing money market interest rates, and are expected to provide the Federal Reserve with greater control over short-term rates." They explain, "In further support of this goal, the Committee has authorized the Desk to continue the exercise established in September 2013 of offering daily overnight RRPs and to modify the terms. Specifically, the authorization to conduct this exercise was extended one year, through January 30, 2015. Effective with the operation to be announced tomorrow, Thursday, January 30, 2014, the maximum allotment cap will be increased to $5 billion per counterparty per day from its current level of $3 billion per counterparty per day. It is expected that, over the coming months, the maximum allotment cap may be increased further."
A Feb. 27 piece, entitled, "FDIC Shows Deposits Keep Growing, No Impact from TAG Expiration (2/27/14)," says, "The Federal Deposit Insurance Corporation released its latest "Quarterly Banking Profile" yesterday, which showed that "Deposit Growth Remains Strong" and that uninsured noninterest bearing transaction accounts left over from the temporary "TAG" (Transaction Account Guarantee) program continue to remain, and even grow, in the largest banks." Deposit growth continued through 2014, though it slowed at year-end as bank felt pressure to raise fees.
A March 25 piece, "SEC Posts 4 Mini Studies: Liquidity Costs, Non-Govt, Muni Backing, Safe," comments, "A press release entitled, "Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform," says, "The staff of the Securities and Exchange Commission today made available certain analyses of data and academic literature related to money market fund reform. The analyses, which were conducted by the staff of the SEC's Division of Economic and Risk Analysis, are available for review and comment on the Commission's website as part of the comment file for rule amendments proposed by the SEC in June 2013 regarding money market fund reform." The postings or "mini" studies include: Analysis of Liquidity Cost During Crisis Periods; Analysis of Government Money Market Fund Exposure to Non-Government Securities, Analysis of Municipal Money Market Funds Exposure to Parents of Guarantors, and Analysis of Demand and Supply of Safe Assets in the Economy." These studies paved the way for the compromise reform proposal eventually passed by the SEC.
Another is a May 8 article, "FSOC Annual Report: Wholesale Funding, Tri-Party Repo, Money Funds." It comments, "The Financial Stability Oversight Council, or FSOC, released its 2014 Annual Report yesterday, which includes sections on wholesale funding, tri-party repo, and of course money market mutual funds. The report says of the Short-Term Wholesale Funding Markets, "The influx of customer deposits in recent years has afforded banks the opportunity to reduce their dependence on short term wholesale funding. Although the usage of commercial paper (CP), repo, time deposit, and other sources of wholesale funding fell this past year, financial institutions without access to customer deposits and prohibited from using customer cash and securities for proprietary purposes, such as broker-dealers, remain dependent on wholesale markets for funding. Since the Council's inaugural annual report nearly three years ago, the structural vulnerabilities of the tri-party repo markets have been highlighted. This past year witnessed important progress in tri-party repo reform."
Our July 16 News piece, "China Booms, Drives Worldwide MMF Growth in Q1 Says ICI; U.S. Down," says, "China continued its dramatic money fund growth in Q1 of 2014. The 6th largest money fund country saw assets jump again; China now reports $234.5B in total, up a massive $111.0 (89.8%) in Q1 (after rising $43.6B in Q4) and up $150.9 billion (180.7%) over the last 12 months. See our July 9 Link of the Day, "Chinese Money Fund Growth." The Asia Asset Management article said, "Money market funds (MMFs) continued to play a key role in the growth of mainland China's asset management industry. Beijing-based Tianhong Asset Management, which paired up with e-commerce giant Alibaba Group to launch the online fund platform Yu'e Bao, trumped conventional asset managers with total AUM of 586.1 billion RMB (US$93.88 billion) as of the end of June. Tianhong's ballooning AUM has mainly been driven by its partnership with Alibaba, through which it launched its first online MMF, the Tianhong Zenglibao Monetary Fund, in June 2013." Alibaba launched an online money-market fund called Yu'e Bao last June, and the fund had 554 billion RMB in assets as of March 31, 2014, which equates to around $90 billion USD."
Our biggest news story of the year hit on July 23, "SEC Passes Final MMF Reform Rule 3-2; Final Reforms Just Like Proposed." It comments, "The U.S. Securities & Exchange Commission (SEC), which discussed and passed its Final Money Market Fund Reforms Wednesday morning (July 23 10am) with a 3-2 vote, released the following press release and "Fact Sheet" outlining the new rules. The SEC's "Fact Sheet" on Money Market Fund Reform says, "The Commission will consider whether to adopt final rules that reform the way money market funds are structured and operate in order to better equip them to address run risks, while preserving the benefits of money market funds. The money market fund reforms would: Require certain money market funds to maintain a floating net asset value (NAV) for sales and redemptions based on the current market value of the securities in their portfolios rounded to the fourth decimal place (e.g., $1.0000). The requirement, which would apply to institutional prime money market funds (including institutional municipal money market funds), would result in the daily share prices of the money market funds fluctuating along with changes in the market-based value of the funds' investments.... The new tools -- fees and gates -- would give fund boards the ability to impose liquidity fees or to suspend redemptions temporarily, also known as "gate," if a fund's level of weekly liquid assets falls below a certain threshold." See Chair Mary Jo White's Opening Statement here, Commissioner Aguilar's Comments here, Commissioner Gallagher's Comments here, Commissioner Piwowar's (dissenting) Comments here, and Commissioner Stein's (dissenting) Comments here."
On August 20, we wrote, "Analyzing SEC's New Definitions, Rules for Government, Retail MMFs," saying, "While much of the focus of the SEC's recent Money Market Fund Reforms has been on institutional MMFs, the final rules also establish new guidelines -- and definitions -- for government and retail money market funds. We take a look at the key rules changes around government and retail MMFs below. On page 202 of the final rules (which were recently published in the Federal Register), it explains how the definition of government MMFs has changed, particularly with respect to the non-government basket. "The fees and gates and floating NAV reforms included in today's Release will not apply to government money market funds, which are defined as a money market fund that invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are "collateralized fully" (i.e., collateralized by cash or government securities). In addition, under today's amendments, government money market funds may invest a de minimis amount (up to 0.5%) in non-government assets, unlike our proposal and under current rule 2a-7, which permits government money market funds to invest up to 20% of total assets in non-government assets."
On November 14, we covered, "Euro Money Fund Update: Negative Yields Arrive, But Assets Jump." It reads, "In its European MMF Quarterly report, Fitch Ratings says, "Euro-denominated money market funds are moving closer to negative yields, on average, as declining short-term market rates have turned negative for most high quality money market issuers. Euro MMFs saw their yields fall to 3bp, on average, at the end of September," Fitch's report states. "As higher yielding assets mature, funds are reinvesting at lower, often negative rates, which is expected to push euro MMF yields into negative territory." Fitch adds, "Negative euro MMF yields or the resulting use of unit cancellations to maintain a stable fund asset value, in and of itself, would not be a negative rating factor. It remains however untested how investors may react... Euro money fund assets have increased of late, however. Since June 11, when the European Central Bank decision to cut the interest rate on the deposit facility to -0.10% became effective, assets of euro-denominated MMFs have increased by E13.3 billion to E91.5 billion (as of Nov. 12, 2014), according to the Crane EUR MMF Index."
On Dec. 18, we wrote, "Fed Takes Baby Steps Towards Hikes; Fed Funds Headed Higher in 2015. The article says, "The Federal Reserve issued its FOMC statement following its 2-day meeting yesterday and removed its "considerable period of time" language and replaced it with "patient". The Fed also released its "dots" or "target federal funds rate projections," which shows expectations of 4 rate hikes in 2015 and a median Fed funds target of 1.125% by yearend. (The Wall Street Journal notes that the estimates are 2.5% for 2016 and 3.625% for 2017.) Chair Janet Yellen also held a press release where she affirmed market expectations for a hike in the Fed funds target rate around mid-year in 2015."
Finally, our Dec. 23 News reflects the growth of ultra-short bond funds and money fund alternatives, "Crane Data Launches Bond Fund Intelligence, Focus on Ultra-Shorts." We wrote, "Crane Data, which has published its flagship Money Fund Intelligence newsletter since 2006, is in the process of launching a new publication, Bond Fund Intelligence. Our latest monthly newsletter, which has been in "beta" testing the past two months, covers bond funds (including ETFs), with an initial focus on the ultra-short end of the spectrum. Bond Fund Intelligence includes news, features, and performance data on over 150 (up from 88 last month) of the largest bond funds. Crane Data also offers an Excel "complement" with even more performance, data and rankings, Bond Fund Intelligence XLS. BFI also includes our new Crane BFI Indexes, which will provide benchmarks for various bond market segments, including a new Conservative Ultra-Short BFI Index, a more focused benchmark for the more conservative funds in the space just beyond money market funds. While the official launch of Issue No. 1 is set for mid-January, Crane Data recently sent out its second "beta" edition to subscribers. (Let us know if you'd like to see a copy.)
