The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") late last week. Among the 4 tables it includes on money market mutual funds, the Fourth Quarter, 2016 edition shows that the Household Sector remains the largest investor segment, as assets here jumped and retook the $1.0 trillion level in Q4. Nonfinancial Corporate Businesses and Funding Corporations (primarily Securities Lending money) remained the second and third largest segments, with the former rising and the latter falling sharply in the latest survey. State & Local Governments, Private Pension Funds, Rest of World, and Nonfinancial Noncorporate Business were the next largest segments, and these all remained relatively flat in the latest quarter. Businesses, Local Govts and Pension Funds showed increases over the past 12 months, while Household holdings of MMFs declined over the past year. We review the latest Fed Z.1 numbers, and we also review a new publication on Repo from the OFR, below.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows total assets increasing by $56 billion, or 2.1%, in the fourth quarter to $2.728 trillion. Over the year through Dec. 31, 2016, assets are down $27 billion, or -1.0%. The largest segment, the Household sector, totals $1.023 trillion, or 37.5% of assets. The Household Sector increased by $51 billion, or 5.2%, in the quarter, after decreasing $13 billion in the 3rd quarter and $50 billion in Q2'16. Over the past 12 months through Dec. 31, Household assets are down $45 billion, or 4.2%. Household assets remain well below their record level of $1.581 trillion (from year-end 2008).
Nonfinancial Corporate Businesses were the second largest investor segment, according to the Fed's data series, with $583 billion, or 21.4% of the total. Business assets in money funds increased $8.0 billion in the quarter, or 1.4%, and have risen by $6 billion over the past year, or 1.1%. Funding Corporations remained the third largest investor segment with $445 billion, or 16.3% of money fund shares. They decreased by $12 billion in the latest quarter and decreased $1 billion over the previous 12 months.
The fourth largest segment, State and Local Governments held 6.7% of money fund assets ($183 billion) -- up $1 billion, or 0.7%, for the quarter, and up $6 billion, or 3.2%, for the year. Private Pension Funds, which held $156 billion (5.7%), remained in 5th place. Rest Of The World category was the sixth largest segment in market share among investor segments with 4.2%, or $113 billion, while Nonfin Noncorp Business held $98 billion (3.6%), Life Insurance Companies held $56 billion (2.1%), State and Local Government Retirement Funds held $52 billion (1.9%), and Property-Casualty Insurance held $19 billion (0.7%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.746 trillion, or 64.0%. Debt securities includes: Open market paper ($104 billion, or 3.8%; we assume this is CP), Treasury securities ($796 billion, or 29.2%), Agency and GSE backed securities ($678 billion, or 24.8%), Municipal securities ($162 billion, or 5.9%), and Corporate and foreign bonds ($6 billion, or 0.2%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($800 billion, or 29.3%) and Time and savings deposits ($147 billion, or 5.4%). Money funds also hold minor positions in Foreign deposits ($2 billion, or 0.1%), Miscellaneous assets ($4 billion, or 0.1%), and Checkable deposits and currency ($30 billion, 1.1%). Note: The Fed also recently added a new breakout line to this table which lists "Variable Annuity Money Funds;" they currently total $36 billion, up $1 billion in the quarter.
During Q4, Treasury Securities (up $161 billion), Agency- and GSE-Backed Securities (up $35 billion), and Municipal Securities (up $6 billion) showed increases. Security Repurchase Agreements (down $56 billion), Time and Savings Deposits (down $47 billion), Checkable Deposits and Currency (down $20 billion), and Open Market Paper (down $10 billion), all showed declines.
Over the 12 months through 12/31/16, Time and Savings Deposits (down $298B), Open Market Paper (down $195B), and Municipal Securities (down $106B) all showed huge declines due to the massive shift from Prime and Tax-Exempt money funds to Government MMFs. Treasury Securities (up $210B), Agency- and GSE-Backed Securities (up $210B), and Security Repurchase Agreements (up $164B) all showed major gains in 2016.
In other news, the U.S. Treasury's Office of Financial Research published a paper entitled, "Benefits and Risks of Central Clearing in the Repo Market." The summary says, "Recent regulatory changes have raised the cost of activity in the repurchase agreement (repo) market for bank-affiliated dealers. Many transactions between dealers are centrally cleared. Expanding the use of central clearing to transactions between dealers and nondealers could reduce costs and improve market access for market participants. But what are the trade-offs? Data from the Office of Financial Research's interagency bilateral repo data collection pilot indicate that dealers could reduce their risk exposures if repo transactions by nondealer clients were centrally cleared. But the potential risks that central counterparties themselves face from larger exposures would also increase."
The piece explains, "A repo is the sale of a security with a commitment to buy it back later at a set price. Dealers obtain trillions of dollars in funding from repo markets on a daily basis. Repo markets were under stress during the 2007-09 financial crisis. Regulations introduced after the crisis have made banks and the repo market more resilient. In some cases, they also negatively affected liquidity and reduced market access by increasing the cost of dealer activity. One way to reduce costs in the repo market is to expand the use of central counterparties (CCPs)."
It adds, "This brief quantifies the potential direct economic benefits to market participants and increased risks to CCPs of moving bilateral repo transactions between U.S. dealers and their nondealer clients to CCPs. The brief analyzes data from the bilateral repo data collection pilot that the Office of Financial Research conducted in 2015 with the Federal Reserve, with input from the Securities and Exchange Commission. Analysis shows that using CCPs offers economic incentives to repo dealers by reducing their risk exposures. That benefit must be weighed against the cost of additional funds those dealers would have to contribute to cushion CCPs from the increased risks."
