The Investment Company Institute released its "2017 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund industry. The latest edition reports that while equity and bond fund grew strongly in 2016, money market funds had modest outflows last year. It looks at institutional and retail MMF demand, as well as recent reforms and the shift to Government MMFs. Overall, money funds assets were $2.728 trillion at year-end 2016, making up 16.7% of the $16.3 trillion in overall mutual fund assets. Retail investors held $986 billion, while institutional investors held $1.742 trillion. ICI tells us, "Businesses and other institutional investors also rely on funds. Many institutions use money market funds to manage some of their cash and other short-term assets. Nonfinancial businesses held 22 percent of their short-term assets in money market funds at year-end 2016."
On "Demand for Money Market Funds," the Fact Book says, "In 2016, investors redeemed, on net, $30 billion from money market funds. This modest topline net outflow for the year, however, masks significant shifts in flows for different types of money market funds that was spurred by the final implementation of new rules governing money market funds (see page 50). In 2016, government money market funds received $851 billion in net inflows, while prime and tax-exempt money market funds saw net redemptions of $765 billion and $116 billion, respectively."
Regarding "Recent Reforms to Money Market Funds," ICI comments, "In July 2014, the SEC adopted additional rules for money market funds. All money market funds were required to comply with the new rules by October 14, 2016. The new rules largely centered around two key reforms. First, nongovernment (prime and tax-exempt) money market funds that are sold to institutional investors must price and transact their shares to the nearest one-hundredth of a cent (i.e., float their net asset values [NAVs]). Additionally, all prime and tax-exempt money market funds, whether retail or institutional, can impose gates (i.e., temporarily halt redemptions) or redemption fees on redeeming shareholders under limited situations. A fund is required to impose redemption fees if the fund's weekly liquid assets fall below 10 percent of its total assets, unless the fund's board decides a redemption fee is not in the best interest of the fund's shareholders."
They explain, "These rules clearly had an impact on investor demand for money market funds beginning in late 2015. The changes pushed investors toward government money market funds -- those that invest principally in securities issued by the US Treasury or government agencies (or repurchase agreements backed by government securities). Institutional investors that preferred money market funds with stable $1.00 NAVs appear to have moved from prime to government money market funds. From October 2015 through October 2016, assets in prime institutional money market funds fell $814 billion.... Over the same period, assets in government institutional money market funds rose by $772 billion."
The Fact Book continues, "A similar, though muted, shift occurred in retail money market funds. From October 2015 to October 2016, assets in prime retail money market funds dropped by $262 billion ... and assets in tax-exempt money market funds -- the vast majority of which are held by retail investors -- fell $117 billion. In contrast, assets of retail government money market funds rose by $371 billion."
It tells us, "Under the new rules, prime and tax-exempt retail money market funds may continue to transact at stable $1.00 NAVs. Thus, the shift in retail money market fund assets was not related to floating the NAV. Rather, the requirement that all nongovernment money market funds (including prime and tax-exempt retail money market funds) must now be able to impose redemption fees and gates pushed retail investors toward government money market funds. Before the rule change, prime and tax-exempt money market funds were often used as "sweeps" in brokerage accounts. In a sweep arrangement, any available client funds not yet needed to pay for investments generally are moved daily into a money market fund so that the investor is fully invested at all times. Broker-dealers with sweep arrangements reportedly moved client assets from prime retail and tax-exempt money market funds to government money market funds to avoid the possibility that clients would not be able to fulfill settlement obligations for securities transactions if a gate or redemption fee were imposed on their prime or tax-exempt money market fund."
ICI describes the "Orderly Transition to Government Money Market Funds," saying, "This massive shift in assets between prime money market funds and government money market funds proceeded smoothly. Prime money market funds prepared for the October 14, 2016, deadline by investing predominantly in securities with very short maturities, which made their portfolios extremely liquid. The weighted average maturity (WAM) on prime money market funds fell from 33 days in mid-October 2015 to 14 days in early October 2016, about 10 days before the deadline.... Similarly, the weighted average life (WAL) dropped from 59 days to 24 days over the same period. With the shorter maturities, prime money market funds had ample liquidity to accommodate high levels of outflows. Prime money markets funds' WAMs and WALs increased after the October 14, 2016, deadline passed, but remained low in comparison to levels before October 2015."
They add, "As assets in government money market funds rose, those funds' demand for government securities (and repurchase agreements backed by government securities) jumped sharply. The market accommodated the increased demand for government securities in good order. From October 2015 to October 2016, the US Treasury added $480 billion to the supply of Treasury bills, in part to fund a significant increase in the Treasury's cash balance. In addition, the Federal Home Loan Banks increased their issuance of floating rate notes, which government money market funds can hold. Government money market funds also can place dollars with the Federal Reserve's overnight reverse repurchase agreement (ON RRP) facility, which allows money market funds to make collateralized overnight loans to the Federal Reserve, earning interest on those loans. In the month leading up to the October 14, 2016, deadline, the ON RRP facility expanded with an average of $464 billion in overnight lending -- this amount was about $145 billion higher than the comparable period in 2015."
Finally, ICI writes, "Unsurprisingly, the composition of assets held by taxable money market funds at the end of 2016 was vastly different than it was before the shift from prime into government funds, even though total assets of taxable money market funds were little changed. In October 2015, taxable money market funds had $2.5 trillion in assets; by year-end 2016, total assets had grown modestly to $2.6 trillion.... In October 2015, 15 percent of taxable money market funds' portfolio securities were invested in commercial paper and 55 percent was invested in government securities, including repurchase agreements backed by government securities. As of December 2016, commercial paper accounted for a much smaller proportion (4 percent) and government securities a substantially larger proportion (88 percent) of portfolio securities held by taxable money market funds. Taxable money market funds' commercial paper holdings fell $232 billion over the period and their share of the commercial paper market shrank significantly.... Despite a sizable reduction in holdings of commercial paper by money market funds, the overall commercial paper market was minimally affected over this period. Seasonally adjusted total outstanding commercial paper declined only $37 billion from $1,027 billion in October 2015 to $990 billion in December 2016, as other buyers entered the commercial paper market in place of prime money market funds."
