The SEC released it latest "Private Funds Statistics" report, which summarizes Form PF statistics, including Liquidity Funds. The quarterly publication shows a decline in overall Liquidity fund assets in the latest quarter to $537 billion. A press release entitled, "SEC Staff Supplements Quarterly Private Funds Statistics" tells us, "The U.S. Securities and Exchange Commission staff today published a suite of new data and analyses of private fund statistics and trends. The Private Funds Statistics, released quarterly since October 2015 by the Division of Investment Management's Risk and Examinations Office, offers investors and other market participants valuable insights by aggregating data reported by private fund advisers on Form ADV and Form PF. New analyses include information about the use of financial and economic leverage by hedge funds, and characteristics of private liquidity funds." (See also our March 15 News, "CAG's Pan on Pros and Cons of Private Liquidity Funds, SEC Paper, Stats.") We review the latest SEC report below, and we also discuss changes in the DTCC's Repo Clearing Services.
SEC Acting Chairman Michael Piwowar comments, "We believe publishing these statistics provides the public with more transparency into and understanding of the private funds industry. The additional statistical analyses represent a continued focus on using data to inform policy and provide public information and will continue to facilitate feedback and analysis that could be used by the Commission and others."
The SEC report, which primarily tracks hedge funds and private equity funds, also includes statistics on liquidity funds. (They do not disclose any individual fund information or names, but we believe the biggest component is securities lending reinvestment pools.) The release explains, "Form PF is filed by SEC-registered investment advisers with at least $150 million in private funds assets under management to report information about the private funds that they manage."
The tables in the SEC's "Private Funds Statistics: Third Calendar Quarter 2016," the most recent data available, show 103 Liquidity Funds (including "Section 3 Liquidity Funds" which are Liquidity Funds from advisors with over $1 billion total in cash), the same number as the prior quarter and four fewer than a year ago. (There are 67 Liquidity Funds and 36 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 37 Liquidity Fund advisers and 19 Section 3 Liquidity Fund advisers, or 56 advisers in total, the same number as last quarter (and one more than a year ago).
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $537 billion, down $4 billion from Q2'16 and down $4 billion from a year ago (Q3'15). Of this total, $290 billion is normal Liquidity Funds while $247 billion is in Section 3 (large manager) Liquidity Funds. Regarding Ownership of Liquidity Funds, the SEC's cryptic tables show that $80 billion is held by Private Funds, $60 billion is held by Unknown Non-U.S. Investors, $40 billion is held by Other, $18 billion is held by SEC-Registered Investment Companies, $8 billion is held by Insurance Companies, and $4 billion is held by Non-U.S. Individuals <b:>`_.
The tables also show that 80.1% of Liquidity Funds have a liquidation period of one day, 232 funds may suspend redemptions, and 199 funds may have gates. The Portfolio Characteristics show that these funds are very close to money market funds. WAMs average a short 20 days (45 days when weighted by assets), WALs are a very short 49 days (83 days when asset-weighted), and 7-Day Gross Yields average about 0.33% (0.50% asset-weighted). Daily Liquid Assets average about 50% while Weekly Liquid Assets average about 60%. Overall, these portfolios appear shorter with a much heavier Treasury exposure than money market funds in general; half of them are fully compliant with Rule 2a-7.
In other news, a statement entitled, "DTCC Repo Clearing Services Gain Regulatory Approval" tells us, "The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, today announced that the Securities and Exchange Commission (SEC) has approved rule changes allowing its Fixed Income Clearing Corporation (FICC) subsidiary to expand the availability of central clearing in the repo market, strengthening both the safety and efficiency of the marketplace. The rule approvals will allow institutional investors to participate in FICC either directly in the new Centrally Cleared Institutional Triparty (CCIT) Service or indirectly through a sponsoring member bank."
It says of the CCIT Service, "FICC is the only central counterparty (CCP) platform in the U.S. that clears tri-party repo and debt transactions. Since 1998, FICC's GCF Repo Service has enabled its dealer members to trade FICC-cleared general collateral tri-party repos with each other based on rate, term and underlying product throughout the day without requiring intra-day, trade-for-trade settlement on a Delivery-versus-Payment (DVP) basis. As an expansion of the GCF Repo Service, the CCIT Service will extend FICC's CCP services and guaranty of the completion of eligible trades to tri-party repo transactions between its dealer members and eligible tri-party cash lenders."
On the Sponsored DVP Repo Service, they comment, "Since 2005, FICC has also offered a service that allows well-capitalized bank members to sponsor their Registered Investment Company clients into FICC. With the expansion of the sponsored membership program, FICC will now permit additional Qualified Institutional Buyer clients to lend cash and U.S. treasuries via their sponsoring member banks throughout the day."
The DTCC adds, "Enabling new market participants to join FICC reduces counterparty risk, a key benefit because of the guaranteed completion of settlement in the event of a member default. In such a stress scenario, the CCP guaranty can lower the risk of liquidity drain from a large scale exit by institutional investors. A centralized liquidation of a failed counterparty by FICC would reduce the risk of fire sales that drive down asset prices and spread stress across the financial system. Centrally clearing these transactions at FICC also offers members opportunities for potential balance sheet netting and capital relief, which, in turn, may afford institutional investors increased lending capacity and income."
Murray Pozmanter, DTCC Managing Director and Head of Clearing Agency Services, comments, "The repo market is a critical source of funding for broker-dealers and an important cash management tool for institutional counterparties. We believe the larger group of market participants able to use central clearing through the CCIT Service and sponsored membership program strengthens the entire marketplace. We applaud the SEC actions, and look forward to delivering increased central clearing capabilities to our expanded community."
J.P. Morgan Securities writes in its "Mid-Week US Short Duration Update," "Last night, DTCC announced that the SEC has approved the proposal to allow FICC to expand the availability of central clearing in the repo market. In particular, the proposal would allow DTCC to leverage existing FICC infrastructure for GCF repo to facilitate centrally cleared tri-party trades for non-dealer counterparties. Under this platform, non-Registered Investment Companies (RICs) such as securities lenders and corporations may access collateral via the Centrally Cleared Institutional Triparty (CCIT) service, while RICs may access collateral via the Sponsored DVP repo service."
They add, "While the expansion of centrally clearing in the repo market is a positive (as it should provide Basel III netting benefits and therefore increased repo supply in the marketplace), just how much is unclear. Importantly, even with this expansion, it's unclear how much MMFs (which are RICs) would realistically access this program under the Sponsored DVP repo service. Based on our understanding, there is an additional cost to access collateral via a sponsor. Against this backdrop, Treasury repo supply has already expanded in recent months as a result of MMF reform. As a result, the FICC program should eventually expand the market, all else remaining equal, implying easier credit condition in repo. That being said, it's hard to know the magnitude at this point."
