Today, we review a number of issues involving European money market funds, pending regulations, and "offshore" cash. We revisit the recently released AFP Liquidity Survey, and quote its section on Europe and the euro, we cite a new WSJ article, which discusses the massive pools of cash trapped outside the U.S., and we also review our latest MFI International Money Fund Portfolio Holdings data. As we mentioned in our "Link of the Day" yesterday, Crane Data is preparing for its next European Money Fund Symposium, which will take place in Paris this Sept. 25-26. (Note: Fitch will also host a Teleconference entitled, "European Money Fund Reform Finalised; What happens next?" this morning at 10:00am EDT.)

The 2017 AFP Survey comments on "Euro, European Reforms," "AFP members report that managing euro-denominated balances has been challenging.... Some have ... reexamined their legal entity structures, and pooled cash or have done netting where allowed. Relying on bank relationships has become even more important -- and transitional for some -- in a negative rate environment as they have moved to new banks. Over half of survey respondents indicate that their organizations do not maintain cash balances in countries where yields on investment securities are negative. Of those that do have such investments, a majority of finance professionals reports their organizations are leveraging their bank relationships as much as possible to minimize the impact of negative yields. Forty-five percent of organizations are choosing to invest in banks that do not charge for deposits or bank products."

It tells us, "Larger organizations with annual revenue of at least $1 billion and those that are publicly owned are more likely than smaller and privately held ones to leverage their bank relationships to minimize any impact from negative returns on their investments, as well as centralize balances in non-EUR currencies. Other steps being taken by organizations to manage cash balances in countries where yields on investment securities are currently negative are: Repatriate cash due to our legal entity structure (cited by 27 percent of respondents); Centralize balances in non-EUR countries (25 percent); and, Work with tax structure to move cash to different entities/currencies (24 percent)."

The AFP writes, "In 2008 the G20 group of countries agreed to reforms for money market funds. The European Commission proposed legislation in response in 2013. The culmination of this is new regulations on money market funds in Europe. The rules were expected to published in the summer of 2017, although full compliance will not take effect until the end of 2018. The Institutional Money Market Funds Association (IMMFA) reports that tighter provisions will apply to all money market funds that are established, marketed or managed in the European Union. The revisions are somewhat similar to those in the U.S., with slight variations."

They explain, "There will be three types of money market funds: Public debt constant NAV funds (similar to government/Treasury Funds in the U.S.); Low volatility NAV funds (stringent liquidity provisions similar to U.S. prime funds); and, Variable NAV funds (similar to U.S. prime funds). Public debt and low volatility funds will have amortized cost accounting applied and mandatory gates and fees should the fund liquidity fall below 10 percent on a weekly basis. Variable NAV funds will have market or model accounting applied. Discretional gates and fees as determined by Collective Investment in Transferable Securities (UCITS) provisions on fund redemptions will apply to all funds, and there will be further liquidity requirements for Constant Net Asset Value (CNAV) funds."

AFP's update adds, "It's important that companies talk to their fund providers to understand changes to their fund lineup. Nearly two-thirds of finance professionals are unaware of the changes in the rules that will impact European MMFs. Only 15 percent are aware of these changes and planning for them. The remaining 20 percent, while aware of these changes, have no plans in place to deal with the new rules."

In related news, The Wall Street Journal discussed offshore cash yesterday in its piece, "The Morning Ledger: Tech Firms Help Buoy Offshore Cash To Fresh Record. They write, "Growing cash piles Apple Inc., Microsoft Corp. and Alphabet Inc. helped companies sock away another $100 billion overseas, pushing the pile of money U.S. corporations keep offshore to a new peak in 2016, writes CFO Journal's Tatyana Shumsky. Cash held by U.S. non-financial companies notched its largest increase, 9.2%, to set a fresh record of $1.84 trillion at the end of 2016, according to a report from Moody's Investors Service. Moody's estimates that roughly 70% of total corporate cash, or a record $1.3 trillion, is held overseas."

The piece adds, "Offshore cash holdings continue to grow due to the disparity between U.S. and foreign tax codes, said Moody's senior vice president Richard Lane. Finance chiefs who oversee companies with overseas profits must pay the difference between lower offshore tax rates and the higher U.S. rate in order to bring the money home. "Most CFOs are loathe to do that for good financial sense," Mr. Lane said."

Crane Data's MFI International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), up $50 billion year-to-date to $781 billion as of 7/18/17. U.S. Dollar (USD) funds (147) account for over half ($416 billion, or 53.3%) of the total, while Euro (EUR) money funds (93) total E91 billion and Pound Sterling (GBP) funds (104) total L205. USD funds are up $17 billion, YTD, while Euro funds are down E3 billion and GBP funds are up L14B. USD MMFs yield 0.96% (7-Day) on average (7/18/17), up 80 basis points from 12/31/16. EUR MMFs yield -0.50% on average, down 31 basis points YTD, while GBP MMFs yield 0.13%, down 15 bps YTD.

Crane's latest MFI International Money Fund Portfolio Holdings data (as of 6/30/17) shows that European-domiciled US Dollar MMFs, on average, consist of 17% in Treasury securities, 24% in Commercial Paper (CP), 24% in Certificates of Deposit (CDs), 17% in Other securities (primarily Time Deposits), 15% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 30.6% of their portfolios maturing Overnight, 14.2% maturing in 2-7 Days, 21.1% maturing in 8-30 Days, 10.7% maturing in 31-60 Days, 8.3% maturing in 61-90 Days, 11.5% maturing in 91-180 Days, and 3.5% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (29.7%), France (11.9%), Canada (10.7%), Japan (10.2%), Sweden (5.9%), Australia (5.6%), Germany (4.5%), the Netherlands (4.2%) and Singapore (4.1%), United Kingdom (3.8%), and China (2.7%).

The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $77.5 billion (17.6% of total assets), BNP Paribas with $16.1B (3.7%), Toronto-Dominion Bank with $12.3B (2.8%), Mitsubishi UFJ with $11.0B (2.5%), RBC with $10.0B (2.3%), Svenska Handelsbanken with $9.7B (2.2%), Federal Reserve Bank of New York with $9.4B (2.1%), Sumitomo Mitsui Banking Co with $8.7B (2.0%), Wells Fargo with $8.6B (1.9%), Bank of Nova Scotia with $8.0B (1.8%), National Australia Bank Ltd with $7.6B (1.7%), Bank of Montreal with $7.1B (1.6%), Commonwealth Bank of Australia with $7.0B (1.6%), Societe Generale with $7.0B (1.6%), Credit Agricole with $6.8B (1.6%), DBS Bank Ltd with $6.6B (1.5%), Rabobank with $6.6B (1.5%), Oversea-Chinese Banking Co. with $6.5B (1.5%), Sumitomo Mitsui Trust Bank with $6.0B (1.4%), and Mizuho Corporate Bank Ltd with $5.9B (1.3%).

Euro MMFs tracked by Crane Data contain, on average 37% in CP, 30% in CDs, 21% in Other (primarily Time Deposits), 8% in Repo, 2% in Treasury securities and 2% in Agency securities. EUR funds have on average 23.8% of their portfolios maturing Overnight, 10.3% maturing in 2-7 Days, 13.4% maturing in 8-30 Days, 17.5% maturing in 31-60 Days, 14.4% maturing in 61-90 Days, 15.7% maturing in 91-180 Days and 4.9% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (27.2%), US (13.7%), Japan (12.8%), Sweden (7.6%), Netherlands (7.0%), Belgium (6.8%), Germany (5.9%), Switzerland (5.7%), and the United Kingdom (2.6%).

The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.2B (5.5%), Svenska Handelsbanken with E4.0B (4.2%), Rabobank with E3.7B (3.9%), Credit Mutuel with E3.3B (3.5%), Proctor & Gamble with E3.5B (3.7%), Dexia Group with E3.0B (3.2%), Credit Agricole with E3.0B (3.1%), BPCE SA with E2.8B (2.9%), Mitsubishi UFJ Financial Group Inc with E2.7B (2.8%), KBC Group NV with E2.7B (2.8%), Nordea Bank with E2.6B (2.7%), Norinchukin Bank with E2.5B (2.6%), Credit Suisse with E2.5B (2.6%), Mizuho Corporate Bank Ltd with E2.4B (2.5%), and Societe Generale with E2.4B (2.5%).

The GBP funds tracked by MFI International contain, on average (as of 6/30/17): 42% in CDs, 22% in Other (Time Deposits), 22% in CP, 9% in Repo, 3% in Treasury, and 2% in Agency. Sterling funds have on average 23.6% of their portfolios maturing Overnight, 7.8% maturing in 2-7 Days, 16.0% maturing in 8-30 Days, 17.4% maturing in 31-60 Days, 15.6% maturing in 61-90 Days, 14.4% maturing in 91-180 Days, and 5.3% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (18.4%), Japan (15.6%), United Kingdom (15.6%), Germany (6.7%), Netherlands (6.2%), Sweden (6.2%), US (5.9%), Australia (5.0%), Canada (4.6%), and Belgium (2.6%).

The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L11.3B (6.7%), BNP Paribas with L7.0B (4.2%), Mitsubishi UFJ Financial Group Inc. with L6.9B (4.1%), Sumitomo Mitsui Banking Co. with L6.6B (3.9%), Nordea Bank with L6.2B (3.7%), Credit Mutuel with L5.7B (3.4%), DZ Bank AG with L5.3B (3.1%), BPCE SA with L5.1B (3.0%), Rabobank with L4.8B (2.9%), Sumitomo Mitsui Trust Bank with L4.7B (2.8%), Standard Chartered Bank with L4.6B (2.7%), Credit Agricole with L4.6B (2.7%), Bank of America with L4.4B (2.6%), ING Bank with L3.8B (2.3%), National Bank of Abu Dhabi with L3.7B (2.2%), Dexia Group with L3.6B (2.1%), Svenska Handelsbanken with L3.5B (2.1%), Nationwide Building Society with L3.4B (2.0%), Commonwealth Bank of Australia with L3.1B (1.9%), and UBS AG with L3.0B (1.8%).

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