Wells Fargo Securities' Garret Sloan writes in his "Daily Short Stuff," "Crane's money market fund holdings were released yesterday afternoon revealing some interesting trends in 2a-7 fund investment strategy. On the government fund side.... In terms of alternative repo structures, we continue to see a slowly building counterparty position to FICC in 2a-7 funds. Given that 2a-7 funds are not able to directly face FICC, this is likely part of a dealer-sponsored program in which a dealer/custodian faces FICC on behalf of its 2a-7 fund clients. We would anticipate that if the dealer/custodian is sponsoring this activity, it is charging an additional fee to offer the product, which may be why we only see a very small number of counterparties trading in it. Based on the sharply different repo levels appearing in the data there may be some discrepancies in how the funds are reporting the trades, or the trade levels may be reflective of volatility in the intra-day FICC-cleared repo market. Looking at July month-end, there were five funds facing FICC according to Crane Data: Goldman Sachs Treasury Obligations Institutional Fund, Goldman Sachs FS Government Fund, Federated Government Reserves Fund, BMO Government Money Market Fund and BMO Prime Money Market Fund. Amongst those five funds, the "coupons" reported in the Crane holdings ranged from 12 to 108 basis points. If the FICC trades are available throughout the day, the differences in coupon could simply be chalked up to timing, as there is a marked difference between repo levels offered before the Fed RRP auction and those available at the end of the day. If certain funds are entering these transactions earlier in the day when there are other overnight options available, they would likely have increased pricing power in the cleared-FICC repo market, while those looking to place end-of-day cash may have few, if any, substitutes available." (For more, see our June 30 Link of the Day, "DTCC on CCIT Repo and see the DTCC release.")

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