The U.S. Department of the Treasury recently published a report entitled, "A Financial System that Creates Economic Opportunities Asset Management and Insurance," which contains a number of mentions on money market funds. The press release says, "The U.S. Department of the Treasury today released a report that examines the current regulatory framework for the asset management and insurance industries and makes recommendations to ensure the regulatory framework is aligned with the Administration's Core Principles for financial regulation. Treasury's evaluation focuses on four key areas: the proper evaluation of systemic risk, ensuring effective regulation and government processes, rationalizing international engagement, and promoting economic growth and informed choices."

The Introduction explains, "The U.S. asset management industry is a critical component of the nation's vibrant financial system.... Through mutual funds and exchange-traded funds (ETFs), an individual can assemble a diversified portfolio of investments, providing exposure to a variety of asset classes, at a very low cost.... The asset management industry makes it possible for all Americans to participate in the capital markets. In 2016, U.S. registered investment companies owned 31% of U.S. corporate equity, 19% of U.S. and foreign corporate bonds, 13% of U.S. Treasury and government agency securities, and 23% of U.S. municipal securities. Notably, U.S. money market mutual funds also play a key role in cash management for businesses as well as individuals, managing 22% of U.S. nonfinancial businesses' short-term assets."

The report continues, "Although the largest asset managers have had continued growth in assets under management (AUM), fees charged to investors have decreased. On average, expense ratios for stock and bond funds have declined substantially over the past 20 years. Substantial asset flows are going to fewer asset managers and global competition for AUM has placed downward pressure on margins, with the effect of making it more difficult for smaller asset managers as well as new entrants to the market.... Moreover, implementation of compliance regimes under the current regulatory framework has put continued pressure on margins, has favored the largest asset managers by disproportionately affecting smaller asset managers, and reduced the ability of asset managers to reinvest for innovation and long-term growth."

It notes that, "The performance of the asset management industry during periods of financial stress demonstrates that the types of industry-wide 'runs' that occur in the banking industry during a systemic crisis have not materialized in the asset management industry outside of money market mutual funds. One reason for this outcome is structural; fund assets are financed with the capital of shareholders and redemptions constitute market value return of that capital from the fund itself. Mutual funds are owned by many investors, each with their own time horizons for investing, their own risk preferences, and their own investment goals."

The Treasury report tells us, "The pace of regulatory expansion, reach, and complexity of regulation affecting funds in the asset management industry has been significant over the past nine years. Additional rules and regulations such as the SEC money market mutual fund rule reforms, enhanced fund reporting, liquidity rulemaking, the DOL fiduciary rule, new SRO rules, and requirements related to Dodd-Frank and other compliance regimes, have resulted in a median increase in compliance costs of an estimated 20% over the past five years."

It also says, "Since 2014, the SEC has adopted numerous additional rules impacting the asset management industry, which provide additional transparency and mitigate potential systemic risks, including: ... Moving institutional prime money market funds to a floating NAV and permitting the imposition of liquidity fees and redemption gates for money market mutual funds.... Where appropriate, the SEC has imposed regulations on mutual funds to address potential risks that funds might face as a result of stressed market conditions, including revised rules for money market mutual funds and new liquidity risk management requirements for other mutual funds."

The piece then discusses "Liquidity Risk Management," saying, "Liquidity can be defined as the ability by a financial market participant to quickly liquidate assets as needed and without a significant impact on price to meet immediate, short-term financial obligations with cash. Since the financial crisis, regulators have correctly focused on liquidity risk in global financial markets. This concern stems from deep scars left by the liquidity crunch during the financial crisis, in which stressed market conditions led rapidly to liquidity crises at various market participants as concerned counterparties and investors withdrew credit and funding, which precipitated further liquidity-driven asset sales, or 'fire sales.' An example of how stressed liquidity conditions can present risks is the failure of Bear Stearns in 2008, which stemmed in part from the rapid withdrawal of credit lines and funding by the firm's creditors and counterparties as the firm experienced losses due to its exposure to subprime mortgages."

A sidebar on "Money Market Mutual Fund Reform," tells us, "A money market mutual fund (MMMF) is a type of open-end investment company that seeks to maintain a stable NAV of $1 per share. MMMFs invest in short duration, low risk securities such as U.S Treasuries and high quality commercial paper to provide investors with liquidity and higher returns than can otherwise be found in other cash equivalent investments. The combination of principal stability, liquidity, and competitive yields has made MMMFs popular with retail and institutional investors as a cash management vehicle. MMMFs were first established in the early 1970s as a solution to the Federal Reserve's then-Regulation Q, which at the time prohibited bank demand deposits from paying interest and capped the rate of interest on other types of bank accounts at 5.25%. MMMFs are typically used by investors seeking short-term, liquid, and cash-like investments with the potential for some incremental yield relative to cash held at a bank."

It continues, "During the fall of 2008, many MMMFs experienced large-scale redemptions and other money market funds saw reduced liquidity for the securities of otherwise credit-worthy issuers. Due to illiquidity concerns across the market, some MMMFs were not able to satisfy investor redemption requests. In September 2008, the Reserve Primary Fund's exposure to Lehman Brothers led the fund to "break the buck," or fall below the value of $1 per share. The federal government subsequently intervened in the money market, specifically through the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. The facility was introduced to help MMMFs that held asset-backed commercial paper (ABCP) meet investors' demands for redemptions, and to foster liquidity in the ABCP market and money market mutual funds more generally. In addition, in September 2008, Treasury established a Temporary Guarantee Program for Money Market Funds to guarantee the share price of any publicly offered eligible MMMF that applied to and paid a fee for participation in the program. The program was designed to address temporary dislocations in the credit markets. President Bush approved Treasury's use of the assets of the Exchange Stabilization Fund to guarantee payments under the program."

The sidebar says, "In 2010, the SEC undertook a series of reforms to Rule 2a-7, which governs MMMFs. The reforms included: (1) daily and weekly liquidity minimums of 10% and 30% of total assets respectively, (2) general liquidity requirements, which require portfolio managers to determine whether they have additional liquidity needs beyond the rule's minimum requirements to meet reasonably foreseeable shareholder redemptions, (3) portfolio maturity limits of weighted average maturity of 60 days or less, and weighted average life of 120 days or less, (4) stress testing requirements, requiring funds to determine how they would perform in stressed market conditions, (5) portfolio holdings disclosure requirements for the funds to file a report with the SEC on a monthly basis, and (6) new Rule 22e-3, which permits fund boards to suspend redemptions and payment of redemption proceeds."

It adds, "In 2014, the SEC, following the issuance of proposed recommendations by the FSOC, undertook additional reforms, the pillar of which requires 'prime' (non-government) institutional MMMFs to float the NAV of their shares instead of letting the funds maintain the stable $1 NAV per share. In addition, boards of directors were given discretion to lower 'gates' on redemptions, or charge fees of up to 2% if market stress causes a fund's weekly liquid assets to fall below 30%. Retail and government MMMFs were exempted from the rule. The compliance date for the floating NAV requirement and liquidity fees and gates was October 14, 2016. By October 31, 2016, prime and tax-exempt MMMFs experienced a decrease in assets of $1 trillion since the beginning of the year, and government MMMFs saw an increase in assets of $968 billion during the same period."

The Treasury report also discusses how, "Registered investment companies are subject to many ongoing disclosure requirements. Mutual funds, which are engaged in a continuous offering, must update their prospectuses and registration statements on an annual basis. Funds other than MMMFs are required to report portfolio holdings on a quarterly basis. The portfolio holdings data will be significantly enhanced by recently adopted Form N-PORT, which will require reporting on a monthly basis once it becomes effective.... The SEC requires MMMFs to disclose information pursuant to a specially tailored reporting regime. The SEC requires MMMFs to report their portfolio holdings monthly and to publicly disclose monthly holdings on the fund's website. MMMFs also have a requirement to report to the SEC within one business day after the occurrence of a material event, such as a default, insolvency of a portfolio security, or imposition of liquidity fees."

Finally, a table on the, "Top 50 Worldwide Mutual Funds, Money Market Funds, and Exchange-Traded Funds" shows JP Morgan U.S. Government Money Market Fund as the 9th largest fund and the largest money fund with $142.1 billion. Other money funds making the Top 50 include: Fidelity Government Cash Reserves ($130.9B) ranked 11th; Vanguard Prime Money Market Fund ($96.2B) ranked 19th; `JP Morgan Liquidity Funds-U.S. Dollar Liquidity Fund ($93.7B) ranked 22nd; Fidelity Government Money Market Fund ($85.3B) ranked 30th; Goldman Sachs Financial Square Government Fund ($85.1B) ranked 31st; BlackRock Liquidity Funds Fed Fund ($79.3B) ranked 35th; Vanguard Federal Money Market Fund ($76.2B) ranked 38th; Dreyfus Government Cash Management Fund ($67.3B) ranked 42nd; Federated Government Obligations Fund ($66.3B) ranked 45th; Wells Fargo Government Money Market Fund ($60.8B) ranked 49th; and, Amundi Cash Corporate ($59.7B) ranked 50th.

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