Saturday's San Francisco Chronicle featured the article, "Here's something most brokerage firms would rather you ignore," which discusses brokerage sweep yields. They write, "Most brokerage firms have found a subtle way to squeeze money out of their customers. The trick: switching their sweep accounts from higher-yielding money market mutual funds to lower-yielding bank accounts. Sweep accounts are the places within a brokerage account where cash from dividends, interest, stock sales and other transactions accumulates. When investors buy stock or other securities, it comes out of the sweep account automatically." We quote from this piece, as well as a Bloomberg article on European Money Fund Reforms, below.
Chronicle columnist Kathleen Pender explains, "The average yield on the 100 largest money market funds is about 2 percent, while the average yield on bank sweep accounts at brokerage firms is 0.27 percent, said Peter Crane of Crane Data, which tracks money market mutual funds. The sweep switch is a byproduct of the price war that has driven down trading commissions -- even eliminating them in some cases. Brokerage firms have had to find other ways to make money, and sweeps is a big one.... Investors may balk at paying $4.95 to trade stocks but ignore the hidden cost of earning less on their cash, Crane said."
She continues, "Money market fund yields generally follow the federal funds rate. When the Federal Reserve kept the funds rate near zero from 2009 through 2015, money funds and bank deposits all yielded next to nothing, and it didn't really matter where you kept your cash."
The article adds, "Unlike most of their competitors, Vanguard and Fidelity Investments are still letting their brokerage customers use money funds as sweep accounts. They are also the two biggest money-fund managers, according to Crane Data."
It also says, "Here's a look at what some brokerage firms are doing with their sweep accounts. Merrill Lynch: Before September, Merrill Lynch clients had a choice of money market funds or bank deposits as their sweep account, but only 4 percent chose money market funds, according to a company spokeswoman. In September, Merrill made bank accounts the only sweep option for most new accounts."
On Charles Schwab, the Chronicle writes, "In July 2016, it made bank sweep the default option for all new brokerage accounts, but existing accounts still had billions of dollars in money fund sweeps. In the first nine months of this year, Schwab transferred $68 billion from money fund sweeps to sweep accounts at Schwab-affiliated banks. At the end of the third quarter, it had $33 billion remaining in sweep money market funds and $194 billion in bank sweeps."
For more on brokerage sweeps, see our Oct. 26 News, "TD Ameritrade, Morgan Stanley on Sweeps; Money Fund Assets Rebound," our Oct. 10 News, "Money Fund Yields, Sweep Rates Move Higher; WSJ on Savings, Deposits," our Oct 2 News, "Schwab Liquidating Cash Reserves, Shift to Sweeps; Rates Inch Higher," our Aug. 21 News, "More Insured Brokerage Sweeps Blowback: ignites, BlackRock Comment," our Aug. 6 News, "Journal's Zweig Targets Sweeps (Again); Schneider Video on Front End," and our July 25 News, "MS Liquidating AA Govt, Wells Pushes Sweep Rates Higher; Weekly Holds." (Also, ask if you'd like to see our most recent Brokerage Sweep Intelligence publication, which tracks rates on FDIC-insured brokerage sweep deposits and money market funds.)
In other news, Bloomberg writes on the recent confirmation that the European Union will not allow "share cancelation" or "reverse distribution mechanisms" (RDMs), in the article, "`Money Funds With $91 Billion Call for Time to Meet EU Regulation." They explain, "The world's biggest asset managers are pressing European Union regulators for extra time to adjust to new regulations that could upend about 80 billion euros ($91 billion) of money-market funds. The fund companies and their trade association say more time is needed because it has become clear only in recent days that a common industry practice will no longer comply with the rules as overseen by the Central Bank of Ireland, one of the main regulators for fixed-share price funds."
The piece tells us, "BlackRock Inc. and the asset-management arms of JPMorgan Chase & Co. and Goldman Sachs Group Inc. are among the biggest managers of the funds, and will need to adjust their euro-denominated funds by as early as Jan. 21, when the rule takes effect. BlackRock is calling for a transition period to help the market adjust, and said in a statement that its board overseeing money-market funds in Europe is preparing a contingency plan for regulators. Corporate treasurers around the world rely on money funds to park their cash with the assurance they'll be able to take out every dollar -- or euro -- when they need funds for payroll or investments."
Bloomberg comments, "The European Commission and the European Securities and Markets Authority previously said the mechanism wouldn't comply with the upcoming regulations. The industry sought a last-minute reprieve, but the Irish central bank instead told money managers to explain how they'll make their funds comply with the upcoming regulation. The Irish central bank said it expects to receive the plans in the next few weeks."
For more on this topic, see our Nov. 26 News, "Cash Will Be King in '19 Says GS; BlackRock Update; Europe Rejects RDM," our Nov. 14 News, "Treasury Today Hosts MSIM Podcast on European Reforms; ESMA Consults," our Nov. 1 News, "WSJ: Yu'e Bao Shrinking; Europe Still Unclear on RDM Ban; Weekly Holds, and our Oct. 19 News, "Oct. MFI Profile: Highlights from European MFS: Irish Funds' Rooney." (Ask us too if you'd like to see our latest Money Fund Intelligence International, which tracks European money market funds.)
