We learned from Dechert LLP Partner Brenden Carroll that the U.S. Securities & Exchange Commission recently published a "Risk Alert" entitled, "Top Compliance Topics Observed in Examinations of Investment Companies and Observations from Money Market Fund and Target Date Fund Initiatives." It tells us, "The Office of Compliance Inspections and Examinations ('OCIE') is issuing this Risk Alert to provide investment companies, investors, and other market participants with information on the most often cited deficiencies and weaknesses that the staff has observed in recent examinations of registered investment companies ('funds'). In addition, this Risk Alert includes observations by the staff from national examination initiatives focusing on money market funds and target date funds."
The SEC writes, "As part of OCIE's assessment of market-wide risks and matters of importance to retail investors and investors saving for retirement, the staff recently conducted national examination initiatives focusing on MMFs and TDFs. The staff's observations from each of these examination initiatives are described below.... OCIE staff examined MMFs for compliance with the amendments to the rules governing MMFs that became effective in October 2016. These amendments made significant changes to the manner in which MMFs operate and the matters for which fund boards have oversight responsibility. The staff examined more than 70 MMFs as part of the MMF Initiative across a wide range of fund categories, including Government, Prime, and Tax Exempt funds, as well as MMFs that were also designated as Retail MMFs, which are required to limit their beneficial owners to natural persons."
They tell us, "In general, OCIE staff observed that the MMFs examined appeared to be in substantial compliance with the amended MMF rules. However, as discussed below, the staff also observed instances of deficiencies or weaknesses related to MMFs' portfolio management practices, compliance programs, and disclosures.... Some MMFs did not: Include in their credit files one or more of the factors required to be considered when determining whether a security presents minimal credit risks and is an eligible security, as defined under Rule 2a-7; Adequately document the periodic updating of their credit files to support the eligible security determination and; Maintain records that adequately support their determination that investments in repurchase agreements with non-government entities were fully collateralized by cash or government securities (for Government MMFs).... Some MMFs provided stress test results to their boards that did not include the required summary of significant assumptions used in the stress tests."
The Alert continues, "Some MMFs had not adopted and implemented compliance policies and procedures reasonably designed to address certain requirements under Rule 2a-7 and other areas. For example, some funds did not have policies and procedures that addressed: Periodic board oversight of the MMFs' written guidelines and procedures under which the adviser, when delegated by the MMFs' board, analyzes credit risks and makes minimal credit risk determinations; Periodic board oversight of certain MMF information, including the MMFs' net asset value deviation methods and the amount of the deviation; Limiting investors in Retail MMFs to natural persons; Testing for issuer diversification to ensure that no more than 5% of the funds' assets were invested in any one issuer (other than government securities); Incorporating all required elements for considering, imposing and lifting liquidity fees and/or gates if the funds' weekly liquid assets were less than 30% of their assets; Filing accurate and timely information with the Commission, such as Form N-MFP; Providing that the master fund shall make the fee and gate determinations in master/feeder fund arrangements."
Finally, the SEC adds, "The staff observed certain instances in which MMFs did not post on their websites all information required under Rule 2a-7 and/or posted inaccurate information on their websites. The staff also observed certain instances in which MMFs did not include all required legends in their advertising materials."
Earlier this week, J.P. Morgan distributed its "Mid-Week US Short Duration Update," which asks, "Will money funds lose steam in 2020?" They explain, "By all accounts, money market funds have had a phenomenal year. Year to date, total taxable money fund balances grew $504bn (+18%).... Even accounting for seasonality, this year's inflows were substantially higher than those of prior years.... In the face of an inverted yield curve and volatile equity markets, MMFs provided a 'safe haven' for investors seeking stability and yield. Perhaps more importantly, MMFs continued to offer better yields relative to bank deposits. So it was not surprising then that flows have been fairly widespread, with significant gains across different types of taxable MMFs. And along with it, the demand for Treasuries, Agencies, repo and bank CP/CD increased significantly as well."
JPM continues, "Notably, cash continued to pile into MMFs even as the Fed eased interest rates this year, refuting the notion that lower rates would prompt imminent outflows. In fact, we find that MMFs historically have not experienced outflows until 1-2 years after the Fed cut rates. That said, as we are now four months past the first rate cut and with a Fed that has signaled an intent to remain on hold, this lends itself to the question: could we see outflows next year?"
They comment, "In part, we suspect MMF balances will depend on how the curve evolves next year. With the Fed on hold, our Treasury strategists now expect the 2y, 5y, and 10y Treasuries to be at 1.65%, 1.65%, and 1.80% by 2Q20 respectively, not too far off from current levels.... [W]e see little economic incentive for investors to increase duration risk. As a result, we may continue to see new cash flow into the money markets. Notwithstanding the recent repo turmoil and Fed intervention in the T-bill market, the stability of MMFs may continue to attract incremental cash."
The Mid-Week update adds, "Furthermore, in spite of Fed rate cuts, the relative attractiveness between bank deposits and MMFs continue to favor the latter asset class.... [T]he spread between bank deposits and MMFs remains wide, with MMFs yielding 100-125bp above bank deposits.... All told, we do not foresee outsized flows out of MMFs next year. While the degree to which cash moved into MMFs may abate, the combination of a flat front-end yield curve and low deposit rates should keep balances relatively elevated. This means steady demand for money market instruments."
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be published Tuesday, Nov. 12 (money funds are closed for Veteran's Day), and we'll be writing our normal monthly update on the Oct. 31 data for Wednesday's News. But we also generate a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings, and we posted these to the website Friday. (We continue to merge the two series, and the N-MFP version is now available via Holding file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of Oct. 31, 2019, includes holdings information from 1,099 money funds, representing assets of $3.968 trillion (up from $3.885 trillion last month). We review the latest N-MFP data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds totaling $1,204 billion (down from $1,231 billion), or 30.4% of all assets. Treasury holdings total $1,081 billion (up from $1,048 billion), or 27.3%, and Government Agency securities totaled $804.0 billion (up from $763.9 billion), or 20.3%. Holdings of Treasuries, Government agencies and Repo (the vast majority of which is backed by Treasuries and agencies) combined total $3.090 trillion, or 77.9% of all holdings.
Commercial paper (CP) totals $356.0 billion (up from $344.8 billion), or 9.0%, and Certificates of Deposit (CDs) total $267.1 billion (up from $254.1 billion), or 6.7%. The Other category (primarily Time Deposits) totals $154.3 billion (up from $145.2 billion), or 3.9%, and VRDNs account for $100.8 billion (up from $98.0 billion last month), or 2.5%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $236.4 billion, or 6.0%, in Financial Company Commercial Paper; $61.4 billion or 1.5%, in Asset Backed Commercial Paper; and, $58.2 billion, or 1.5%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($727.8B, or 18.3%), U.S. Govt Agency Repo ($421.3B, or 10.6%) and Other Repo ($55.1B, or 1.4%).
The N-MFP Holdings summary for the 214 Prime Money Market Funds shows: CP holdings of $350.4 billion (up from $339.0 billion), or 31.7%; CD holdings of $267.1 billion (up from $254.1 billion), or 24.2%; Repo holdings of $196.6 billion (up from $189.0 billion), or 17.8%; Other (primarily Time Deposits) holdings of $105.9 billion (up from $99.4 billion), or 9.6%; Treasury holdings of $107.1 billion (down from $116.9 billion), or 9.7%; Government Agency holdings of $71.4 billion (up from $70.4 billion), or 6.5%; and VRDN holdings of $5.7 billion (down from $5.6 billion), or 0.5%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $236.4 billion (up from $226.7 billion), or 21.4% in Financial Company Commercial Paper; $61.4 billion (down from $62.1 billion) or, 5.6% in Asset Backed Commercial Paper; and $52.7 billion (up from $50.1 billion), or 4.8% in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($76.7 billion, or 6.9%), U.S. Govt Agency Repo ($65.1 billion, or 5.9%), and Other Repo ($54.8 billion, or 5.0%).
